SEBI introduces enhanced disclosure and standardized reporting for AIFs

Timothy Lopes, Executive, Vinod Kothari Consultants Pvt. Ltd.

finserv@vinodkothari.com

SEBI has vide circular dated 5th February, 2020[1] introduced a standard Private Placement Memorandum (PPM) and mandatory performance bench-marking for Alternative Investment Funds (AIF). The move is part of SEBI’s initiative to streamline disclosure standards in the growing AIF space. The changes are made based on the recommendations of the SEBI Consultation Paper[2] on ‘Introduction of Performance Bench-marking’ and ‘Standardization of Private Placement Memorandum for AIFs’.

Template for Private Placement Memorandum (PPM)

The SEBI (AIF) Regulations, 2012 specified broad areas of disclosures required to be made in the PPM. This led to a significant variation in the manner in which various clauses, explanations and illustrations are incorporated in the PPMs. Hence, this led to concerns that the investors receive a PPM which provides information in a manner which is too complex to easily comprehend or with too little information on important aspects of the AIF, e.g. potential conflicts of interests, risk factors specific to AIF or its investment strategy, etc.

Thus, SEBI has mandated a template[3] for the PPM providing certain minimum level of information in a simple and comparable format. The template for PPM consists of two parts –

Part A – Section for minimum disclosures, which includes the following –

  • Executive Summary –

This lays down the summary of the parties and terms of the transaction. In effect, it is a summary term sheet of the PPM, laying down essential features of the transaction.

  • Market opportunity / Indian Economy / Industry Outlook;

The theme of this section includes a general economic background followed by investment outlook and sector/ industry outlook. This section may include any additional information as well which may be relevant. An illustrative list of additional items which may be included has been specified in the template.

  • Investment Objective, Strategy and Process;

A tabular representation of the investment areas and strategy to be employed is laid down in under this head. Further, a flow chart depicting the investment decision making process and detailed description of the same is required to be specified. This will give investors a comprehensive idea of the ultimate investment objective and strategy.

  • Fund/Scheme Structure;

A diagrammatic structure of the Fund/ Scheme which discloses all the key constituents and a brief description of the activities of the Fund/ Scheme.

The diagrammatic representation shall specify, for instance, the sponsor, trustee, manager, custodian, investment advisor, offshore feeder, etc. 

  • Governance Structure; 

To enhance the governance disclosures to investors and ensure transparency this section mandates disclosures of all details of each person involved in the Fund/ Scheme structure, including details about the investment team, advisory committees, operating partners, etc.

  • Track Record of the Manager;

The track record of the Fund Manager is of great significance since investors would like to know the skill, experience and competence of the Manager before making an investment.

The template mandates disclosures about the manager including explicit disclosure of whether he is a first time manager or experienced manager.

  • Principal terms of the Fund/ Scheme;

Explicit disclosures about the principal terms such as minimum investment commitment, size of the scheme, target investors, expenses, fees and other charges, etc. are required to be disclosed as per the template.

Major terms and disclosures are covered under this section. 

  • Principles of Portfolio Valuation;

This section would broadly lay down the principles that will be used by the Manager for valuation of the portfolio company.

The investors would get a fair idea of the manner in which valuation of the portfolio would be undertaken, in this section.

  • Conflicts of interest;

All present and potential conflicts of interests that the manager would envisage during the operation of the Fund/ Scheme at various levels are to be disclosed under this section.

This would enable investors to factor in the conflicts of interests existing or which may arise in the future of the fund and make an informed decision.

  • Risk Factors;

All risk factors that investors should take into account such as specific risks of the portfolio investment or the fund structure are required to be disclosed in the PPM.

These risks would include operational risks, tax risks, regulatory risks, etc. among other risk factors. 

  • Legal, Regulatory, and Tax Consideration;

This section shall include standard language for legal, regulatory and tax considerations as applicable to the Fund/Scheme, including the SEBI (AIF) Regulations, 2012, Takeover Regulations, Insider Trading Regulations, Anti-Money Laundering, Companies Act, 2013. Taxation aspects of the fund are also to be disclosed.

  • Illustration of fees, expenses and other charges;

A tabular representation of the fees and other charges along with the expenses of the Fund are required to be disclosed for transparency of investors and no hidden charges. 

  • Distribution Waterfall;

The payment waterfall to different classes of investors is required to be disclosed in detail.

  • Disciplinary History.

Any prior disciplinary action taken against the sponsor, manager, etc. will be required to be disclosed for better informed decision making of investors.

Part B – Supplementary section to allow full flexibility to the Fund in order to provide any additional information, which it deems fit.

The template requires enhanced disclosures mandatorily required to be made by the AIF, such as risk factors, investment strategy, conflicts of interest and several other areas that may affect the interest of the investors of AIFs.

This will standardize disclosures across the AIF space and increase simplicity of information to investors in a standard reporting format. Enhancing disclosure requirements will increase investor understanding about AIF schemes.

Further there is a mandatory requirement to carry out an annual audit of the compliance of the PPM by either an internal or external auditor/ legal professional. The findings arising out of the audit are required to be communicated to the Trustee or Board or Designated Partners of the AI, Board of the Manager and SEBI.

Exemption has been provided from the above PPM and audit requirements to the following classes of funds:

  1. Angel Funds as defined in SEBI (Alternative Investment Funds), Regulations 2012.
  2. AIFs/Schemes in which each investor commits to a minimum capital contribution of Rs. 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 of the SEBI Circular.

These requirements are however applicable from 01st March, 2020.

Bench-marking for disclosure of performance

Considering that investments by AIFs have grown at a rate of 75% year on year in the past two years, a need was felt to introduce disclosures by AIFs indicating returns on their investments. Prior to the SEBI circular there was no disclosure requirement for AIFs on their investment performance.

There was no bench-marking of returns disclosed by AIFs to their prospective or existing investors. However, returns generated on investment is one of the most important factors taken into consideration by potential investors and is also important for existing investors in order to be informed about the performance of their investment in comparison to a benchmark.

Therefore, it is felt that there is a need to provide a framework to bench-marking the performance of AIFs to be available for the investors and to minimize potential misselling.

In this regard SEBI has introduced the following –

  1. Mandatory bench-marking of the performance of AIFs (including Venture Capital Funds) and the AIF industry.
  2. A framework for facilitating the use of data collected by Bench-marking Agencies to provide customized performance reports.

The new bench-marking framework prescribes that each AIF must enter into an agreement with a Bench-marking Agency (notified by an AIF association representing at least 51% of the number of AIFs) for carrying out the bench-marking process.

The agreement between the Bench-marking Agencies and AIFs shall 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 Bench-marking Agencies may be used, etc.

Reporting to the Bench marking Agency –

AIFs are required to report all the necessary information including scheme-wise valuation and cash flow data to the Bench-marking Agencies in a timely manner for all schemes which have completed at least one year from the date of ‘First Close’. The form and format of reporting shall be mutually decided by the Association and the Benchmarking Agencies.

If an applicant claims a track-record on the basis of India performance of funds incorporated overseas, it shall also provide the data of the investments of the said funds in Indian companies to the Benchmarking Agencies, when they seek registration as AIF.

PPM and Marketing material –

In case past performance of the AIF is mentioned in the PPM or any marketing material the performance versus benchmark report provided by the benchmarking agencies for such AIF/Scheme is also required to be provided.

Operational Guidelines for the benchmarking criteria is placed in Annexure 4 to the SEBI Circular.

Further there is an exemption from the above requirements to Angel Funds registered under sub-category of Venture Capital Fund under Category-1 AIF.

Conclusion

These changes are likely to bring about higher disclosure and transparency in the AIF space, especially for existing as well as potential investors of AIFs. Standardization of PPM will eliminate any variance from the manner of disclosures made by various AIFs.

Links to related write ups –

http://vinodkothari.com/2018/03/can-aif-grant-loans/

http://vinodkothari.com/wp-content/uploads/2018/03/PPT-on-financial-and-capital-markets_27-02-18_final.pdf

http://vinodkothari.com/aifart/

[1] https://www.sebi.gov.in/legal/circulars/feb-2020/disclosure-standards-for-alternative-investment-funds-aifs-_45919.html

[2] https://www.sebi.gov.in/reports-and-statistics/reports/dec-2019/consultation-paper-on-introduction-of-performance-benchmarking-and-standardization-of-private-placement-memorandum-for-alternative-investment-funds_45215.html

[3] https://www.sebi.gov.in/sebi_data/commondocs/feb-2020/an_1_p.pdf

SEBI proposes to liberalise norms for REITs & InvITs

By Simran Jalan (simran@vinodkothari.com)

Introduction

Infrastructure Investment Trusts (InvITs) is an innovative vehicle that allows investors to invest in infrastructure assets. It was established with an objective of easing out the liquidity crunch in the infrastructure space. Real Estate Investment Trusts (REITs) has been one of the most important vehicles for making collective investments in commercial real estate. Emanating in the USA in 1960s as a tax transparent collective investment vehicle, REITs subsequently have been used by several other countries, and have done remarkably well.

The Securities Exchange Board of India (SEBI) had notified the SEBI (Infrastructure Investment Trusts) Regulations, 2014[1] (InvITs Regulations) and SEBI (Real Estate Investment Trusts) Regulations, 2014[2] (REITs Regulations) on September 26, 2014. With the introduction of these regulations and fast-growing cities needing more investments in commercial properties and infrastructures, it was expected that there will be a surge in these collective investment vehicles in India. However, the current scenario depicts a different story. Till date, only 3 InvITs have issued and listed their units raising approximately Rs. 10,000 crores and 1 REIT is in the process of making a public offer. Despite various relaxations given by the market regulator to these investment vehicles, they failed to attract investors.

Therefore, to gear up the market for REITs and InvITs and to increase the participants in this sector, SEBI has issued a consultation paper[3] with a proposal to amend regulations pertaining to REITs and InvITs. In this write up we intend to discuss the amendments proposed by SEBI.

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Real estate suffers from the paradox of being a much sought after mode of investment which is at the same time illiquid, has high investment threshold and is difficult to adminster and manage. However technology can provide newer and more efficient ways of investing smaller amounts into co-ownership of property.

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By Saloni Mathur , (finserv@vinodkothari.com)

The SEBI vide its circular dated 18th January 2018[1](‘Circular’) issued guidelines on participation by the strategic investors in InVIT’s and REIT’s. These guidelines have been issued in pursuance to the powers conferred on SEBI as per the provisions of the section 11(1) of the Securities and Exchange Board of India Act, 1992(‘SEBI Act’) read with regulation 33 of the Securities and Exchange Board of India (Real Estate Investment trusts) and (Infrastructure Investment trusts) regulations, 2014.[2]

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COMPARATIVE ANALYSIS OF AMENDMENTS TO INVIT’S AND REIT’S REGULATIONS, 2017

By Saloni Mathur & Kirti Sharma , (finserv@vinodkothari.com)

The SEBI in its Board Meeting on 18th September, 2017[1] approved several changes to the regulations issued for REITs.

The recent amendments by way of Securities and Exchange board of India (Infrastructure Investment Trusts) (Amendment) Regulations, 2017[2] and the Securities and Exchange board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2017[3] has brought about several changes in the existing regulations, which are the necessary incorporations to the changes that were proposed in the board meeting held on September 18th, 2017. SEBI in its Board Meeting made certain amendments to the SEBI (infrastructure Investment Trusts) Regulations, 2014 and SEBI (Real Estate Investment Trusts) Regulations, 2014 (referred to as ‘REIT Regulations’).

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SEBI Board approves amendments to REIT Regulations

By Shreya Routh, (finserv@vinodkothari.com)

Introduction

The SEBI in its Board Meeting on 18th September, 2017[1]approved several changes to the regulations issued for REITs. Before we start discussing the changes approved, let us quickly recap the way in which a REIT operates. REIT is a form of alternative investment vehicle. The working mechanism of a REIT involves purchase of commercial properties and then providing them on rent to tenants. The funding is done through issuance of units to public which are tradable on stock exchanges. The main advantage of a REIT structure is grounded on the tax exemptions that it receives.

Since, REITs mechanism observed a complete downfall and the fact that till date no REIT has been listed with SEBI, the proposed amendments come as a saviour intending to gear up the market for REITs. Read more