SEBI, vide circular dated January 11, 2024, has revised the Master Circular for AIFs to incorporate the revised thresholds for determining beneficial ownership. The Prevention of Money Laundering (Maintenance of Records) Rules, 2005 were amended last year revising the thresholds for determining beneficial ownership from 25% to 10% for companies and from 15% to 10% for trusts. Pursuant to the amendment, the manager of an AIF must ensure, at the time of on-boarding investors, that the investor, or its beneficial owner is not included in the sanctions list notified by the United Nations Security Council (as notified from time to time) and is not a resident in the country identified in the public statement of Financial Action Task Force as:
- a jurisdiction having a strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply; or
- a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.
Further, in case an investor who has been already on-boarded to the scheme of an AIF, does not meet the revised condition as specified above, the manager of the AIF must not drawdown any further capital contribution from such investor for making investment, until the investor meets the said conditions.
Guidelines for AIFs with respect to holding their investments in dematerialised form
SEBI, vide circular dated January 12, 2024, introduced guidelines for AIFs holding investments in dematerialised form. The key provisions are as follows:
- any investment made by an AIF on or after October 1, 2024, must be held in dematerialised form only;
- the investments made by an AIF prior to October 1, 2024, are exempt from the requirement of being held in dematerialised form, except in the following cases: (a) investee company of the AIF is mandated under applicable law to facilitate dematerialisation of its securities; and (b) AIF, on its own, or along with other SEBI registered intermediaries/entities which are mandated to hold their investments in dematerialised form, exercises control over the investee company (these investments must, however, be held in dematerialised form by the AIF on or before January 31, 2025); and
- the requirement of holding investments in dematerialised form is not applicable to: (a) scheme of an AIF whose tenure (not including permissible extension of tenure) ends on or before January 31, 2025; and (b) scheme of an AIF which is in extended tenure as on January 12, 2024.
Investments in AIFs
RBI, vide notification dated March 27, 2024, advised the following to ensure uniformity in relation to investment by Regulated Entities ("REs") in AIFs:
- downstream investments referred to in paragraph 2 (i) of the circular dated December 19, 2023 ("Circular"), exclude investments in equity shares of the debtor company of the RE, but will include all other investments, including investment in hybrid instruments;
- provisioning in terms of paragraph 2(iii) of the Circular is required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme;
- proposed deduction in paragraph 3 of the Circular, from capital will take place equally from both Tier-1 and Tier-2 capital. Further, reference to investment in subordinated units of AIF scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units; and
- investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the Circular.
Changes in terms of private placement memorandum of AIFs
SEBI, vide circular dated April 29, 2024, eased the requirement of intimation of changes in the terms of Private Placement Memorandum ("PPM") of AIFs through merchant bankers. Pursuant to the SEBI Master Circular for AIFs dated July 31, 2023, intimation with respect to any change in the terms of PPM of AIF was required to be submitted to SEBI through a merchant banker along with a due diligence certificate from the merchant banker in the prescribed format. Now, certain changes in the sections of PPM (such as, changes made in the write-up on market opportunity/Indian economy/industry outlook, track record of investment manager, risk factors, legal regulatory and tax consideration), do not need to be submitted through a merchant banker and can be filed directly with SEBI. Similarly, certain specified changes in the PPM need not be filed through a merchant banker, such as changes with respect to:
- contact details (such as address, phone number) of AIF, sponsor, manager, trustee or custodian; and
- auditor, Registrar and Share Transfer Agents ("RTAs"), legal advisor or tax advisor, size of the fund/scheme, information related to affiliates, commitment period, key investment team, key management personnel (except if the changes are due to change in control of manager or sponsor), advisory boards, expenses, disclosures, and other factual and routine updates.
Further, large value funds for accredited investors are exempted from the requirement of intimating any changes in the terms of PPM through a merchant banker. Such funds can directly file any changes in the terms of PPM with SEBI, along with a duly signed and stamped undertaking by the CEO of the manager of the AIF (or such other person holding equivalent role/position) and compliance officer of the manager of the AIF, in a pre-specified format.
Issuance of partly paid units by AIFs to persons resident outside India
RBI, vide circular dated May 21, 2024, and pursuant to the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2024 dated March 14, 2024[8], has decided to regularise the issuances of partly paid units by AIFs to persons resident outside India prior to the said amendment, through compounding under the Foreign Exchange Management Act, 1999. However, before approaching the RBI for compounding, Authorised Dealer Category-I banks may ensure that the necessary administrative action, including the reporting of such issuances by AIFs to the RBI, through Foreign Investment Reporting and Management System (FIRMS) Portal and issuing of conditional acknowledgements for such reporting, is completed.
Certification requirement for key investment team of manager of AIF
Pursuant to the amendment dated May 10, 2024 to the SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007, SEBI, vide circular dated May 13, 2024, has decided that the requirement to obtain the prescribed certification by at least 1 (one) key personnel of the key investment team of the manager of an AIF, is applicable as an eligibility criterion to all the applications for registration of AIFs and launch of schemes by AIFs filed after May 10, 2024. Further, the aforesaid requirement of obtaining the certification must be complied with on or before May 9, 2025, for the following:
- existing schemes of AIFs; and
- the schemes of AIFs whose application for launch of scheme pending with SEBI as on May 10, 2024.
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