SEBI has notified critical amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 detailing the responsibility of members of the Investment Committee of AIFs and prescribing qualification criteria for key investment teams. The amendments were notified by way of a notification dated October 19, 2020. Separately, SEBI has also issued a circular dated October 22, 2020 on processing of applications for registration of AIFs whose Investment Committee has members who are not resident-Indian citizens. The key takeaways from these regulatory updates are as follows:

1.     Investment Committee

i.     The manager will be responsible for investment decisions of the Alternative Investment Fund (‘AIF’).

ii.    The manager may constitute an Investment Committee (by whatever name called) to approve investment decisions, subject to the following conditions:

•     the members of Investment Committee will be equally responsible as the manager for investment decisions of the AIF;

•     the manager and members of the Investment Committee will jointly and severally ensure that the investments of the AIF are in compliance with the provisions of the SEBI (Alternative Investment Funds) Regulations, 2012, the terms of the placement memorandum, agreement made with the investor, any other fund documents and any other applicable law; and

•     external members whose names are not disclosed in the placement memorandum or agreement made with the investor or any other fund documents at the time of onboarding investors, will be appointed to the Investment Committee only with the consent of at least 75% of the investors by value of their investment in the AIF.

iii.  SEBI has written to the Indian Government and Reserve Bank of India seeking clarity on whether investments made by an AIF whose Investment Committee approves investment decisions and consists of external members who are not ‘resident Indian citizens’ would be treated as indirect foreign investment^[1]. AIF applications where Investment Committees to approve investment decisions include external members who are not ‘resident Indian citizens’, will be considered by SEBI only after receipt of clarification. Other applications will be duly processed.

2.     Professional Qualifications for Team

The key investment team of the manager to the AIF is now required to have:

i.     adequate experience, with at least one key personnel having not less than 5 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 and dealing of securities or other financial assets; and

ii.  at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital markets or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by SEBI.

The requirements stipulated under paragraphs i and ii above can also be satisfied by the same key personnel.

3.     Key Takeaways

i.     SEBI has imposed substantial responsibility on any person who seeks to be a part of the Investment Committee, as these members and the investment manager will need to jointly and severally ensure that investments of the AIF are in compliance with the provisions of the SEBI (Alternative Investment Funds) Regulations, 2012. They will also need to individually confirm that the decisions are in line with applicable laws, fund documents and the placement memorandum.

ii.    The Investment Committee composition will have to be decided on or before initial closing of the AIF and suitable disclosures will have to be made. Any external member joining subsequently, whose name was not disclosed, will require consent from at least 75% of investors by value.

iii.   SEBI has not clarified whether these amendments will apply to funds already registered with SEBI as an AIF prior to October 19, 2020. In our view, even existing funds which are currently in operation may need to comply with these conditions and a purposive interpretation may have to be given to the notification dated October 19, 2020. Further clarifications are awaited in this regard.

iv.   If an external non-resident member on the Investment Committee has veto or other control rights, it will need to be assessed whether such the AIF can be considered foreign controlled, which could have implications on the investments made by the AIF. Thus, a fact specific analysis will need to be undertaken.

v.   A different process will need to be delineated for institutional managers whose board is not squarely involved in making investment decisions (and investment decisions are taken by separate Investment Committees) – given that SEBI has indicated that the manager will be responsible for investment decisions of the AIF.

vi.   The professional qualifications prescribed for managers seem sufficiently broad and in our view, would be reasonably achievable.

[1] Schedule VIII of FEMA (Non-debt Instruments) Rules, 2019 governs foreign investment in AIFs. It states that investments made by an AIF into an investee Indian entity will be treated as indirect foreign investment for the investee Indian entity if the sponsor or the manager (i) is not owned and not controlled by resident Indian citizens or (ii) is owned or controlled by persons resident outside India.

‘Control’ of the AIF should be in the hands of sponsors and managers, with the general exclusion to others. In case the sponsors and managers of the AIF are individuals, for the treatment of downstream investment by such AIF as domestic, sponsors and managers should be resident Indian citizens.