Sebi proposes performance benchmarking, standardisation of draft documents by AIFs

With an aim to create a conducive environment for a sound Alternative Investment Fund (AIF), Sebi has proposed to introduce minimum benchmarks for disclosure of performance history of such asset class and standardisation of draft document issued to investors by them.

AIFs are privately-pooled investment funds which collect funds from investors, whether Indian or foreign, for investing in accordance with a defined investment policy for the benefit of their investors. There are three different categories of AIFs.

The markets regulator noted that investments by registered AIFs have grown 75 per cent year-on-year in the last two years. Total investments made by AIFs have increased from over Rs 35,000 crore in March 2017 to Rs 61,400 crore in March 2018 to Rs 1.1 lakh crore in March 2019.

However, at present, there is no disclosure by AIFs indicating returns on their investments and in turn their performance available in public domain, Sebi said while issuing the draft papers.

Also, there is no standard format for draft document or private placement memorandum (PPM) currently, which provides the necessary information that a prospective investor would need to take an informed decision to invest in a particular AIF.

Such asset class submits draft PPMs to Sebi before launch of their schemes for incorporation of comments received from the regulator in such draft documents. The regulator has observed that there is significant variation in the manner in which various clauses, explanations and illustrations are incorporated in the PPMs.

Accordingly, Sebi has proposed to introduce these measures which are aimed at creating a conducive environment for a sound AIF.

The regulator has sought public comments on these proposals till December 25 and final regulation will be put in place after taking into account suggestions of all stakeholders.

With regard to introduction of minimum benchmarks for disclosure of performance history of AIFs, the regulator has proposed that AIFs which are registered with Sebi for at least 3 years, report their audited scheme-wise performance data to single or multiple benchmarking agencies (to be identified later), for benchmarking the individual fund's performance with the comparable industry performance.

In all and any documents and media for marketing or promoting the AIF, if any data on the performance of such asset class is mentioned, the benchmark report of the AIF provided by the benchmarking agency to also be provided. Besides, a copy of this report should be provided to all investors.

"Any investment manager of an existing unregistered fund, including foreign funds, shall provide the data on their investments in Indian companies, to benchmarking agencies, when they seek registration as AIF," Sebi said in the proposal.

"If any performance data based on previous experience of the investment manager is referred in the fund documents or marketing material furnished to Sebi, the same shall be accompanied by the benchmark report received by the applicant," it added.

Sebi said any association of registered AIFs which in terms of membership represent at least 50 per cent of such registered asset class, may propose one or more benchmarking agencies, who shall enter into agreement with AIFs for carrying out benchmarking process.

All the AIFs that have been registered for more than 3 years, will provide the necessary information to all the agencies.

Considering the importance of PPM to investors, to ensure that minimum standard of information be available in such draft papers and to facilitate the processing of AIF applications in a time bound manner, Sebi has proposed for standardisation of PPM and issued draft templates for PPM prepared for all the three categories of AIFs.

The draft templates focuses on clarifying the riskiness of investment in AIFs, sequence of presentation of information as well as the list of minimum information to be provided under each heading in the PPM.

On an annual basis, Sebi has proposed an audit of the compliance of the AIF with the terms of the PPM, with special emphasis on impact of side letters on other investors, shall be carried out by an auditor. The findings of the audit would be communicated to the trustee, board of the investment manager and Sebi.

In case of any adverse findings, the corrective steps taken would also be submitted.

Initially, the audit may be carried out by an internal or external auditor. Going ahead, Sebi may notify that the audit would be carried out only by an external auditor.

Also, as per the proposal, summary of audit findings with respect to compliance with terms of PPM would be shared with all investors.