Alternative investment funds (AIFs) are rushing to update their Private Placement Memorandums (PPMs) ahead of the April 30 deadline. This comes on the back of increased scrutiny by the Securities and Exchange of India (Sebi) for non-filing of reports and inadequate disclosures.
AIFs have to report any changes made to the PPMs during 2022-23 to the regulator by April 30. The funds are taking additional care this year to ensure that the data and disclosures provided meet the regulatory requirements.
In the past year, Sebi has come out with a number of guidelines which have forced fund managers to revisit their PPMs.
Some of these guidelines directly impacted the clauses that are part of the PPM template issued by Sebi in 2020, such as the definition of the term of the AIF, timeline for declaring the first close of schemes, requirement of a compliance officer for AIFs and overseas investment by AIFs.
As a result, most funds have had to make revisions to their PPMs to comply with the evolving regulatory framework in addition to any other fund specific changes. “Given the recent inspections and notices to fund managers and trustees, most funds have approached merchant bankers to obtain the certificate for filing the revised PPM before the deadline,” said Vaneesa Agrawal, managing partner, Thinking Legal.
The rush for updating PPM near the deadline is also the result of the confusion surrounding the April 10 circular, which mandates AIFs to offer direct plans and trail commission for distributors.
The industry was not ready for such a short timeline for implementation of direct plans, disclosure of commission and suspension of upfronting of distribution fees, according to Leelavathi Naidu, partner, IC Universal Legal.
“This requires not only updation of PPM and contribution agreements but also getting the dependent ecosystem of distributors and placement agents aligned to the new payment norm. With the complexity in the prevailing nature of arrangements with distributors across various categories of AIFs, the industry is struggling with the extent to which disclosures have to be made, and what amounts to correct disclosure,” said Naidu.
Some AIFs, for instance, would have negotiated 30% of the management fee with the distributors, for somebody else it would be management fee plus performance fee. AIFs are grappling with how they need to disclose this in the PPM.
AIFs are looking at trustee details very carefully this year while filing their PPMs – whether the trustee has been involved in any disputes, or if any regulatory action has been taken against them in the past, track record of past litigation and if these need to be disclosed, said a person who deals with AIF clients.
Also read: The Changing Landscape of Space Tech in India
AIFs are also paying closer attention to quarterly disclosures amid increased inspections by Sebi.
Naidu also added that the recent show-cause notices and warning letters issued for incorrect details in periodical reports have got the AIF industry to enhance its compliance framework and put in place robust mechanisms to ensure correct disclosures and avoid regulatory scrutiny at a later date.
Earlier this week, Sebi recommended that the certificate of registration of eight AIFs be cancelled for non-compliance of AIF regulations and failure to file periodic reports.
AIFs have to submit periodic reports about their activities and operations, including details of the funds raised and invested under various schemes as well as categories of investors under the schemes.