This note has been prepared to set out the key takeaways from Securities and Exchange Board of India (“SEBI”) Circular no. SEBI/HO/IMD/DF6/CIR/P/2020/24 dated February 5, 2020.
In the circular, SEBI has instituted the following reforms aimed at streamlining disclosure standards in the AIF space:
Templatisation of preliminary placement memorandum: The private placement memorandum (“PPM”) template is divided into part A which prescribes minimum disclosures and part B for any additional information which the fund may decide.
This requirement will be effective from March 1, 2020.
There is an exemption for funds/schemes in which (i) each investor commits to at least INR 70 crores (USD 10 million if in non-INR currency) and (ii) provides a waiver to the fund from the requirement of PPM in the SEBI-prescribed format (“Exempted Large Funds”).
The intent to exempt angel funds from the PPM templatisation requirement is not fully clear because paragraph A.2 is exempted for angel funds- but not paragraph A.4 (A.4 only details the template formats while A.2 has the substantive law- therefore A.4 exemption can be just a drafting miss).
Annual Audit: A mandatory audit is now required to be carried out with the focus of ensuring compliance with the PPM.
The audit can be carried out by internal or external auditors or legal professionals. Certain sections such as risk factors have been set as optional for this audit.
The findings of the audit (along with corrective measures) are to be communicated to the trustee/designated partners/board of directors of the AIF, the “board of the manager”- and SEBI.
Angel funds are exempted from this audit as well as Exempted Large Funds (upon a waiver).
The audit requirement will be effective from March 1, 2020.
Performance Benchmarking: There will be mandatory benchmarking of performance of AIFs in a structured manner for use of this data. There can be any number of benchmarking agencies as long as they are notified by an association of AIFs which represent at least 51% of the number of the existing AIFs. Operational guidelines for performance benchmarking have been prescribed.
Scheme-wise valuation: An AIF has to report scheme-wise valuation and cash flow data for all schemes which have completed at least one year from “first close‟.
AIF application: If an AIF-applicant claims track record on the basis of India performance of overseas funds then data of investment of the funds in the Indian companies.
Past performance claims: Performance v benchmark report (as provided by the benchmarking agencies) have to be provided in the PPM or in any other material (including marketing material) where past performance of the AIF is mentioned.
Existing Investor Reporting: Similarly, a copy of performance and benchmark report has to be provided to existing investors in any reporting to existing investors.
Angel funds are exempted from performance benchmarking.
Timelines: The AIF association and benchmark agencies have to ensure that the reports are available by July 1, 2020 for performances up to Sep 30, 2019.
Customised performance reports: Customised performance reports can be generated by benchmarking agencies upon request from an AIF. This also requires a consent of the other AIFs the data of which is involved- and negotiated fees with the benchmarking agency.
This amendment due to its contents qualifies as a significant reform in the AIF space.