Alternative Investment is a rapidly evolving industry and expanding its ability to provide durable investments strategies. Alternative Investment Funds (“AIF“) are those which are not a part of traditional investment. AIF offers a distinct set of investment vehicles not commonly found in mainstream investments such as stocks, bonds, mutual funds, etc. The AIF vehicles attribute long term, high risk or liquid investments associated with higher returns, diversification benefits and scalability.
Over the past few decades, the alternative investment industry has become a critical component of the global financial system. Investors are now deploying trillions of dollars around the world and redistributing risk. Industry’s rise has been a recurring worry, and consequently, AIF Regulations were introduced to channel incentives and lead transparency effectively.
The SEBI (Alternative Investment Funds) Regulations, 2012 governs India’s pooling vehicle setup. Since then, the SEBI has amended the regulations, issued circulars, and penal provisions have become more stringent.
Now it is time to implement robust systems and processes to ensure adherence to the AIF compliances and regulations. Here is a checklist the of key compliances applicable to all categories of AIF.
Internal Reporting –
Reporting to the investors– The manager of the AIF shall be responsible for providing the following reports and disclosures to the investors of AIF.
| Compliance Requirement | Frequency and due date |
| An annual report regarding the following information is to be sent to the investors
-Financial information of the investee company: -Material risks, including: a. Concentration risk at fund level; b. Foreign exchange risk; c. Leverage risk; d. Realization risk; e. Strategy risk; f. Reputation risk at the investee company level; g. Extra-financial risks, including environmental, social and governance. |
Annually for AIF Category I and Category II. This report will be submitted within 180 days from the end of the year for AIF Category I and II.
Quarterly for AIF Category III. This report is to be submitted within 60 days from the end of the quarter for AIF Category III. |
| Valuation and methodology description for valuing assets.
Valuation for AIF Category I and II is to be undertaken by an independent value. NAV valuation to be undertaken for AIF Category III and disclose NAV to the investors. |
Half-yearly that can be enhanced to 1 year on the approval of 75% investors by the value of their investment.
Quarterly for the closed-ended fund and monthly for open-ended funds.
|
| Changes to the placement memorandum. | Immediately as and when occurred. |
| Report any fees paid to the manager or sponsor, the fee charged to the AIF by any associate of the manager or sponsor, transaction information regarding fund investments. | Periodically |
| Reporting of any:
a. legal actions by the legal or regulatory bodies; b. material liability arising during AIFs tenure; c. breach of placement memorandum or other fund documents; d. change in control of manager or sponsor or the investee company; e. signification change in the key investment team. |
Immediately as and when occurred. |
| Disclosure of investments by the manager and sponsor in AIF to the investors. | Immediately as and when occurred. |
| Disclose all conflicts of interest by manager and sponsor. | Immediately as and when occurred or seem likely to arise. |
Reporting to the trustees/directors/partners and sponsor–
The manager of the AIF shall be responsible for providing the following reports and disclosures to the trustees/directors/partner and sponsor of AIF.
| Compliance Requirement | Frequency and due date |
| The manager shall prepare and submit a Compliance Test Report (CTR) to trustees/directors/partners and sponsors of AIF.
· Trustee/sponsor shall intimate their observations on CTR to the manager. · Manager shall make necessary changes in CTR basis observation received from trustee/sponsor.
|
This report is to be submitted annually within 30 days from the end of the financial year.
· Within 30 days from the date of receipt of CTR. · Within 15 days from the date of receipt of observations. |
| Any audit findings along with corrective steps, if any.
AIFs shall submit a certificate from Chartered Accountant to the effect that no funds have been raised if funds have not been raised. |
This report is to be submitted annually within six months from the end of the financial year. |
Governance
Good fund governance is essential not only to protect investors but also for better investment returns. Below is the list of must-have policies by AIFs to implement the robust and transparent system:
- Risk Management Policy
- Client Acceptance Policy
- Conflict of interest policy
- Voting and disclosure policy
- Prevention of money laundering policy
- Valuation Policy
- Grievance Redressal Policy
- Stewardship policy
Reporting to SEBI
| Compliance Requirement | Frequency and due date |
| Any change in the control of AIF, sponsor or manager shall require prior SEBI approval. | Prior approval |
| Online quarterly report on the activity as an AIF. | Seventh of the month of the following quarter. |
| Report on leverage undertaken by AIF Category III | Quarterly |
| Intimation of violations of the AIF regulations or circulars issued and observed from the CTR. | Immediate as soon as possible |
| Intimate information submitted is misleading or false. | Immediate as soon as possible |
| Reporting of the utilization of overseas investment limits on SEBI intermediary portal. | Within five working days. |
| Reporting to the SEBI on the intermediary portal if overseas investment limits have not been utilized/partly utilized within six months from the date of SEBI approval. | Within two working days on the expiry of the validity period. |
| Reporting to the SEBI on the intermediary portal if AIF wishes to surrender overseas limits within the validity period. | The decision is to be intimated within two working days from the date on which a decision to surrender the limits has been taken. |
| Any modification or change in the placement memorandum. | As and when occurred. |
FEMA Compliances
| Compliance Requirement | Frequency and due date |
| Reporting to RBI for issuance of units to the persons resident outside in India . | Within thirty days from the day of issuance of units to the person resident outside India. |
| Reporting of downstream investments in Form DI | Within thirty days from the day of investment. |
| Foreign Liabilities and Assets (FLA) return | 15 JULY
|
| Filing of electronic KYC of clients to the Central KYC Record Registry | Within ten days from the date of commencement of the relationship with the client. |
Tax Compliances
| Compliance Requirement | Frequency and due date |
| AIF Category I and II shall furnish a statement in Form No. 64C to unitholders for income distributed during the previous year. | 30 June |
| AIF Category I and II shall furnish a statement in Form No. 64D to Income Tax Authorities for income distributed during the previous year. | 15 June |
| Income tax return filing | 31 October |
| 1. Payment of advance tax-
2.Payment- 3. Payment- 4.Payment- |
15 June
15 September 15 December 15 March |
Violations-
As per 15EA of the Security and Exchange Board of India Act, 1992 where any person fails to comply with the regulations made by the Board in respect of alternative investment funds, infrastructure investment trusts and real estate investment trusts or fails to comply with the directions issued by the Board, such person shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees or three times the amount of gains made out of such failure, whichever is higher.
With this article, we have attempted to summarize all the basic compliance applies to an AIF. We anticipate that it will help you implement a strong compliance management mechanism and unlock growth.
Please reach out to us for any AIF related services, advice and opinions.
- COMPLIANCE INSIGHTS- ALTERNATIVE INVESTMENT FUNDS IN INDIA - September 27, 2021
Pingback: DECODING THE REGISTRATION PROCESS OF ALTERNATIVE INVESTMENT FUNDS IN INDIA – RAC Advisers LLP