Sebi has clarified norms for excusing or excluding investors in alternative investment funds (AIFs) from participating in certain investments. In a circular, the regulator laid out certain conditions, by way of which AIF investors may be exempt from certain investments.
One instance would be if the investor — based on the opinion of a legal professional/advisor— confirms that its participation in the investment opportunity would be in violation of an applicable law or regulation.
Another condition would be if the investor — as part of a contribution agreement or any other agreement signed with the AIF — had disclosed to the manager that participation in such an investment opportunity would be in contravention to the internal policy of the investor. However, this has to be intimated to the AIF within 15 days, says the circular.
Sebi has mandated amendment in disclosure norms, as well as verification of legal opinions or supporting documents by managers of AIFs based on the criteria under which exemption is being granted.
AIFs may exclude investors from participating in a particular investment opportunity if the manager is satisfied that the participation of such investor in the investment opportunity would lead to the scheme being in violation of applicable law or regulation, or would result in material adverse effect on the scheme of the AIF.
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“The circular addresses the concerns on excusing or excluding an investor when an AIF is investing. AIF is a pooling vehicle and works on blind pool concept. The template PPM format introduced by Sebi did require disclosures on this front; however, Sebi has introduced these changes to allay the inconsistencies in market practice. It needs to be borne in mind that the circular places the decision making process on part of the investment managers, and their discretion to allow or disallow such calls will need to be carefully made, and based on legal rationale,” said Manendra Singh, associate partner, Economic Laws Practice.
Exclusion will also be allowed if the investor of an AIF is another AIF or other investment vehicle. They may be partially excused or excluded from participation, only to the extent of the contribution of the said fund or investment vehicle’s underlying investors, who have sought exemption.