Vinayak Burman, Managing Partner, Vertices Partners
Hardik Thakker, Associate Partner, Vertices Partners
Paul Albert, Associate Manager, Vertices Partners
The Securities and Exchange Board of India (“SEBI” or “Board”) vide its notification dated October 19, 2020 has notified the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2020 (“Amendment Regulations”). The Amendment Regulations has introduced 2 (two) amendments to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).
The first amendment deals with the eligibility criteria of the key investment team of the Manager of the Alternative Investment Fund. Before the Amendment Regulations, the AIF Regulations required that at least 1 (one) key personnel should have a minimum experience of 5 (five) years in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets. As per the Amendment Regulations, an additional criteria have been included in relation to the qualification/experience of the key investment team. This additional criteria states that at least one key personnel of the key investment team of the Manager should have professional qualification in finance, accountancy, business management, commerce, economics, capital market, or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA Institute or any other qualification as may be specified by the Board. It further states that the requirements of experience (which was the condition that was already encapsulated in the AIF Regulations) and professional qualification (which has been introduced by the Amendment Regulations) may be fulfilled by the same key personnel.
The second amendment introduced by the Amendment Regulations is with respect to the constitution of the Investment Committee. The Manager may constitute an Investment Committee to approve the investment decisions of the Alternative Investment Fund. Further, certain conditions have also been introduced with respect to the Investment Committee:
- The members of the Investment Committee shall be equally responsible as the Manager for investment decisions of the Alternative Investment Fund.
- The Manager and members of the Investment Committee shall jointly and severally ensure that the investments of the Alternative Investment Fund are in compliance with the provisions of the AIF Regulations, the terms of the placement memorandum, agreement made with the investor, any other fund documents and any other applicable law.
- External members whose names are not disclosed in the placement memorandum, or agreement made with the investor or any other fund documents at the time of on-boarding investors, shall be appointed to the Investment Committee only with the consent of at least seventy-five percent of the investors by the value of their investment in the Alternative Investment Fund or scheme.
- Any other conditions as specified by the Board from time to time.
While Alternative Investment Funds used to have investment committees, the AIF Regulations did not provide for the constitution of an Investment Committee. Pursuant to the Amendment Regulations, the Manager of the Alternative Investment Fund has discretion to constitute an Investment Committee. However, at the same time, the Investment Committee shall be equally responsible as the Manager for investment decisions of the Alternative Investment Fund in addition to the other requirements as set forth above.
Further, the SEBI has issued a circular dated October 22, 2020 in relation to the processing of applications for registrations of Alternative Investment Funds and the launch of schemes. As per the said circular, SEBI has sought clarification from the Government of India and Reserve Bank of India on the applicability of Clause 4 of schedule VIII under Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 to investment made by an Alternative Investment Fund whose Investment Committee approves investment decisions and consists of external members who are not ‘resident Indian citizens’. Pending such clarification, the applications wherein Investment Committee proposed to be constituted to approve investment decisions of Alternative Investment Fund includes external members who are not ‘resident Indian citizens’, shall be considered only after receipt of clarification from the Government of India and Reserve Bank of India.