The Securities and Exchange Board of India (“SEBI”) has issued a consultation paper proposing for certain changes to the current regulatory regime governing Alternative Investment Funds (“AIFs”) registered with SEBI under the SEBI (Alternative Investment Fund) Regulations, 2012 (“AIF Regulations”).

The amendments being proposed are the (i) introduction of minimum benchmarks for disclosure of performance history of AIFs, and (ii) standardization of the private placement memorandum (“PPM”) issued by AIFs to their investors.

Introduction of minimum benchmarks for disclosure of performance history

Before deciding whether to invest in an AIF or not, prospective investors rely on the “returns on investment” generated in the past for other fund(s) by such AIF’s investment manager. Currently, there are no standards or norms for disclosure of past performance since AIFs disclose their performance to prospective investors on a standalone basis. Therefore, SEBI proposes to inter alia mandate that:

(a) benchmarking agencies be identified by associations of AIFs with members representing at least 50% (fifty percent) of AIFs;

(b) AIFs which are registered with SEBI for at least 3 (three) years, have to report their audited scheme-wise performance data to benchmarking agencies for benchmarking the AIF’s performance with comparable industry performance;

(c) a copy of the benchmark report received by the AIF should be provided to all investors;

(d) in all and any promotional material issued by an AIF which refers to the performance of the AIF, the benchmark report provided by the benchmarking agency should also be provided.

The consultation paper details the major steps for the implementation of such benchmarking.

Standardization of the PPM

The AIF Regulations specify only the broad areas of disclosures that should be a part of the PPM. Currently, there is a significant variation in the PPMs brought out by different AIFs. Some PPMs are too complex whilst some may have too little information on important aspects such as potential conflict of interests, risk factors, investment strategies, etc. To avoid such variations, SEBI wishes to standardise PPMs and has issued draft templates for PPMs, one for Category I and II AIFs and another for Category III AIFs, which are attached to the consultation paper issued by SEBI.

SEBI’s consultation paper solicits comments from the public and the industry on the aforementioned proposals. The comments should reach SEBI by December 25, 2019.

This update has been contributed by Vinod Joseph (Partner) and Deeya Ray (Associate).