Chapter IV - General Obligations & Responsibilities & Transparency

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Chapter IV - GENERAL OBLIGATIONS AND RESPONSIBILITIES AND TRANSPARENCY

Section 20. General Obligations

20(1).

  • The following persons must abide by the Code of Conduct specified in the Fourth Schedule:

    1. Alternative Investment Fund (AIF)

    2. Key Management Personnel (KMP) of the AIF

    3. Trustee

    4. Trustee Company

    5. Directors of the Trustee Company

    6. Designated Partners or Directors of the AIF, as applicable

    7. Managers of the AIF

    8. Key Management Personnel of the Managers

  • Compliance with the Fourth Schedule Code of Conduct is mandatory for all the above persons and entities.

Explanation:

  • The term "Key Management Personnel (KMP)" is not defined directly in this regulation.

  • For the purpose of this sub-regulation, "Key Management Personnel" shall have the meaning specified by SEBI from time to time.

20(2).

  • The Manager and the governing body of the Alternative Investment Fund are responsible for ensuring compliance with the Code of Conduct specified in the Fourth Schedule.

  • Depending on the legal structure of the AIF, this responsibility rests with:

    1. The Trustee or Trustee Company (if the AIF is established as a trust).

    2. The Board of Directors (if the AIF is established as a company).

    3. The Designated Partners (if the AIF is established as an LLP).

  • These persons must ensure that the Alternative Investment Fund complies with the Code of Conduct at all times.

20(3).

  • Every Alternative Investment Fund (AIF) must have detailed policies and procedures governing its operations and decision-making.

  • These policies and procedures must be jointly approved by the Manager and the appropriate governing body of the AIF, namely:

    1. Trustee or Trustee Company (for a trust);

    2. Board of Directors (for a company); or

    3. Designated Partners (for an LLP).

  • The policies and procedures must ensure that all decisions of the AIF comply with:

    1. The SEBI (Alternative Investment Funds) Regulations;

    2. The Placement Memorandum;

    3. Agreements entered into with investors;

    4. Other fund documents; and

    5. Applicable laws.

20(4).

  • Every Alternative Investment Fund (AIF) must periodically review its approved policies and procedures, as well as any other internal policies.

    1. The review must be conducted regularly or whenever there are significant business developments that may affect the fund's operations.

    2. The purpose of the review is to ensure that the policies remain appropriate, effective, and consistent with the fund's activities and regulatory requirements.

  • Where necessary, the AIF should update or revise its policies and procedures to reflect changes in business operations, legal requirements, or industry practices.

20(5).

  • The Manager is responsible for every decision taken on behalf of the Alternative Investment Fund (AIF).

  • The Manager must ensure that every decision complies with the SEBI (Alternative Investment Funds) Regulations.

  • The Manager must also ensure compliance with:

    1. The Placement Memorandum;

    2. Agreements entered into with investors;

    3. Other fund documents; and

    4. Applicable laws.

20(6).

  • The Manager is responsible for ensuring that every decision of the Alternative Investment Fund (AIF) complies with its approved policies and procedures.

    1. Every decision must be consistent with the policies and procedures adopted under 20(3).

    2. The Manager must also ensure compliance with any other internal policies of the AIF, wherever applicable.

20(7).

  • The Manager may constitute an Investment Committee (by whatever name called) to approve the decisions of the Alternative Investment Fund (AIF).

  • The Investment Committee is optional and may be established by the Manager to review and approve investment or other fund decisions.

  • The composition, constitution, and functioning of the Investment Committee must comply with the conditions specified by SEBI from time to time.

  • Even if an Investment Committee is constituted:

    1. The Manager continues to remain responsible for the decisions of the AIF and compliance with the AIF Regulations, unless otherwise provided under the regulations.

20(8).

  • The members of the Investment Committee are responsible for ensuring that the Committee's decisions comply with the AIF's approved policies and procedures.

    1. Every decision taken by the Investment Committee must be consistent with the policies and procedures adopted under 20(3) of this regulation.

    2. The Investment Committee must ensure that its decisions follow the AIF's internal governance and compliance framework before granting approval.

Exemption from Investment Committee Compliance Requirements for Certain Large Investors

  • The requirements of 20(8) do not apply to certain Alternative Investment Funds that satisfy specified conditions.

  • This exemption is available only where each investor (other than the Manager, Sponsor, employees or directors of the AIF, or employees or directors of the Manager):

    1. Has committed to invest at least ₹70 crore (or an equivalent amount in foreign currency).

    2. In addition, each such investor must furnish a waiver to the AIF, in the manner specified by SEBI, agreeing that compliance with20(8) is not required.

Exemption for Large Value Funds for Accredited Investors

  • The requirements of 20(8) do not apply to a Large Value Fund for Accredited Investors (LVF).

  • An LVF is exempt from complying with the provisions of 20(8):

    1. Because it caters exclusively to accredited investors, who are considered financially sophisticated.

    2. This exemption recognises that accredited investors are capable of assessing investment risks and negotiating appropriate governance arrangements.

  • Accordingly, an LVF is not required to comply with the obligations prescribed under this 20(8), while remaining subject to the other applicable provisions of the AIF Regulations.

20(9).

  • Every member of the Investment Committee must comply with the Code of Conduct specified in the Fourth Schedule.

  • The Code of Conduct applies individually to each member of the Investment Committee while performing their duties.

  • Investment Committee members are required:

    1. To act with integrity, fairness, diligence, and in the best interests of the AlF and its investors, in accordance with the Fourth Schedule.

    2. Failure to comply with the Code of Conduct may result in regulatory action under the SEBI (Alternative Investment Funds) Regulations.

20(10).

  • External members whose names were not disclosed at the time of onboarding investors cannot be appointed to the Investment Committee without investor approval.

  • This applies where the external members' names were not disclosed:

    1. In the Placement Memorandum, investor agreement, or any other fund document at the time investors were admitted to the fund.

    2. Such members may be appointed only with the consent of at least 75% of the investors, calculated by the value of their investment in the AIF or the relevant scheme.

20(11).

  • The Sponsor or the Manager of the Alternative Investment Fund (AIF) must appoint a Custodian registered with SEBI.

    1. The Custodian is responsible for the safekeeping of the securities held by the AIF.

    2. The appointment of the Custodian must be made in the manner specified by SEBI from time to time.

Custody of Security and Goods

  • The Custodian appointed by the Sponsor or Manager of a Category III Alternative Investment Fund (AIF) must:

    1. Keep custody of the securities and goods received through the physical settlement of commodity derivatives.

    2. This requirement applies specifically to Category III AIFs that participate in commodity derivative transactions involving physical settlement.

    3. The Custodian is responsible for the safekeeping of the securities or physical goods delivered upon settlement of such derivative contracts.

Reporting and Disclosure by the Custodian

  • The Custodian appointed by the Sponsor or Manager of an Alternative Investment Fund (AIF) must report or disclose information relating to the AIF's investments.

    1. The information to be reported or disclosed and the manner of reporting shall be as specified by SEBI from time to time.

    2. The Custodian must comply with all reporting and disclosure requirements prescribed by SEBI in relation to the AIF's investments.

20(11A).

20(12).

  • Every Alternative Investment Fund (AIF) must inform SEBI of any material change in the information provided at the time of its registration application.

    1. A material change refers to a significant change that may affect the information or particulars originally submitted to SEBI during the registration process.

    2. The AIF has a continuing obligation to keep SEBI informed whenever such material changes occur.

20(13).

  • An Alternative Investment Fund (AIF) must obtain prior approval from SEBI before:

    1. Changing its Sponsor;

    2. Changing its Manager; or

    3. Undergoing a change in control of the AIF, Sponsor, or Manager.

  • The prior approval must be obtained before the proposed change takes effect.

  • The approval is subject to the payment of prescribed fees and compliance with any other conditions specified by SEBI from time to time.

20(14).

  • Every Alternative Investment Fund (AIF) must have its books of accounts audited every year.

    1. The audit must be conducted by a qualified auditor.

  • Usually , at the end of each financial year:

  • An AIF appoints a qualified chartered accountant to audit its books of accounts and verify that its financial records are accurate and compliant with the applicable regulations.

20(15).

  1. The Manager of an Alternative Investment Fund (AIF) shall not provide advisory services to investors regarding securities of companies in which the AIF has invested.

  2. The restriction applies to all persons other than:

    1. Investors of a Co-investment Scheme; and

    2. Clients of a Co-investment Portfolio Manager registered under the SEBI (Portfolio Managers) Regulations, 2020.

  3. This restriction applies only in relation to the securities of investee companies in which the AIF managed by the Manager has made investments.

Example:

  • An AIF invests in XYZ Pvt. Ltd.

  • The Manager cannot advise outside investors to invest in XYZ's securities.

  • However, the Manager may provide such advice to investors of a Co-investment Scheme or clients of a Co-investment Portfolio Manager, as permitted under the regulations.

20(16).

  • The Manager and the governing body of the Alternative Investment Fund (AIF) (Trustee, Trustee Company, Board of Directors, or Designated Partners, as applicable) must:

    1. Ensure that each scheme's assets and liabilities are kept separate from those of other schemes.

    2. The assets and liabilities of one scheme cannot be mixed or used for another scheme, ensuring that each scheme operates independently.

    3. Each scheme must maintain separate bank accounts and securities accounts, which must also be segregated and ring-fenced from those of other schemes.

20(17).

  • The Manager of an Alternative Investment Fund (AIF) must appoint a Compliance Officer.

  • The Compliance Officer is responsible for monitoring the AIF's compliance with the SEBI Act and all applicable regulatory requirements.

  • The Compliance Officer must ensure compliance with rules, regulations, notifications, circulars, guidelines, instructions, and any other directions issued by SEBI from time to time.

20(18).

  • The Compliance Officer appointed by the Manager must satisfy the eligibility criteria specified by SEBI from time to time.

    1. The eligibility requirements are not fixed in the regulations and may be prescribed or amended by SEBI through notifications, circulars, or other directions.

    2. The Manager must ensure that the appointed Compliance Officer continues to meet SEBI's prescribed eligibility standards.

20(19).

  • The Compliance Officer must immediately and independently report any non-compliance observed to SEBI.

    1. The report must be made as soon as possible, but not later than seven working days from the date the non-compliance is observed.

    2. The reporting obligation is independent, meaning the Compliance Officer must report the non-compliance regardless of any internal decisions or approvals.

20(20).

  • Every AIF, its Manager, and the Key Management Personnel (KMP) of both the Manager and the AIF must conduct specific due diligence on their investors and investments.

    1. The due diligence must be carried out to prevent the facilitation of circumvention of laws specified by SEBI from time to time.

    2. The obligation applies to both investor onboarding and investment activities, ensuring that the AIF is not used to bypass applicable legal or regulatory requirements.

20(21).

  • Investors in a scheme of an Alternative Investment Fund (AIF) are entitled to rights in each investment of the scheme in proportion to their capital commitment.

    1. The proceeds from each investment must also be distributed among investors on a pro-rata basis, according to their commitment to the scheme.

    2. SEBI may specify exceptions to this pro-rata principle from time to time, which the AIF must follow.

Example:

  • If Investor A commits ₹60 crore and Investor B commits ₹40 crore to an AIF scheme.

  • Investor A is generally entitled to 60% and Investor B 40% of the rights in each investment and the proceeds from those investments, unless SEBI has prescribed a different treatment.

Treatment of Existing Non-Pro-Rata Investor Rights

  • This provision applies to schemes of an AIF that issued investor rights before the SEBI (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024 came into effect.

    1. If those investor rights are not proportionate to the investors' commitments and have not been exempted by SEBI, they cannot continue unchanged.

    2. Such existing non-pro-rata rights must be dealt with in the manner specified by SEBI from time to time.

    3. The provision enables SEBI to regulate the transition of older investment arrangements to ensure consistency with the revised pro-rata rights framework.

Example:

  • An AIF scheme launched before the 2024 amendment grants one investor a larger share of investment proceeds than its capital commitment would justify.

  • If this arrangement is not exempted by SEBI, the AIF must deal with those rights in the manner prescribed by SEBI.

20(22).

  • Except for the pro-rata rights covered under 20(21), all investors in a scheme of an Alternative Investment Fund (AIF) shall have pari-passu rights in all respects.

  • Pari-passu means that investors are treated equally and enjoy the same rights and obligations under the scheme.

  • SEBI may permit differential rights for selected investors, provided they are offered in the manner specified by SEBI and do not adversely affect the interests of the other investors in the scheme.

Differential Rights for Select Investors

  • An Alternative Investment Fund (AIF) may offer differential rights to select investors in a scheme.

    1. Such differential rights can only be offered in the manner specified by SEBI from time to time.

    2. The grant of differential rights must not adversely affect the rights or interests of the other investors in the same scheme.

  • Differential rights may relate to governance, reporting, information access, liquidity, or other investor-specific benefits, as permitted by SEBI.

Exemption for Accredited Investors Only Funds

  • The requirement of pari-passu rights under sub-regulation (22) does not apply to an Accredited Investors Only Fund.

    1. An Accredited Investors Only Fund may provide different rights to different investors, without being bound by the pari-passu requirement.

    2. This exemption recognizes that accredited investors are sophisticated investors who can negotiate and agree to customized investment terms.

Example:

  • An Accredited Investors Only Fund may grant one investor enhanced governance or information rights that are not available to other investors.

  • This is done without violating the pari-passu requirement under 20(22).

Existing Differential Rights Issued Before the 2024 Amendment

  • Any differential rights issued by an AIF before the notification of the SEBI (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024 are subject to SEBI's transitional framework.

    1. The requirement covers only those differential rights that do not fall within the first proviso to 20(22).

    2. First provision of 20 (22) deals with Differential Rights for Select Investors.

  • Such differential rights cannot continue solely because they were granted before the amendment.

    1. The AIF must deal with those rights in the manner specified by SEBI from time to time.

    2. SEBI may prescribe the process for reviewing, modifying, regularising, or otherwise dealing with such differential rights.

20(23).

  • Every Alternative Investment Fund (AIF) must comply with the Investor Charter specified by SEBI from time to time.

    1. The Investor Charter lays down the rights of investors, services expected from the AIF, and the standards of conduct that the AIF must follow.

    2. The contents of the Investor Charter may be amended or updated by SEBI, and the AIF must comply with the latest version issued by the Board.

20(24).

  • Manager to Perform Trustee's Responsibilities in Accredited Investors Only Funds

    1. In an Accredited Investors Only Fund, the responsibilities and obligations assigned to the Trustee under the AIF Regulations shall be performed by the Manager.

      1. The Manager assumes all regulatory duties that would otherwise be carried out by the Trustee under the AIF Regulations.

      2. The Manager remains fully responsible for complying with all trustee-related obligations prescribed under the regulations.

    2. Accredited Investors are sophisticated investors, allowing a simplified governance structure without compromising regulatory compliance.

    3. Although the Trustee's responsibilities shift to the Manager, the fund must continue to comply with all applicable provisions of the AIF Regulations.

Section 21. Conflict of interest

21(1).

  • The Sponsor and Manager of an Alternative Investment Fund (AIF) must act in a fiduciary capacity towards the investors.

    1. A fiduciary duty requires them to act honestly, fairly, in good faith, and in the best interests of the investors.

    2. The Sponsor and Manager must identify and disclose all actual or potential conflicts of interest to the investors.

    3. Such disclosures must be made as soon as the conflict arises or is reasonably likely to arise, allowing investors to make informed decisions.

  • A conflict of interest may arise where the Sponsor's or Manager's personal, financial, or business interests differ from the interests of the AIF or its investors.

21(2).

  • The Manager must establish and implement written policies and procedures to manage conflicts of interest.

    1. The policies must enable the Manager to identify actual and potential conflicts of interest arising during the course of its business.

    2. The Manager must continuously monitor conflicts of interest to ensure they are detected and addressed promptly.

    3. The Manager must take appropriate measures to mitigate or manage identified conflicts of interest, so that investor interests are protected.

  • These policies and procedures must apply throughout the entire scope of the Manager's business, not just to a particular fund or investment.

21(3).

  • The Sponsor and Manager of an Alternative Investment Fund (AIF) must comply with the high-level principles prescribed by SEBI for avoiding conflicts of interest with associated persons.

  • Associated persons may include:

    1. Group entities

    2. Affiliates.

    3. Related parties.

    4. Employees.

    5. Directors.

  • Any other persons having a close relationship with the Sponsor or Manager, as specified by SEBI.

  • The Sponsor and Manager must identify, avoid, and appropriately manage conflicts of interest that may arise while dealing with such associated persons.

  • The applicable principles may be specified, amended, or updated by SEBI from time to time, and the Sponsor and Manager must comply with the latest requirements.

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