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Regulations & Compliance

(Alternative Investment Funds)

Presented by:
R. Leelavathi Naidu
VP – Compliance
Avendus Capital Private Limited

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Index
1 Fund Structure

2 Principles of Governance for Sponsor and Investment Manager

3
Category of Schemes

4 Compliance and Governance around key activities

5 Foreign Investment

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Structure

3
Trust LLP
Settlor/Sponsor

Appointment of
Trustees Settling the Trust
AIF
(LLP)

Investment
Trustee Management services
AIF
(Trust)

Appointment of Can also act as


Manager Investment Investment Manager Sponsor
Management services

Can also act as


Investment Manager Sponsor Fund
Custodian Registrar
Accountant

Fund
Custodian Registrar
Accountant
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3 Principles of Governance
For Sponsor & Manager

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All investors are treated
uniformly

Fairness

Follow 3T:
Timely
Transpare
Transparent
ncy
Truthful Investors interest will always
Fiduciary be paramount

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Category of Schemes

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Category I Category II Category III

What it Venture capital funds, SME Which do not fall in Category I & II Complex and diverse
means? Funds, social venture and does not undertake borrowing or trading strategies and
funds, infrastructure funds leverage engaged in leverage

Tenure Close ended; Minimum 3 Close ended; Minimum 3 years Open ended or close
years ended
Borrowing No. only for temporary No. only for temporary funding Yes – upto 2 times of NAV
funding
Investment i)25% single issuer i) 25% single issuer 10% single issuer
Limit ii) Investment in unlisted ii) Primarily Investing in unlisted
as per category securities
AIF Category I AIF Category I & II AIF Category I & II AIF
investment

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Compliance & Governance
around key activities

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- Research; - Know Your Customer;
- Limit Monitoring; - Risk Categorization;
Investments Clients - Transaction Monitoring
- Oversight

- Advertisement; - Valuations;
- Client Reporting; Operations - Client Contribution;
Communication
- PPM Modification - Corpus

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Investments Clients

Communicati
Operations
on

Investments

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Investments
Pre -Investment Investment Post - Investment

Limit Monitoring basis Investible Oversight on investment and


Research Report /
Funds: rectification as a continuing
Rationale for investment
process
Category I & II : 25% single Issuer.
Category III : 10% single Issuer Category III AIFs engaged in
Investment approval leverage: leverage ratio to be
process – Fund Manager / Category I & II : Unlisted securities reported to custodian before
Investment Committee EOD of next business day.

Limit to be maintained, during In case of breach of leverage


the lifetime of the fund ratio, rectification to be done
before 10.00 a.m. next
Process / Policies business day and inform
▪ Stewardship Policy investors.
▪ Investment Manual (Best execution, trade allocation etc.)
▪ Broker empanelment Policy
▪ Trade Error Policy 12
Investments
Unpublished Price
Insider Trading Conflict of Interest
Sensitive Information

➢ Process in place to ensure no ➢ Documented policy


employee trades or takes identifying instances where
➢ Implement Insider trading
advantage of any Unpublished conflict may arise and
Policy in line with SEBI (Insider
price sensitive Information; process for dealing with
Trading Regulations), 2015;
➢ Controls to check such conflict
➢ Checks and controls on Front
communications with clients ➢ Disclosure to investors if
Running
and third parties any conflict situation has
arisen

SREI Order:
▪ Not Meeting investment conditions as per PPM
▪ Non compliance with single investee company exposure as per SEBI regulations
▪ Not maintaining sponsor contribution
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Investments Clients

Communicati
Operations
on

Client Onboarding

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Client Onboarding
Enhanced Due Risk Periodical
KYC AML Check
Diligence Categorization review

1 2 3 4 5

➢ Collect proof of Check the following ➢ PEP: ensure senior ➢ Categorize ➢ High Risk
identity and sanctions list: management investors into investors: KYC
proof of address ➢ UNSCR approval is in place High, Medium and due
➢ Identify UBO in ➢ OFAC post EDD and Low diligence to be
case of Corporate ➢ SEBI debarred ➢ Negative news: ➢ Categorization of undertaken more
entity ➢ Negative market depending on investors to be frequently
➢ Collect proof of news gravity onboard maintained at all ➢ Medium and
identity for UBO ➢ PEP verification post EDD times Low: can be
and directors ➢ No client from USCR undertaken as
➢ Mask Aadhar and Clients are CKYC or OFAC sanctions per internal
take consent and KRA complied list to be onboarded process
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AML Policy

Transaction Monitoring AML Policy Training

➢ Set criteria for identifying


suspicious transactions;
➢ Any transaction identified ➢ Draft AML Policy in line with
as suspicious to be reported ➢ Identify the front line and
the SEBI Master circular of
to FIU within 7 days of such operations team who needs to
2019 and PMLA Rules
identification undergo training;
➢ Keep the policy upto date with
➢ Undertake NPO reporting any amendments
to FIU within 15 days from
the month end

BOD Order:
▪ Imposed penalty of INR 40 lakhs for not meeting criteria of AML requirements

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Investments Clients

Communicati
on Operations

Operations

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Operations
Sponsor Contribution Corpus Minimum contribution

➢ Category II AIF : Sponsor to ➢ AIF schemes should maintain


maintain 2.5% of the corpus or ➢ Minimum INR 1 Crore
minimum corpus of INR 20 Crore
5 crore whichever is lesser
➢ Only permissible relationship can together
➢ Any fall in corpus due to receipt of
➢ Category III AIF : Sponsor to contribute INR 1Crore :
redemption request should be
maintain 5% of the corpus or intimated to SEBI within 3 working
Rs.10 Crore whichever is lesser - investor and spouse,
days of receipt of redemption
- investor and children,
request
➢ At the initial stages of the fund, - investor and parent
the sponsor contribution can be ➢ Corpus to be revived back to INR
in proportion to the ➢ In case of minor holding there can only be
20 crore within 3 months in
contributions called from other one additional holder
absence of which redemption to be
investors carried out to all the investors.

➢ At the time of distribution, the


sponsor has to maintain the
contribution till the end of the
scheme and should be the last
entity to whom distribution is
made
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Valuation Disclose to the
investors detailed
valuation policy and
process

➢ Category I & II AIFs to undertake Valuation


valuation every six months
➢ Category III AIFs (open ended) to
disclose NAV every month for open
ended
➢ Category III AIFs (Close ended) to
disclose NAV, every quarter for close Disclosure
ended
➢ Fund Management and Fund ➢ Capture adequate information
Accountant should be different in SOA i.e. nomination, pledge,
KYC information
Account ➢ Taxation clarity (specifically in
case of schemes undertaking
statement leverage) should be provided
in brief

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Investments Clients

Communicati
on Operations

Client Communication

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Client Communication

Regulatory Reporting PPM Modification


Advertisement
- Reporting on risks and mandatory - Non fundamental in nature: intimate within
- True and fair; disclosures under Regulaiton 22(g) – 7 days of change
- Appropriate disclaimer - Fundamental change: provide exit option.
- Strictly on private placement (including Exit option not required if consent received
- Category III AIF schemes within 60 days from
information on website should not induce from 2/3rd majority by value of investment
quarter end.
investment) - Change in Investment objective and extension
- In case of offshore solicitation, legend of of tenure of close ended scheme : obtain
relevant jurisdiction - Category II AIF schemes within 180 days consent from 2/3rd majority by value of
from year end. investment

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Foreign Investment

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Foreign Investment
Category I Category II Category III
NRO Domestic Domestic Domestic
NRE* Foreign Investment Foreign Investment Foreign Investment

FPI* Not Permitted Not Permitted Permitted – upto 25% of


corpus of scheme.
FPIinvestment restriction
to be followed

FDI* Permitted – no FDI limit to Permitted – no FDI limit to be followed Not permitted
be followed

* Form INVI reporting to be done on FIRMS portal


FOCC:
▪ Sponsor or investment manager of an AIF is not held by resident Indian, irrespective of whether there is foreign
investment or not, the scheme shall follow FDI limits.
▪ Form DI reporting to be undertaken for every downstream investment made by the scheme 23
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Thank you

You can connect with me on:


Leela.naidu7@gmail.com

@leelarnaidu

www.linkedin.com/in/Leelavathi-Naidu-ob030661

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