| SEBI issues some important directions for Alternate Investment Funds |
| As per the extant regulations, Category III AIFs i.e. funds employing diverse and complex trading strategies are allowed to engage in leverage or borrow funds subject to consent from the investors in the fund and a limit as specified by SEBI. Also, the said regulations state that the Category III AIFs shall be regulated by directions issued by the Board from time to time regarding aspects like operational standards, business rules, prudential requirements, restrictions on redemption and conflict of interests.
Keeping in line with this and in continuance of its efforts to protect the interest of investors in the Indian Securities Markets, SEBI vide its circular dated 29th July 2013 has notified certain operational, prudential and reporting norms for the Alternative Investment Funds (AIFs) registered or to be registered under the Securities Exchange Board of India (Alternative Investment Funds) Regulations as notified on 21st May 2012. |
| The major highlights of the new directions are as follows: |
| Aspect |
Directions |
|
Risk Management and Compliance
Applicability:
Category III AIFs that employ leverage |
| 1. |
Keeping in mind the funds size, complexity & risk profile, have:
- Comprehensive risk management framework supported by independent risk management function
- A strong and independent compliance function supported by sound and controlled operations & infrastructure, adequate resources and checks and balances
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| 2. |
Maintain appropriate records of the trades/transactions performed. |
| 3 |
Provide to investors full disclosure and transparency of:
- Conflicts of interest
- How the conflicts are managed from time to time in accordance with various SEBI guidelines.
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Redemption norms
Applicability:
Open Ended Category III AIFs for all existing and new schemes
|
The Manager of the fund :
- Shall ensure adequate and sufficient degree of liquidity, and shall establish a liquidity management policy in order to meet redemption obligations and other liabilities
- Shall clearly disclose in placement memorandum the possibility of suspension of redemption in exceptional circumstances exclusively in the best interest of investors or as required by SEBI
- Shall build operational capability to suspend redemptions in an orderly and efficient manner
- Shall document the decision, reasons and planned actions for suspension and communicate the same to investors.
- During the suspension shall:
- Not accept new subscriptions
- Regularly review the suspension
- Keep SEBI and investors informed about actions taken
The suspension of redemptions shall be justified only if such a suspension is exclusively in the best interest of investors or is required by SEBI or under AIF regulations. |
| Prudential requirements
Applicability:
All Category III AIFs which undertake leverage |
| 1. |
The leverage undertaken by an AIF shall be calculated as follows:
Leverage = Total exposure [Longs + Shorts after permitted
| Offsetting] |
| Net Asset Value of the AIF |
The circular stipulates various points which need to be kept in mind while calculating the exposure and Net Asset Value, and while offsetting the positions.
|
| 2. |
The leverage shall not exceed 2 times the NAV of the fund. |
| 3. |
All the restrictions/limits given in the circular shall apply to the AIF at the scheme-level. The AIFs:
- Shall have adequate systems in place to monitor exposures and ensure they don’t exceed the limits.
- Shall report to the custodian on a daily basis the amount of leverage at the end of the day (based on closing prices)
In case of breach of leverage limits, the following obligations will need to be fulfilled:
| AIFs obligation |
Custodians obligation |
| Communicate the breach to its clients before 10:00 AM on next working day |
Communicate to SEBI the name of AIF, extent of breach and reasons thereof before 10:00 AM on next working day |
| Square off excess exposure by the end of next working day |
|
| Communicate confirmation of squaring off to the clients by the end of the day on which squaring off is done |
Communicate confirmation of squaring off to SEBI by the end of the day on which squaring off is done |
SEBI may take an action against the AIF for beach of leverage limits |
|
| Reporting Requirements:
Applicability: All AIFs according to their categories |
| 1. |
All the AIFs may at any time be called upon by the Board to file such reports as the Board may desire. The reporting requirements stipulated are:
| AIFs obligation |
Custodians obligation |
| I, II and III (which do not undertake leverage) |
Quarterly reporting in Annexure I |
| III (which have undertaken leverage) |
Monthly reporting in Annexure II |
|
| 2. |
The following things need to be kept in mind:
- No physical copy or report is to be filed.
- Reports are to be submitted online through an online reporting system and till the time such system is put in place, the report has to be sent to the following e-mail: aifreporting@sebi.gov.in
- Reporting has to be done within 7 calendar days from the end of quarter/ month as the case may be
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| Apart from the above directions, the AIFs will now have to ensure that all their marketing documents can be distributed to their proposed investors on a private basis only and have to be in accordance with the placement memorandum of the fund/ scheme. |
| The notification of the SEBI (Alternative Investment Funds), Regulations in 2012 brought along a familiar but a new concept all together. A statute is good as long as it evolves owing to the practicalities that come to light subsequent to its promulgation. As a little over one year elapses from the notification of the said regulations, SEBI in answer to various practical issues which have arisen during this time has notified these directions to remove ambiguity from the said regulations. |
