Guidelines with respect to excusing or excluding an investor from an investment of AIF

Chapter 15 - Guidelines with respect to excusing or excluding an investor from an investment of AIF

15.1.

• An AIF may allow an investor to opt out of a particular investment in certain specified circumstances.

• This means the investor does not have to participate in that specific investment, even though the investor continues to remain invested in the AIF.

• The circumstances in which such an excuse/opt-out can be given are set out in the provisions that follow.

Example:

• An AIF identifies an investment opportunity in Company X.

• Investor A has a valid reason for not participating in this particular investment.

• If the circumstances prescribed under the applicable framework are satisfied, the AIF may excuse Investor A from that investment.

15.1.1.

• An AIF may excuse an investor from participating in a particular investment if the investor determines that participating would violate an applicable law or regulation.

• The investor must support this position based on the opinion of a legal professional or legal advisor.

• Therefore, the investor cannot simply refuse an investment for personal reasons. There must be a legal or regulatory basis for the investor's inability to participate.

Example:

• An AIF identifies an investment opportunity in Company X.

• Investor A consults its legal advisor.

• The legal advisor concludes that Investor A's participation in Company X would violate a law or regulatory requirement applicable to Investor A.

• Investor A informs the AIF and confirms this position based on the legal advice.

• The AIF may then excuse Investor A from participating in that particular investment.

15.1.2.

• An investor may be excused from a particular investment if the investor had already disclosed to the Manager that participating in such an investment would violate the investor's internal policy.

• This disclosure must be made as part of:

  • The Contribution Agreement; or

  • Any other agreement entered into between the investor and the AIF.

• The Manager must ensure that the agreement also requires the investor to inform the AIF of any change in the disclosed internal policy.

• The investor must report such change within 15 days from the date of the change.

Example:

• Investor A's internal investment policy prohibits it from investing in companies involved in gambling.

• Investor A discloses this restriction to the AIF Manager in the Contribution Agreement.

• The AIF later identifies a gambling-related investment.

• Investor A may be excused from participating in that particular investment.

• If Investor A later changes its internal policy, Investor A must inform the AIF within 15 days of the change.

15.2.

• The AIF Manager may exclude an investor from a particular investment opportunity if the Manager is satisfied that the investor's participation would:

  • Cause the AIF scheme to violate an applicable law or regulation; or

  • Have a material adverse effect on the AIF scheme.

• The Manager must record the reasons for excluding the investor.

• The Manager must also maintain any documents relied upon to support the decision, where applicable.

Example:

• An AIF is considering an investment in Company X.

• If Investor A participates, the AIF scheme may breach an applicable regulatory restriction.

• The Manager reviews the situation and decides that Investor A should not participate in this particular investment.

• The Manager must record the reason for the exclusion and keep the relevant supporting documents.

15.3.

• If an investor in an AIF is itself another AIF or investment vehicle, it may be partially excused or excluded from a particular investment.

• The extent of the excuse or exclusion will depend on the portion of that investor's contribution that comes from its underlying investors who are themselves required to be excused or excluded from the investment.

• Therefore, the intermediary AIF/investment vehicle does not have to completely opt out if only some of its underlying investors are unable to participate.

• The Manager must record the reasons for the excuse or exclusion and maintain any supporting documents relied upon.

Example:

• AIF A invests ₹10 crore in AIF B.

• AIF B has 5 underlying investors.

• Investors representing ₹3 crore of AIF B's contribution cannot participate in a particular investment.

• AIF B may therefore be partially excused/excluded to the extent of ₹3 crore from that investment.