SEBI issues norms for excluding / excusing investors from AIF’s investments, and provides clarity on placement / distribution fees

SEBI issues norms for excluding / excusing investors from AIF’s investments, and provides clarity on placement / distribution fees

In the year 2020, SEBI had introduced template(s) for Private Placement Memorandum (PPM) for AIFs, in order to ascertain that certain minimum level of information, in a simple and comparable format, is disclosed to investors. SEBI has now decided to provide guidelines with respect to following disclosures in the PPM: (1) Excuse or Exclusion provision, and (2) Direct Plan for investors, and constituents of fees that may be charged by the AIF/scheme of AIF, including distribution fee/ placement fee.

A. Guidelines for Excusing or Excluding Investors from Particular Investments of Alternative Investment Funds: SEBI observed that there were inconsistencies and lack of adequate disclosures with respect to the information pertaining to ‘excuse and exclusion’ clauses in template PPM. In order to address this, SEBI has now introduced guidelines to provide for circumstances for excusing or excluding an investor from particular investment(s) of an AIF.

B. Direct plan for schemes of Alternative Investment Funds (AIFs) and trail model for distribution commission in AIFs: On February 3, 2023, SEBI, in an effort to, inter alia, (a) address the issue of a potential double charge to investors looking to invest through a SEBI registered intermediary; and (b) reduce mis-selling and high commission charges, thereby ensuring parity across other SEBI products and offerings, came out with a consultation paper on direct plan for schemes of AIFs and trail model for distribution commission in AIFs. SEBI has now laid down and framed directions regarding direct plan and trail model for distribution of commission.

The abovementioned circulars have been analyzed in the table below:

Guidelines for Excusing or Excluding Investors from Particular Investments of Alternative Investment Funds:

Guidance	Particulars of Guidance
Excusing circumstances	An AIF may excuse its investor from participating in a particular investment in the following circumstances: Violation of Applicable Law or Regulation: Where an investor, based on the opinion of a legal professional/legal advisor, confirms that its participation in the investment opportunity would be in violation of an applicable law or regulation; an Contravention of the Internal Policy of the Investor: If the investor, on account of contribution agreement or any other agreement signed with the AIF, had disclosed to the manager that, participation of the investor in such an investment opportunity would be in contravention to the internal policy of the investor. In this context, the manager shall ensure that terms of such agreement with the investor include reporting of any change in the disclosed internal policy, to the AIF within 15 days of such change.
Excluding circumstances	Violation of Applicable Law or Regulation Resulting in Material Adverse on the AIF: An AIF may exclude an investor from participating in a particular investment opportunity, if the manager of the AIF is satisfied that the participation of such investor in the investment opportunity would lead to the scheme of the AIF being in violation of applicable law or regulation or would result in material adverse effect on the scheme of the AIF. In this regard, the manager shall record the rationale for such exclusion, along with the documents relied upon, if any.
Partial Excuse or Exclusion to Investors in the nature of AIFs/Investment Vehicles	In case the investor of an AIF is also an AIF or any other investment vehicle, such investor may be partially excused or excluded from participation in an investment opportunity, to the extent of the contribution of the said fund/investment vehicle’s underlying investors who are to be excused or excluded from such investment opportunity. In this regard, the manager of AIF shall record the rationale for such excuse or exclusion along with the supporting documents, if any.

This circular with respect to excusing or excluding an investor from an investment of AIF is available here and shall come into force with immediate effect.

ELP Comments

The circular provides much needed clarity on circumstances when an investor of an AIF could be excused or excluded from investments as AIFs work on a blind pool concept. However, there is also emphasis laid on the manager’s role in determining such calls, hence, the grounds on which the managers will take those decisions will be important including legal reasons.

B. Direct plan for schemes of Alternative Investment Funds (AIFs) and trail model for distribution commission in AIFs:

Direction	Particulars
Direct Plans for Schemes of AIFs	Basis the circular, it is specified that schemes of AIFs shall have an option of a ‘Direct Plan’ for investors, which plan shall not entail any distribution fee or placement fee. Furthermore, AIFs will also have to ensure that investors who approach them through a SEBI registered intermediary, which separately charges the investor a fee (such as an advisory fee or portfolio management fee), are on-boarded via the ‘Direct Plan’ route only.
Category-wise Trail Model for Distribution Commission in AIFs	The regulator through the circular has also directed AIFs to disclose distribution fee/placement fee, if any, to the investors of AIF/scheme of AIF at the time of on-boarding. Category III AIFs: Category III AIFs shall charge a distribution fee or placement fee, if any, to investors only on an equal trail basis i.e., no upfront distribution fee or placement fee is to be charged by Category III AIFs directly or indirectly to their investors. Furthermore, any distribution or placement fee paid by the AIF shall be borne from the management fee received by the managers of the category III AIFs. Category I and II AIFs: Category I and II AIFs may pay up to one-third of the distribution fee/placement fee to the distributors on an upfront basis, and the remaining can be paid on an equal trail basis over the tenure of the fund.

This circular with respect to direct plan for schemes of Alternative Investment Funds (AIFs) and trail model for distribution commission in AIFs is available here and shall be complied with for investors on-boarded in AIFs/schemes of AIFs from May 1, 2023, onwards.

ELP Comments

The circular has mandated the direct plan for investors and allows the flexibility to investors to come directly without any separate distribution / placement fees. SEBI’s step to prevent mis-selling and curbing expenses will allow clarity on availability of funds with AIFs and help in maintaining a transparent approach with the investors.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

Manendra Singh, Associate Partner –ManendraSingh@elp-in.com ;
Tanvi Goyal, Principal Associate –TanviGoyal@elp-in.com;
Varun Kaka, Associate- VarunKaka@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein