In this blog post, Sudipta Ghosh, a student at Surendranath Law College, Calcutta University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses SEBI guidelines on disclosures, reporting and clarifications under AIF regulations.
Before we discuss about the SEBI guidelines on disclosure , clarification ,reporting under the AIF regulation , it is important for us to know what SEBI is, its functions and a bit of its historical background .
What is SEBI ?
The Securities and Exchange Board of India (SEBI) was established on 12th April ,1992 and was given statutory power by the Government of India in accordance with the Securities and Exchange board of India Act , 1992 which was passed by the Indian Parliament . The Sebi is a Regulatory body for securities market in India . The SEBI has its headquarters at Bandra Kurla Complex in Mumbai and also has regional offices at Eastern ,Western , Northern and Southern parts of India located at Kolkata , Ahmedabad , New Delhi and Chennai respectively . It also has certain other local offices in parts of India such as in Jaipur and Bangalore . The basic functions of the Securities and Exchange Board of India has been mentioned in the preamble of the Securities and Exchange Board of India Act , 1992 as – “ to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto” .
SEBI is managed by its BOARD of members consisting of –
- A full time chairman to be appointed by the Union Of India
- Two members from amongst the officials of Union Ministry dealing with finance and administration of the Companies Act , 1956 to be nominated by the central government
- One member from amongst the officials of the Reserve Bank of India to be nominated by the Reserve Bank of India
- Five other members to be appointed by the central government .
Some of the functions of the board as mentioned in sec11 of the SEBI Act , 1992 are as follows –
- Regulating the business in stock exchange and other security markets
- Promoting and regulating self regulatory organizations
- Prohibiting unfair and fraudulent trade practices relating to security market
- Promoting investors’ education
- Prohibiting insider trading in securities
- regulating takeover of companies
- levying fees or other charges for carrying out the purposes of this section
- Conducting research
- Performing such other functions as may be prescribed etc
Now before dealing with the guidelines under AIF (alternative investment fund) rules, let us have a brief concept of Alternative investment fund (AIF) .
WHAT IS ALTERNATIVE INVESTMENT FUND (AIF) ?
The term Alternative Investment Fund has been defined in Regulation 2(1)(b) of Security and Exchange Board of India ( Alternative Investment Funds) Regulation 2012 . It means any fund established or incorporated in India in the form of a trust or a company or a limited partnership , or a body corporate which is a privately controlled investment vehicle responsible for the collection of funds from investors , whether Indian or foreign , for investing in accordance with the defined investment policy . AIF’s may also be defined as private funds which are otherwise not coming under the jurisdiction of any regulatory agency in india .
The definition of Alternative Investment Funds also includes venture capital funds , commodity funds , private equity funds , hedge funds, debt funds and excludes mutual funds , family trusts , collective investment schemes , gratuity trusts , funds managed by securitization company and reconstruction company which is registered under sec 3 of Securitization and Reconstruction of financial assets and Enforcement of Security Interest Act , 2002 with the RBI .
Alternative investment funds may be divided into the following three categories based on their impact on the economy :-
- Category I Alernative Investment Fund – These may been defined as those AIFs which have positive effects on the economy . for which certain incentives or concessions may be considered necessary by the SEBI or the Govt of India. Such funds generally invest on sectors which the Government or regulators consider as socially or economically desirable . Example – Venture Capital Funds, infrastructure funds etc
- Category II Alternative Investment Funds – These may be defined as those AIF’s for which no specific incentives or concessions are considered to be given either by the SEBI or the Government of India . Example – Debt fund etc .
- Category III Alternative Investment Funds – These funds trade with the view to make short term returns from the their investments . These funds may also be allowed to invest in Category I and II AIFs .
GUIDELINES ON DISCLOSURES , REPORTING AND CLARIFICATIONS UNDER AIF REGULATIONS –
SEBI ( ALTERNATIVE INVESTMENT FUNDS) WERE NOTIFIED ON 21ST MAY 2012 . CIRCULAR NUMBER – CIR/IMD/DF/10/2013 dated 29th July ,2013 also issued for reporting , prudential requirements of AIF regulations .
SUBMISSION OF INFORMATION TO SEBI UNDER SUB REGULATION (1) OF RREGULATION 3 OF AIF RULES .
As per circular number CIR/IMD/DF/10/2013 dated 29th July 2013 all category III AIFs are required to report to the custodian on a daily basis regarding the amount of leverage at the end of the day , based on the closing prices and whether there has been any breach during the day in limits .
As the AIFs are dependent upon various parties in order to submit to the custodian the amount of leverage at the end of the day and just because these parties provide information at varied time periods to the AIFs , it becomes difficult for them to report to the custodian the amount of end of day leverage on the same day . Therefore certain modifications were made in the aforesaid circular dated 29th July 2013 thereby resulting in the reporting of all category III AIFs to the custodians the amount of leverage at the end of the day , based on prices(closing) , by the end of the next working day .
DISCLOSURES IN PLACEMENT MEMORANDUM
As the fee structure applicable to the investors in an AIF is generally complex in nature . Therefore for better understanding every AIF shall in its placement memorandum , add an annexure of detailed tabular example of how the fees and charges shall be applicable to the investor including the distribution waterfall .
In addition to the tabular distribution of fees and charges in the placement memorandum , details of disciplinary action shall also be there . Regulation 11(2) states that an AIF shall include details of disciplinary actions/history in its placement memorandum such as disciplinary history of –
- sponsor ,partners, manager and their Directors/ AIF /promoters and associates
- If applicant is a trust, Trustees or trustee company and its directors.
The disciplinary actions in the placement memorandum shall include details of outstanding/pending and past cases of litigations , criminal or civil prosecution , disputes , non payment of statutory dues , default against banks , disputed tax liabilities ,penalties levied , economic offences and proceedings initiated against them . It may also include any disciplinary action taken by the board or any other regulatory authority .
If Any further litigation / case , arises in the course of activities of the AIF , the litigations in the form of disciplinary actions shall be correctly incorporated in the placement memorandum and intimated to the investors .
Furthermore the annexure for fees and details of disciplinary actions shall be sent to all the investors in addition to the existing placement memorandum within 30 days of this circular .
CHANGES IN PLACEMENT MEMORANDUM
If there is any change relating to sponsor or fees in the placement memorandum , then the same should be highlighted in the placement memorandum as well as the covering letter at the time of final submission of the placement memorandum . The holders shall also be intimated of the change within 7days of making the change .
In case of dissenting investor with respect to material changes made in the placement record , proper exit opportunity in accordance with the procedure as prescribed in the guidelines shall be provided to the investors .
CLARIFICATIONS MADE IN THE AIF REGULATIONS
The clarifications made in the AIF regulations are listed as follows –
- It has to be ensured by every AIF that the corpus of an open ended scheme is to be maintained to 20 crores . The AIF should intimate SEBI within 2 days if by any chance any client requests for redemption . and thereafter should take necessary steps to bring back the corpus within 3 months .
- Only the following persons may be called as joint investors for the purpose of investing not less than 1crore rupees : –
- An investor and his /her spouse
- An investor his/her parent
- An investor his/her daughter /son
- An investment made in real estate or infrastructure projects by an investee company shall not hold less than 1 project .
- Every investor , as mentioned in the regulation , has to invest minimum amount in the AIF .
- If the AIF fails to submit registered trust deed or partnership deed within stipulated date , as prescribed , after grant of an in-principle approval , then fresh application has to filled for registration .
- Anti-money laundering and outsourcing of activities shall be applicable to all AIF s and the manager of such AIF shall be responsible to obey such guidelines and run the AIF in accordance with it .
Compliance Test Report
Every manager has to make a CTR by the end of the financial year and shall submit the same to the trustee and sponsor within 30 days in the prescribed format . If an observation comment is made in the CTR , it shall be revised within 15 days .
REFERENCES
- vinodkothari.com
