Direct plan for schemes of AIFs and trail model for distribution commission in AIFs

Chapter 16 - Direct plan for schemes of AIFs and trail model for distribution commission in AIFs

16.1.

• The PPM templates in Annexure 1 and Annexure 2 require AIFs to disclose important information relating to:

  1. Direct Plan available to investors; and

  2. Different fees and expenses that may be charged by the AIF/scheme.

• This includes fees such as:

  1. Distribution fees.a

  2. Placement fees.

• The purpose of these requirements is to:

  1. Give investors greater flexibility when investing in AIFs;

  2. Improve transparency regarding the expenses charged; and

  3. Help prevent mis-selling of AIF products.

• SEBI has therefore prescribed certain requirements regarding Direct Plans and fees/expenses charged by AIFs.

16.1. Direct Plan for schemes of AIFs

16.1.1.

• Every AIF scheme must provide investors with an option to invest through a Direct Plan.

• Under the Direct Plan, the investor invests without paying any distribution fee or placement fee.

• Therefore, investors who choose the Direct Plan will not be charged fees for distribution or placement of the AIF units.

Example:

• Investor A invests in an AIF through the regular route and a placement fee is applicable.

• Investor B chooses the Direct Plan.

• Investor B will not be charged any distribution fee or placement fee under the Direct Plan boarded via Direct Plan only.

16.1.2.

• If an investor approaches an AIF through a SEBI-registered intermediary, and that intermediary separately charges the investor a fee, the investor must be onboarded through the Direct Plan.

• This applies where the intermediary charges fees such as:

  1. Advisory fee.

  2. Portfolio management fee.

• The purpose is to ensure that the investor is not charged an additional distribution or placement fee by the AIF when the intermediary is already separately charging the investor for its services.

Example:

• Investor A approaches an AIF through a SEBI-registered investment adviser.

  1. The adviser separately charges Investor A an advisory fee.

  2. Investor A must therefore be onboarded through the Direct Plan of the AIF.

• The AIF cannot charge Investor A a separate distribution or placement fee.

16.2. Trail model for distribution commission in AIFs

16.2.1.

• If an AIF charges any distribution fee or placement fee, it must clearly disclose this to the investor at the time of onboarding.

• This disclosure is mandatory regardless of how the distribution fee is charged.

• The investor should therefore know about the applicable distribution/placement fee before becoming an investor in the AIF.

Example:

• Investor A is being onboarded into an AIF.

  1. The AIF involves a distribution fee of ₹2 lakh.

  2. The AIF must disclose this fee to Investor A at the time of onboarding.

• This requirement applies even if the fee is structured or collected in a different manner.

16.2.2.

• For Category III AIFs, any distribution fee or placement fee must be charged to investors only on an equal trail basis.

  1. This means that the fee cannot be charged as a one-time upfront fee.

  2. Category III AIFs cannot charge an upfront distribution/placement fee to investors either Directly or Indirectly.

• Any distribution/placement fee that is paid must come only out of the management fee received by the Manager of the Category III AIF.

Example:

• A Category III AIF charges a management fee to the scheme.

  1. The Manager has to pay a distribution fee to a distributor.

  2. The Manager may pay this distribution fee from the management fee it receives.

• However, the Manager cannot separately charge Investor A an upfront placement fee of ₹1 lakh.

16.2.3.

• Category I and Category II AIFs may pay distribution/placement fees to distributors in two parts:

  1. Up to one-third of the total fee may be paid upfront.

  2. The remaining two-thirds must be paid on an equal trail basis over the tenure of the fund.

• Therefore, the entire distribution/placement fee cannot be paid upfront.

Example:

• Total distribution fee = ₹9 lakh.

  1. Maximum upfront payment: ₹9 lakh × 1/3 = ₹3 lakh

  2. Remaining fee: ₹9 lakh − ₹3 lakh = ₹6 lakh

• The ₹6 lakh must be paid to the distributor on an equal trail basis throughout the fund's tenure.