The Securities and Exchange Board of India (SEBI) has released consultation papers on Alternative Investment Funds (AIFs).
The first article deals with the direct plan for schedules of AIFs and the distribution commission pilot model in AIFs.
The second consultation paper revolves around providing options to AIFs and their investors to transfer illiquid investments of a scheme upon completion of its term.
The purpose of the consultation papers is to gather comments/input/suggestions from all stakeholders on proposals.
What is an Alternative Investment Fund (AIF)?
Alternative Investment Fund or AIF means any fund incorporated or incorporated in India which is a private pooled investment vehicle that collects funds from sophisticated investors, both Indian and foreign, for investment in accordance with a specified investment policy for the benefit of its investors.
Background
Currently, AIFs offer an investor’s choice of a ‘direct plan’ in their Private Placement Memorandum (PPM). Such a direct plan entails no distribution or placement costs for the investor.
Furthermore, the AIF regulations do not place any restrictions on how much distribution commission or placement fee can be paid up front to intermediaries. It may be noted that in order to reduce misselling, the SEBI (Mutual Funds) Regulations, 1996 and SEBI (Portfolio Managers) Regulations, 2020 require asset managers and portfolio managers to operate a full trial model of commission to their distributors.
SEBI proposals
SEBI has proposed mandating direct plans for AIF. The AIF regulations allow AIFs to raise money from investors only on the basis of private placements. An investor can also invest in an AIF through an investment advisor or portfolio manager registered with SEBI.
Investors wishing to invest in an AIF through an Investment Adviser-Portfolio Manager may be charged twice, once in the form of an Investment Adviser advisory fee or the Portfolio Manager’s portfolio management fee, and separately through the AIF Distribution Fee. To address this issue of potential duplication of costs for investors, a proposal was submitted to the Alternative Investment Policy Advisory Committee (AIPAC) to require AIFs to offer the option of direct plans to investors.
It is proposed to authorize AIFs to offer investors the option of a direct plan, without a distribution/placement fee. AIFs ensure that any investor approaching an AIF through an intermediary, who separately charges the investor a fee (such as advisory or portfolio management fees), is only investing in the AIF via the direct planning route.
Also, investors who have come on board through the direct plan will be provided with an adjusted higher number of units, taking into account the lower distribution costs applicable to them compared to other investors, so that all investors would have the same net asset value (NAV). continue to see ) on their holdings.
Trail model for distribution commission in AIFs
Background
While the Mutual Fund Regulations and Portfolio Managers Regulations mandate trail commissions to distributors (rather than upfront commission) to reduce misselling, there are no regulatory guidelines regarding commission/distribution fees in the case of AIFs.
As of late, industry feedback shows that the amount of prepaid commissions for AIF distribution has risen at least in some cases to around 4%-5% of the committed amount. The consultation document stated that such high upfront commissions, especially in stark contrast to the trail commissions for other products, increase the likelihood of AIF schemes being missold.
To address the problem of likely misselling of AIFs and to ensure parity between other SEBI products and offerings, a proposal to adopt a pilot model of distribution commission in AIFs was submitted to AIPAC.
SEBI stated that AIPAC has deliberated on the proposal and recommended that in the case of Category III AIFs, which are somewhat more directly comparable to Mutual Funds/Portfolio Manager Services, investors may be charged a placement/distribution fee on a trial basis.
In the case of Class I AIFs and Class II AIFs, investors may also be charged on a trial basis, but a higher amount of distribution fee may be paid up front (namely: one third of the current value of the total distribution fee). in the first year. This recognizes the need for some reasonable incentives to ensure the flow of savings to private capital markets.
A move towards a trial commission model will ensure that the distribution of AIFs is in line with investors’ interests and will reduce the level of misselling of AIFs. It will also align AIFs with the regulatory framework for portfolio managers and mutual funds by removing the existing commission arbitrage between these products.
SEBI also sought suggestions in another consultation document for a proposal to allow AIFs and their investors the ability to transfer illiquid investments of a scheme after the term of office expires, while ensuring proper recognition of value of assets and fund performance.
Under Regulation 13(5) of the AIF Rules, AIFs can extend the term of a scheme up to two years, subject to approval by two thirds of the investors based on the value of their investment in the AIF. Furthermore, under Regulation 29(8) of the AIF Regulation, AIFs/Managers have the option to allocate the assets of the AIF in specie, after obtaining approval from at least 75% of the investors based on the value of their investment in the AIF. .
At the end of a plan term of more than two years and at the end of the extended term of LVFs, the AIFM may close the existing plan and transfer the illiquid investments to a new plan, subject to the obtain consent from 75% of investors by value.
If approval is not obtained for distribution in cash or for transfer to a new scheme on terms proposed by SEBI, the AIF/Manager must compulsorily liquidate the investments at NAV within one year of expiration.
Read all the latest business news here
