Introduction & BACKGROUND
The Securities and Exchange Board of India (SEBI), in the consultation paper published on 3 February 2023, first indicated its intention of doing away with the requirement Regulation 4(g)(i) of the AIF Regulations where at least one key personnel on the key investment team (KIT) of every alternative investment fund (AIF) was required to have at least five years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling or dealing of securities or financial assets. After much deliberation, SEBI noted that such eligibility condition under the SEBI (AIF) Regulations, 2012 (AIF Regulations) may act as a barrier for new age / first generation managers who may not have requisite experience but have competence and knowledge in fund management and generating returns for investors.
Following the consultation paper, SEBI, in its board meeting on 29 March 2023, approved the proposal to replace existing minimum experience requirement as an eligibility criterion for the key investment team of the manager with a comprehensive certification requirement.
The approval culminated in the amendment to Regulation 4(g)(i) of the AIF Regulations, vide the SEBI (AIF) (Second Amendment) Regulations, 2023, which has finally been notified and made effective from 10 May 2024.
The amendment omitted the subjective five years' experience criteria mandated for the KIT of Managers and instead introduced an objective requirement of obtaining 'relevant certification' as may be prescribed by SEBI.
Regulation 4(g) (before and after the amendment) is reproduced below:
Requirements
From 10 May 2024, the KIT of a manager must have:
- (1) Atleast one personnel who meets the certification requirements in accordance with Regulation 4(g)(i).
- (2) Atleast one personnel who meets the professional qualifications in accordance with Regulation 4(g)(ii).
The requirements stated in (1) and (2) above may be fulfilled by two separate KIT personnels or by the same KIT personnel.
The AIF Amendment presented two facets.
Opportunity:
Managers consisting of skilled investment professionals who are short of five years of experience now have an opportunity to get certified and manage AIFs.
Obstacle:
Seasoned investment moguls, with age old experience and expertise in fund management, which is unbeatable by all standards, will either have to get certified or appoint a certified personnel to their AIF's KIT.
The timeline for existing AIFs and AIFs whose application for launch of scheme is pending with SEBI as on 10 May 2024, to comply with the certification requirement is by 9 May 2025, i.e., one year from the date of the amendment being effective.
We touched upon the certification requirement in our previous Ergo1.
NISM Certification
The certification in question is the 'NISM-Series-XIX-C: Alternative Investment Fund Managers Certification Examination', designed for the KIT of the AIF manager (NISM Certification)2. This examination is tailored to cover all important aspects of AIFs, fund management activities, knowledge of the relevant regulations, valuation norms, taxation, and other essential elements necessary for fulfilling fund management responsibilities for the KIT personnels.
Additionally, Regulation 3 of SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007 has also been amended to effect the NISM Certification requirements and align with the updated Regulation 4(g) of the AIF Regulations.
Conclusion
The earlier criterion under Regulation 4(g) of the AIF Regulations was subjective and led to uncertainty around multiple applications. The experience criterion also allowed for different interpretations and leading to varied standards being applied to ascertain eligibility. The experience requirement also took able and skilful managers out of the race, making them ineligible to seek registration for an AIF and acted as gatekeeping conditions for first time managers, who may otherwise be equipped to run funds.
While this objective requirement of being certified provides a level playing field and ensures that first time fund managers are not discriminated against from participating in the growing alternative asset sector, there seems to be some form of overlap between the requirements under the now amended Regulation 4(g)(i) and 4(g)(ii) wherein both are vocational qualification related criteria.
Further, reasonable time for members of KIT of existing managers to meet the eligibility criteria has been offered by SEBI.
This is a welcome change and should further boost the growing AIF market in India.
Footnotes
1 https://www.khaitanco.com/thought-leaderships/SEBI-notifies-the-framework-for-enhanced-governance-of-AIFs-and-setting-up-of-the-CDMDF
2 https://www.nism.ac.in/nism-series-xix-c-alternative-investment-fund-managers/
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