Vide circular no. SEBI/HO/IMD/DF6/CIR/P/2020/24 dated February 5, 2020 (“February 5th Circular”), the Securities and Exchange Board of India (“SEBI”) had introduced significant changes to the legal regime for alternative investment funds (“AIFs”), by requiring mandatory annual audits and performance benchmarking for AIFs.

Paragraph A5 of the February 5th Circular inter alia provides that: 

“Further, in order to ensure compliance with the terms of PPM, it will be mandatory for AIFs to carry out an annual audit of such compliance. The audit shall be carried out by either internal or external auditor/legal professional.” 

Paragraph A6 of the February 5th Circular provides that:

“The findings of the audit, along with corrective steps, if any, shall be communicated to the Trustee or Board or Designated Partners of the AIF, Board of the Manager and SEBI.”

Though the February 5th Circular provided that it would come into effect from March 1, 2020, the February 5th Circular did not specify any deadline for communicating the audit report to the AIF’s trustee (if the AIF is a trust) or board of directors (if the AIF is a company) or designated partners (if the AIF is an LLP), to the board of directors of the AIF’s investment manager and to SEBI. Therefore, it appeared to be implied that the aforesaid annual audit had to be carried out as of March 31, 2020 and communicated to SEBI and other stakeholders within a reasonable time thereafter.

In light of the novel coronavirus pandemic, SEBI, vide Circular No. SEBI/HO/IMD/DF1/CIR/P/2020/58, dated March 30, 2020, extended the due date for regulatory filings for AIFs and VCFs for the periods ending March 31, 2020 and April 30, 2020 by two months, over and above the timelines prescribed under SEBI (Alternative Investment Funds) Regulations, 2012 and circulars issued thereunder. Later, vide its circular no. SEBI/HO/IMD/DF6/CIR/P/2020/92 dated June 4, 2020, SEBI further extended the due date for regulatory filings by alternative investment funds and venture capital funds for the months ending March, April, May and June 2020, as applicable, to on or before August 7, 2020. 

On June 12, 2020, SEBI has issued a circular bearing no. SEBI/HO/IMD/DF6/CIR/P/2020/99 (“June 12th Circular”) clarifying that the aforesaid audit report has to communicated to SEBI and other stakeholders within 6 months from the end of the Financial Year (“FY”). For the FY 2019-20, the audit report must be communicated to SEBI and other stakeholders on or before December 31, 2020.

The June 12th Circular has further clarified that the requirement of audit of compliance with terms of PPM shall not apply to AIFs which have not raised any funds from their investors. However, such AIFs shall submit a certificate from a chartered accountant to the effect that no funds have been raised, within 6 months from the end of the financial year.

In order to provide the AIF industry the flexibility to showcase its performance based on different criteria and to help investors assess the performance of the AIF industry, the February 5th Circular introduced mandatory benchmarking of the performance of AIFs and the AIF industry as well as a framework for facilitating the use of data collected by benchmarking agencies to provide customized performance reports. These requirements are however not applicable to ‘Angel Funds’ that are registered under sub-category of Venture Capital Fund under Category-I AIF.

Paragraph 12 of the February 5th Circular provides that any association of AIFs (“Association”) representing 51% of the number of AIFs in terms of membership may notify one or more benchmarking agencies, with whom each AIF is required to enter into an agreement for carrying out the benchmarking process. The Association and benchmarking agencies were required to ensure that the first industry benchmark and AIF level performance versus benchmark reports are available latest by July 1, 2020, for the performance upto September 30, 2019. Further the Association is required to submit a progress report in this regard to SEBI on a monthly basis till the creation of first industry benchmark.

In light of market events due to the COVID-19 pandemic, the June 12th Circular has extended the timeline for making available the first industry benchmark and AIF level performance versus Benchmark Reports, till October 01, 2020.

The circulars mentioned above are available through the following links: 

Read circular dated February 5, 2020 here.  

Read circular dated March 30, 2020 here.

Read circular dated June 4, 2020 here.

Read circular dated June 12, 2020 here.

This update has been contributed by Vinod Joseph (Partner).