SEBI revised guidelines for AIF

 

The Securities and Exchange Board of India (SEBI) has issued guidelines for 'excuse and exclusion' of investors in an Alternative Investment Fund (AIF) to mitigate inconsistency in industry practices and prescribe adequate disclosure to investors in AIFs.

The guidelines now prescribe the following for excluding an investor from participating in a particular investment proposed to be made by an AIF:

1. The investor should confirm that its participation in the investment opportunity would be in violation of an applicable law or regulation, based on the opinion of a professional/legal advisor.

2. The investor, as part of contribution agreement (or other agreement with the AIF), should disclose to the manager that participation of the investor in such investment opportunity would be in contravention to the internal policy of the investor. The said agreement should provide a condition that the investor must report any change in the disclosed internal policy to the AIF within 15 days of such change.

3. An AIF (for reasons to be recorded by the manager) 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 AIF being in violation of applicable law or regulation or would result in material adverse effect on the AIF.

4. In the context of an investor in an AIF or other investment vehicle that in turn is an investor in an AIF, such investor may be partially excused or excluded from participation in an investment opportunity, to the extent of the contribution of the AIF/investment vehicle’s underlying investors who are to be excused or excluded from such investment opportunity (for reasons to be recorded by the manager).

The proposed guidelines are broadly consistent with the industry’s current practices. It would be helpful if other regulators, especially the insurance regulator, taking a cue from this SEBI circular, formally clarifies that insurance companies can contribute capital to AIFs that may invest in overseas companies as part of their investment strategy so long as the insurance company is excused from participation in those specific overseas investment opportunities. This would release the much needed capital for investments in AIFs that is awaiting such formal clarity from the IRDAI.