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SEBI's New Master Circular: Key Regulations for Alternative Investment Funds

Introduction

The Securities and Exchange Board of India (SEBI) has released a Master Circular to provide a comprehensive regulatory framework for Alternative Investment Funds (AIFs). This document consolidates provisions from various SEBI circulars issued until March 31, 2023, ensuring compliance and streamlined operations for AIFs. Additionally, AIFs must comply independently with SEBI's overarching guidelines for market intermediaries.

Overview of the Master Circular

Recipients:

  1. Regulatory Objective: This Master Circular aims to solidify the regulatory framework for AIFs by incorporating existing provisions from previous circulars through March 31, 2023.
  2. Exclusions: Circulars providing temporary relaxations related to certain compliance requirements for AIFs are not included in this document.
  3. Compliance Obligations: Beyond this Master Circular, AIFs must also adhere to other SEBI guidelines for market intermediaries, including:
    • Levy of Goods & Services Tax (GST) on fees payable to SEBI
    • Guidelines on securities market data access
    • Digital payment modalities
    • Grievance redressal mechanisms
    • Outsourcing activity guidelines
  4. Ongoing Compliance: Any SEBI directions specifically directed at AIFs will remain effective alongside this Master Circular and other prevailing laws.
  5. Effective Date: The Master Circular takes effect immediately upon issuance. The circulars referenced in Annexure 19 are rescinded as of this issuance.
  6. Transitional Provisions: a) Actions taken under previous circulars will be considered valid under the provisions of this Master Circular. b) Pending applications made under rescinded circulars will be treated as applications under this Master Circular. c) Rights or liabilities accrued under prior circulars will remain unaffected.
  7. Approval: This circular is issued with the sanction of the competent authority.
  8. Legal Authority: This document is issued under the powers conferred by Section 11(1) of the Securities and Exchange Board of India Act, 1992, aimed at investor protection and regulation of the securities market.
  9. Availability: The circular can be accessed on the SEBI website at sebi.gov.in under "Legal framework - Master Circulars" and "Info for - Alternative Investment Funds".

Content Structure

Chapter 1 – Online Filing System for AIFs

  1. Application Submission: Applicants seeking AIF registration must submit applications exclusively online via the SEBI Intermediary Portal. Registered AIFs must file compliance reports and requests accordingly.
  2. Support: Queries can be addressed through the manual provided or via the Portal Helpline.

Chapter 2 – Filing of Private Placement Memorandum (PPM)

  1. PPM Template: A mandatory template ensures minimum disclosure standards in the PPM. Sections include:
    • Part A: Minimum disclosures
    • Part B: Additional information flexibility
  2. Details of Fees and Charges: A comprehensive example of fees applicable to investors must be included in the PPM.
  3. Disciplinary History Disclosure: AIFs must disclose the disciplinary history of the fund, sponsor, and management over the past five years, including monetary penalties over ₹5 lakh.
  4. Filing Through Merchant Banker: A PPM must be filed with SEBI via a registered Merchant Banker, which must also provide a due diligence certificate.
  5. Validity and Timeline: The first close of a scheme should be declared within 12 months from SEBI’s notification. Guidelines for large value funds are also specified.
  6. Annual Compliance Audit: AIFs must conduct an annual audit of PPM compliance, with findings relayed to relevant stakeholders.

Chapter 3 – Registration Related Clarifications

  1. In-Principle Approval: Failure to submit required deeds within the specified period necessitates a fresh application for registration.
  2. Category Change Restrictions: AIFs can only change registration categories if they have not made investments in the prior category and must notify all investors.

Chapter 4 – Investment in AIFs

  1. Investor Criteria: Regulations stipulate investor eligibility, particularly concerning foreign residents.
  2. Documentation Standards: Marketing materials must align with the PPM and be distributed privately.
  3. Joint Investment Provisions: Specific family members can act as joint investors under stipulated conditions.

Chapter 5 – Operational and Prudential Norms for Category III AIFs

  1. Investment Concentration Norm: Guidelines for calculating the investment concentration limit based on net asset value (NAV) are outlined, including rectification timelines.
  2. Leverage Requirements: Regulations specify how leverage is calculated and monitored within AIFs.
  3. Risk Management Standards: AIFs utilizing leverage must maintain robust risk management frameworks and transparent conflict management processes.

Conclusion

The Master Circular issued by SEBI serves to enhance the regulatory environment for AIFs, consolidating existing provisions and ensuring clarity on compliance requirements. AIFs are urged to adhere strictly to these newly established guidelines to promote transparency and operational efficiency within the ecosystem. For further details, stakeholders should refer to the complete Master Circular on the SEBI website.