Securities and Exchange Board India (SEBI) has come out with a consultation paper around Alternative Investment Funds (AIFs).
The first paper deals with Direct Plan for Schemes of AIFs and Trail Model for Distribution Commission in AIFs.
The second consultation paper revolves around providing options to AIFs and their investors to carry forward their unliquidated investments on completion of the tenure of a scheme.
The objective of the consultation papers is to seek comments/inputs/suggestions on the proposals from all the stakeholders.
What is an Alternative Investment Fund (AIF)?
Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle designed to enable sophisticated investors, whether Indian, to make investments in accordance with a defined investment policy for the benefit of its investors. Whether or foreigner, collects money from.
background
Presently AIFs offer ‘Direct Scheme’ to investors in their Private Placement Memorandum (PPM) at their option. There will be no distribution or placement charges for the investor in such a direct plan.
Furthermore, the AIF Regulations do not impose any restrictions on how much of any distribution commission or placement fee may be paid upfront to intermediaries. It may be noted that, in order to curtail mis-selling, the SEBI (Mutual Funds) Regulations, 1996 and the SEBI (Portfolio Managers) Regulations, 2020, mandate that Asset Management Companies and Portfolio Managers must notify their distributors A full trail model of commission should be adopted.
SEBI proposal
SEBI has proposed mandate direct plans AIF Regulations for AIFs allow AIFs to raise funds from investors only on the basis of private placement. An investor can also invest in AIF through a SEBI registered Investment Advisor or through a portfolio manager.
Investors who wish to invest in AIFs through an investment advisory portfolio manager may be charged twice, once as investment advisor’s advisory fee or portfolio manager’s portfolio management fee and separately as AIF distribution fee In. To address this issue of potential double duty to investors, a proposal was made before the Alternative Investment Policy Advisory Committee (AIPAC) to mandate AIFs to offer direct scheme options to investors.
It has been proposed to make it mandatory for AIFs to offer direct plan option to investors for which no distribution/placement fee would be payable. AIFs ensure that any investor who approaches the AIF through an intermediary, who charges the investor separately (such as advisory or portfolio management fees), invests in the AIF only through the Direct Plan route.
Also, taking into account the lower distribution charges applicable to them as compared to other investors, the investors on-boarded through the direct plan provided for an adjusted higher number of units, such that all investors would get the same net The Asset Value (NAV) will continue to be displayed. ) on their unit holdings.
Trail model for distribution commission in AIF
background
While Mutual Fund Regulations and Portfolio Manager Regulations mandate trail commission for distributors (instead of upfront commission) to reduce mis-selling, there are no regulatory guidelines regarding commission/distribution fee in case of AIFs.
Recently, industry feedback suggests that at least in some cases, the amount of upfront commission for AIF disbursements has increased to around 4%-5% of the committed amount. The consultation paper states that such high upfront commission, especially in contrast to the trail commission of other products, increases the possibility of mis-selling of AIF schemes.
To address the issue of possible mis-selling of AIFs, and to ensure parity with other SEBI products and offerings, a proposal to adopt the trial model of distribution commission in AIFs was placed before AIPAC.
SEBI said AIPAC deliberated on the proposal and recommended that in case of Category III AIFs, which are somewhat more directly comparable with mutual fund/portfolio manager services, the placement fee/distribution fee be charged from investors on a trial basis May go.
In case of Category I AIFs and Category II AIFs, investors may also be charged on a trial basis, however, a certain higher amount of distribution fee (ie one-third of the current value of the total distribution fee) will be paid upfront. can be done from in the first year. This is to acknowledge the need for some appropriate incentives to ensure the flow of savings into the private capital markets.
Moving to a trial model of commission will ensure that distribution of AIFs is in line with the interest of investors, and will reduce the scope for mis-selling of AIFs. Further, it will bring AIFs at par with the regulatory framework for portfolio managers and mutual funds by removing the existing commission arbitrage between these products.
Further, in another consultation paper, SEBI sought suggestions on a proposal to provide an option to AIFs and their investors to liquidate unliquidated investments of a scheme at the end of its tenure, while ensuring proper recognition of asset value and fund performance. can be carried forward.
As per Regulation 13(5) of the AIF Regulations, AIFs may extend the period of a scheme up to two years, subject to the approval of two-thirds of the investors by the value of their investments in the AIF. Further, as per Regulation 29(8) of the AIF Regulations, AIFs/Managers have the power to exclusively distribute the assets of the AIF, after obtaining the approval of at least 75% of the investors by the value of their investments in the AIF. There is an option. ,
At the end of a scheme’s tenure of more than two years and at the end of the extended tenure of the LVF, the AIF/Manager may wind up the existing scheme and transfer the non-custodial investment to a new scheme, provided that 75% Consent of the investors should be obtained. worth.
If consent is not received for in-species distribution or transfer to a new scheme as per the terms and conditions proposed by SEBI, the AIF/Manager shall compulsorily liquidate the investment at the Liquidation Value within one year of termination.
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