On-boarding of investors by AIFs
Chapter 3 - On-boarding of investors by AIFs
3.1. Eligibility for on-boarding investors to AIFs
3.1.1.
Under Regulation 10(a) of the AIF Regulations, an AIF may raise funds by issuing units to investors.
The AIF may raise funds from:
Indian investors.
Foreign investors.
Non-Resident Indians (NRIs).
Therefore, the AIF Regulations do not restrict fundraising only to Indian investors.
The Manager of the AIF is responsible for ensuring certain requirements are fulfilled at the time of onboarding investors.
These requirements must be checked and complied with before accepting the investor into the AIF.
(a).
A foreign investor in an AIF must be a resident of a country whose securities market regulator satisfies the specified regulatory cooperation requirement.
The securities market regulator of that country must be either:
(a). An Appendix A Signatory - The regulator must be a signatory to the International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding (MMoU).
(b). A Bilateral MOU Signatory - Alternatively, the regulator must have entered into a bilateral Memorandum of Understanding (MOU) with SEBI.
So, the eligibility of a foreign investor depends on whether the securities market regulator of the investor's country has the required regulatory cooperation arrangement with other regulators/SEBI.
Bilateral MOU
For the purpose of the above requirement, “Bilateral Memorandum of Understanding with SEBI means a specific type of agreement between SEBI and an authority outside India.
It must be a bilateral Memorandum of Understanding (MOU) entered into between:
SEBI.
Any authority outside India.
The MOU must provide for an information-sharing arrangement between SEBI and the foreign authority.
The information-sharing arrangement must be of the type specified under Section 11(2)(ib) of the SEBI Act, 1992.
Therefore, merely having an MOU with SEBI is not sufficient.
The MOU must specifically provide for the required information-sharing mechanism contemplated under Section 11(2)(ib).
Government or Government-Related Investors from Approved Countries
AIFs may accept commitments from an investor that is a Government or Government-related investor.
Normally, such a foreign investor would be required to satisfy the conditions specified earlier regarding the regulatory authority of its country.
However, an exception is available where the Government or Government-related investor does not satisfy those conditions.
Such an investor may still invest in the AIF if it is resident in a country approved by the Government of India.
So, the approval of the Government of India provides an alternative route for eligible Government or Government-related investors.
(b).
The investor or its beneficial owner must not be a person appearing on the Sanctions List notified by the United Nations Security Council.
The beneficial owner is determined in accordance with Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.
The investor must also not be a resident of a country/jurisdiction identified by the Financial Action Task Force (FATF) in its public statement as having specified AML/CFT deficiencies.
The restriction covers the following:
(i). Jurisdiction subject to counter-measures
The country is identified as having strategic deficiencies in Anti-Money Laundering (AML) or Combating the Financing of Terrorism (CFT).
Counter-measures apply to that jurisdiction.
(ii). Jurisdiction not making sufficient progress
The country has not made sufficient progress in addressing the identified AML/CFT deficiencies; or
The country has not committed to an action plan developed with FATF to address those deficiencies.
Therefore, at the time of onboarding, the Manager must ensure that the investor:
Is not on the UN Security Council Sanctions List;
Is not a resident of a jurisdiction subject to FATF counter-measures; and
Is not a resident of a jurisdiction that has failed to make sufficient progress or commit to the required FATF action plan.
(c). Exception for SWAGAT-FI
The above requirements under Para 3.1.1(a) and (b) do not apply when onboarding a Single Window Automatic and Generalised Access for Trusted Foreign Investor (SWAGAT-FI).
SWAGAT-FI is as defined under Regulation 2(1)(r) of the SEBI (Foreign Portfolio Investors) Regulations, 2019.
3.1.2.
If an investor has already been onboarded to a scheme of an AIF, but subsequently fails to meet the conditions specified in Para 3.1.1, certain restrictions apply.
The Manager of the AIF shall not make any further drawdown from that investor.
This restriction applies to further capital contributions required for making investments.
The restriction continues as long as the investor does not meet the conditions specified in Para 3.1.1.
Once the investor again satisfies the required conditions, the Manager may resume drawing down further capital contributions from that investor.
Therefore:
The investor's failure to meet the conditions does not necessarily mean that the investor must immediately exit the AIF.
Instead, the restriction is on further capital drawdowns for investments until the conditions are satisfied again.
3.2. Conditions for fund raising by AIFs
3.2.1.
All AIFs must ensure that any marketing documents relating to the AIF or its scheme are distributed only on a private basis.
The marketing documents may be distributed only to the proposed investors of the AIF/scheme.
Such marketing documents must be consistent with and in accordance with the PPM of the relevant AIF/scheme.
The information provided in marketing materials must therefore not contradict, differ from, or go beyond the disclosures made in the PPM in a manner inconsistent with it.
The requirement applies to all marketing documents, if any, issued by the AIF or its scheme.
3.2.2.
The Manager of the AIF must provide the Placement Memorandum (PPM) to the investor before the investor:
Provides a commitment to the AIF.
Makes an investment in the AIF.
The investor must therefore have an opportunity to review the PPM before committing or investing.
The Manager must also obtain an appropriate acknowledgement from the investor confirming that the PPM has been received.
The acknowledgement should establish that the investor has received the PPM before making the commitment or investment.
Therefore, the Manager must ensure both:
Prior delivery of the PPM to the investor.
Acknowledgement of receipt from the investor.
3.2.3.
The AIF, Manager, Trustee and Sponsor are prohibited from offering assured returns to prospective investors or unitholders.
They cannot promise or guarantee that an investor will receive a fixed or predetermined return from the AIF.
The prohibition applies to:
The AIF.
The Manager.
The Trustee.
The Sponsor.
The prohibition applies when dealing with prospective investors as well as existing unitholders.
Therefore, marketing materials, communications or commitments made to investors must not contain any assurance or guarantee of returns.
The actual returns from an AIF depend on the performance of its investments and cannot be presented as guaranteed.
3.2.4.
The Contribution Agreement or Subscription Agreement, regardless of the name by which it is called, must be aligned with the terms of the PPM.
The terms and conditions contained in the agreement must be consistent with the disclosures and terms provided in the PPM.
The agreement cannot contain terms that go beyond or contradict the PPM.
The Manager must therefore ensure that the investor agreement does not introduce new rights, obligations, fees, conditions or arrangements that are not covered by the PPM.
Any terms agreed with an investor must remain within the framework disclosed in the PPM.
Example:
If the PPM specifies a particular management fee, the Contribution/Subscription Agreement cannot impose a higher or additional fee that is not disclosed in the PPM
If the PPM specifies certain investment terms, the agreement cannot provide the investor with different or additional terms beyond what is disclosed.
3.2.5.
Under Regulation 10(c) of the AIF Regulations, certain persons may invest jointly in an AIF.
Such joint investors may collectively meet the minimum investment amount prescribed for the relevant category or sub-category of AIF.
The following combinations are permitted:
(i). Investor and spouse - An investor may jointly invest with their spouse.
(ii) Investor and parent - An investor may jointly invest with their parent.
(iii) Investor and daughter/son - An investor may jointly invest with their daughter or son.
The joint investment must meet the minimum investment amount applicable to the relevant category/sub-category of AIF.
HEADING
For the joint-investor combinations mentioned above, not more than 2 persons can act as joint investors in an AIF.
Therefore, a maximum of two persons can jointly make an investment under this facility.
The permitted combinations include:
Investor and spouse.
Investor and parent.
Investor and daughter/son.
If any other persons act as joint investors, the minimum investment requirement applies separately to each investor.
The applicable minimum investment amount will be the amount prescribed under the AIF Regulations for the relevant category/sub-category of AIF.
Each joint investor must individually contribute towards the AIF/scheme.
Example:
Applicable minimum investment = ₹1 crore.
Investor and spouse jointly invest ₹1 crore - They may satisfy the minimum investment requirement collectively
Two unrelated investors jointly invest - Each investor must satisfy the ₹1 crore minimum investment requirement individually.
3.2.6.
With respect to units of an AIF issued to employees of the Manager as part of a profit-sharing arrangement.
Normally, Regulation 10(c) prescribes a minimum investment requirement for investors in an AIF.
However, this minimum investment requirement will not apply where the units are issued to employees without requiring them to make any contribution or investment.
Therefore, employees can receive AIF units for profit-sharing purposes even if they do not contribute their own money towards those units.
The exemption applies only when the units do not involve any contribution or investment by the employees.
If employees are required to contribute money or make an investment to receive the units, the exemption from Regulation 10(c) would not apply.
Example:
Manager awards units to an employee as part of a profit-sharing arrangement.
Employee contributes ₹0 towards those units.
Regulation 10(c) minimum investment requirement does not apply.
3.2.7.
With respect to an open-ended scheme of an AIF.
The first investment made by an investor must be in the form of a single lump-sum investment.
The amount of this first lump-sum investment must not be less than the minimum investment amount prescribed under the AIF Regulations.
The investor cannot make an initial investment below the prescribed minimum and subsequently increase it through additional contributions to reach the minimum.
Therefore, the minimum investment requirement must be satisfied at the time of the first investment itself.
Example:
Minimum investment requirement = ₹1 crore.
Investor's first lump-sum investment = ₹1 crore - Requirement satisfied
Investor's first investment = ₹60 lakh, followed later by ₹40 lakh - Requirement not satisfied, because the first lump-sum investment was below ₹1 crore.
