The Securities and Exchange Board of India (SEBI) has mandated alternative investment funds (AIFs) to provide investors with the option of a “direct plan” and introduced a trail model for distribution commission.
- The framework for direct investments will go into effect on May 1, 2023.
With this directive, SEBI intends to reduce misselling, promote transparency in fee payments, bring transparency in expenses, and provide investors more options when investing in AIFs.
Click here for official circular.
Direct Plan for schemes of AIFs
i.Direct plans allow investors to participate in an AIF without paying any distribution or placement fees.
ii.AIFs must make sure that anyone approaching the AIF through a registered intermediary, who is separately charging the investor for any fees, such as an advisory fee or a portfolio management fee, is only accepted into the AIF through the direct plan.
Trail Model for Distribution Commission in AIFs
i.SEBI announced a trail model for distribution commission, stating that category III AIFs would only levy a distribution fee to investors on an equal-trail basis.
- This implies that such AIFs would not impose any upfront distribution fees on their investors, either directly or indirectly.
ii.Furthermore, any distribution charge paid would be paid solely out of the management fee earned by the managers of such category III AIFs.
iii.The remaining distribution charge for the other two categories of AIFs, Category I and Category II AIFs, would be paid to the distributors on an equal-trail basis over the course of the fund’s duration.
- AIFs may pay up to one-third of the total distribution fee to the distributors upfront in these cases.
Guidelines with respect to excusing or excluding an investor from an investment of AIF
SEBI has also issued guidelines for excluding an investor from an investment in an AIF. In light of the recommendations made by the Alternative Investment Policy Advisory Committee (AIPAC), it has been determined that an AIF may excuse its investor from taking part in a specific investment under certain circumstances.
- These circumstances include when an investor discloses to the manager, as part of an agreement signed with the AIF, that its participation in such an investment opportunity would be in violation of its internal policy or when an investor confirms, based on an opinion of a legal professional, that its participation in the investment opportunity would be illegal.
The framework for excluding an investor from an AIF investment is set to go into effect immediately.
Click here for official circular.
Backdrop
i.The regulator, SEBI, found inconsistencies and a lack of proper disclosure in the Private Placement Memorandum (PPM) with regard to certain industry practices.
ii.In this regard, a proposal was put forward in “AIPAC” to review the information disclosed in PPM under the term “Excuse and Exclusion” for the purpose of excusing or excluding an investor from an investment of the AIF.
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ii.Objective: To highlight the key risks and mandatory control measures that REs need to know and follow before adopting cloud computing.
About the Securities and Exchange Board of India (SEBI):
Chairperson– Madhabi Puri Buch
Headquarters– Mumbai, Maharashtra
Establishment– 1992
