The Securities and Exchange Board of India (“SEBI”) issued a circular dated April 10, 2023 (“Circular”) prescribing guidelines regarding direct plan for schemes of alternative investment funds (“AIFs”) and trail model for distribution commission in AIFs.

SEBI, vide its earlier circular SEBI/HO/IMD/DF6/CIR/P/2020/24 dated February 5, 2020, had prescribed a template for private placement memorandum for AIFs. Under the said prescribed template, disclosures regarding ‘direct plan for investors’ are required, i.e. whether the fund or the scheme would be offering any benefits on the units which are issued to investors who directly invest in the fund/scheme and not through a placement agent or a distributor.

The Circular prescribes that scheme of AIFs shall have an option of ‘direct plan’ for investors and such direct plan shall not entail any distribution fee/ placement fee. Further, it has been prescribed that investors who are approaching the AIF through a SEBI registered intermediary which is separately charging the investor any fee (such as advisory fee or portfolio management fee), shall be on-boarded via direct plan only.

In respect of charging distribution commission in AIFs, the Circular states that AIFs have to disclose distribution/placement fee (if any) to the investors of the AIF at the time of on-boarding. Further, the following conditions have been prescribed for distribution commission:

1. Category III AIFs shall charge distribution fee/ placement fee to investors only on an ‘equal trail basis’, i.e., no upfront distribution/ placement fee shall be charged by category III AIFs directly or indirectly to their investors. Any distribution fee/ placement fee paid shall be only from the management fee received by the manager of such category III AIFs.
2. Category I AIFs and Category II AIFs may pay up to one-third of the total distribution fee/ placement fee to the distributors on upfront basis, and the remaining distribution fee/ placement fee shall be paid to the distributors on equal trail basis over the tenure of the fund.

The guidelines prescribed in the Circular shall be complied with for investors on-boarded in AIFs/ schemes of AIFs from May 1, 2023 onwards.

Please find a copy of the Circular, here.

This update has been contributed by Adity Chaudhury (Partner) and Tushar Oberoy (Associate).

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