Alternative investment funds get partial relief as Sebi relaxes norms

In a partial relief to alternative investment funds (AIFs), capital markets watchdog Securities and Exchange Board of India (Sebi) has provided certain exe­m­­ptions to such funds with re­gard to investment committee.

Under the new norms, members of an investment committee of an AIF will no longer be responsible for investment decisions.

Also, members of the committee would not be liable for compliance of the AIF investments with the regulatory provisions, governing documents of the AIF and other applicable laws. However, exemption in AIF rule is conditional upon capital commitment of at least Rs 70 crore from each investor accompanied by a suitable waiver, Sebi said in a notification on Friday.

The exemptions are limited to an “AIF in which each investor other than the manager, sponsor, employees or directors of the AIF or employees or directors of the Manager, has committed to invest not less than Rs 70 crore ...and has furnished a waiver to the AIF in respect of compliance with the said clauses, in the manner specified by the board”. In October, Sebi amended AIF regulations that provided for shared responsibilities for the members of the investment committee  (IC) with the investment manager.

The members of the IC of funds were also made liable for investment decisions and regulatory lapses in cases, where such committee was set up for approving investment decisions.

Prior to that, only fund manager was responsible and accountable for investment decisions.

The amendment provided for equal responsibility of the investment managers and the members of the IC with regard to investment decisions of the AIF.

Also, it had placed joint accountability on the investment manager and members of the IC to ensure the AIF's compliance with the regulations, private placement memorandum (PPM), other fund documents and the applicable law.

Siddharth Shah, Partner, Khaitan & Co said, "while defining the liability of IC members may have been seen by industry as regulators overreaching on the operational aspects of an AIF,  the current amendment brings partial relief for AIFs and aligns with the exemption ofered by Sebi to AIFs from standardized PPM document." "This amendment should come as some relief for institutional investment platforms which have been increasingly using AIFs as a preferred vehicle for various benefits that they offer," he added.

According to him, Sebi should also consider exemption for international financial service centre (IFSC) based AIFs to ensure that the governance regime is aligned to other collective investment regimes in other offshore financial centers around the world to keep Indian IFSCs competitive.

Divam Sharma, co-founder at Green Portfolio, said recent clarifications by Sebi provide a much needed relief to many AIF managers as otherwise they have to appoint external members to investment committee whose names were not disclosed in the placement memorandum and the same has also to be approved by at least 75 per cent of the investors in the fund.

Moreover, there are risks of non-compliance from extended team in IC as the final investment decision making power is subject to fiduciary obligations of all the members of the committee, Sharma said.

Also, the extended team for the IC might create a dilution of the expertise required to run the investment mandate and would also result in increasing the fund expenses, he added.