In a Circular dated 5th February, 2020, the Securities and Exchange Board of India (“SEBI”) has decided to introduce templates for Private Placement Memorandum (“PPM”), subject to certain exemptions, and mandatory performance benchmarking for Alternative Investment Funds (“AIFs”) with provisions for additional customized performance reporting.
SEBI had earlier issued a Consultation Paper dated December 4, 2019 seeking public comments on ‘Introduction of Performance Benchmarking’ and ‘Standardization of Private Placement Memorandum (PPM) for AIFs’.
Considering inputs from public consultation and deliberations in Alternative Investment Policy Advisory Committee (AIPAC), the present Circular has been issued.
Key takeaways from the Circular are mentioned below:
- Template(s) for PPM:
- PPM is a document in which all the necessary information about the AIF is disclosed to prospective investors. Therefore, in order to ensure a minimum standard of disclosure that has to be made, SEBI has decided to provide a template so that certain minimum level of information is available in a simple and comparable format.
However, AIFs are also permitted to provide additional information in their PPM.
- The template for PPM has two parts:
- Part A – section for minimum disclosures, and
- Part B – supplementary section to allow full flexibility to the Fund in order to provide any additional information, which it deems fit.
- The template for PPM of AIFs raising funds under Category I and Category II is provided at Annexure 1 and for AIFs raising funds under Category III is provided at Annexure 2.
- In order to ensure compliance with the terms of PPM, it will be mandatory for AIFs to carry out an annual audit of such compliance. The audit may be carried out by external or internal auditor.
Please note that the audit of sections of PPM relating to ‘Risk Factors’, ‘Legal, Regulatory and Tax Considerations’ and ‘Track Record of First Time Managers’ are optional.
- The findings of the audit, along with corrective steps, (if any) must be communicated to the Trustee or Board or Designated Partners of the AIF, Board of the Manager and SEBI.
- The requirements of PPM will not be applicable to:
(i) Angel Funds as defined in SEBI (Alternative Investment Funds), Regulations 2012.
(ii) AIFs/Schemes in which each investor commits to a minimum capital contribution of INR 70 crores (USD 10 million or equivalent, in case of capital commitment in non-INR currency) and also provides a waiver to the fund from the requirement of PPM in the SEBI prescribed template and annual audit of terms of PPM, in the manner provided at Annexure 3.
Please note that these requirements shall come into effect from March 01, 2020.
- Performance Benchmarking of AIFs:
- It was considered appropriate that an industry benchmark be developed to compare the performance of AIF industry against other investment avenues.
- Further, in order to enhance the flexibility in the AIF industry, SEBI has decided to introduce the following:
- Mandatory benchmarking of the performance of AIFs (including Venture Capital Funds) and the AIF industry.
- A framework for facilitating the use of data collected by Benchmarking Agencies to provide customized performance reports.
- In this regard SEBI has mandated the following:
(i) Any association of AIFs (“Association”), which in terms of membership, represent at least 51% of the number of AIFs, may notify one or more Benchmarking Agencies, with whom each AIF shall enter into an agreement for carrying out the benchmarking process.
(ii) The agreement between the Benchmarking Agencies and AIFs must cover the mode and manner of data reporting, specific data that needs to be reported, terms including confidentiality in the manner in which the data received by the Benchmarking Agencies may be used, etc.
(iii) AIFs must report all the necessary information including scheme-wise valuation and cash flow data to the Benchmarking Agencies in a timely manner for all their schemes which have completed at least one year from the date of ‘First Close’.
- The operational guidelines for performance benchmarking are provided at Annexure 4.
- In addition to the standard benchmark report prepared by the Benchmarking Agencies, if any AIF seeks customized performance reports in a particular manner, the same may be generated by the Benchmarking Agencies, subject to:
(i) Consent of the AIFs, whose data needs to be considered for generation of the customized performance report.
(ii) Terms and conditions, including fees, decided mutually between the Benchmarking Agencies and the AIF.
Please note that the requirements mentioned above for Performance Benchmarking will not apply to Angel Funds registered under sub-category of Venture Capital Fund under Category I – AIF.