Funds and Asset Managment

The past quarter witnessed key regulatory and legislative developments in the funds and asset management space. SEBI provided clarity on provisions relating to compliances by 'large value funds for accredited investors' and mandated the appointment of a compliance officer by all AIFs. The International Financial Services Centres Authority notified regulations for the setting up of AIFs in GIFT City, Gujarat.

Pallabi GhosalPartner

Ananya SonthaliaCounsel

Hetvi DoshiSenior Associate

During the second quarter of 2022, the Securities and Exchange Board of India (SEBI) notified governance and compliance requirements for certain large value funds for accredited investors and modified the procedure for seeking prior approval from SEBI for change in control of portfolio managers (PMs). The International Financial Services Centres Authority (IFSCA) released the IFSCA (Fund Management) Regulations, 2022 to incentivise the setting up of Alternative Investment Funds (AIFs) in Gujarat International Finance Tec-City (GIFT City).

Key Developments

  • Guidelines for large value funds for accredited investors

    In August 2021, SEBI introduced the concept of ‘large value funds for accredited investors’ (LVFs).1 However, LVFs have not gained as much traction as was expected and in June 2022, the SEBI released a circular clarifying a couple of aspects relating to LVFs:

    • Registration of LVF Scheme with SEBI: In order to encourage setting up of LVFs and ease the registration burden, SEBI has streamlined the process for registration of LVFs. While the registration of LVF (including launch of the first scheme) will require the investment manager of the AIF (AIFM) to follow the process set out under the AIF Regulations and submit prescribed documents along with the undertaking of the AIFM, the registration process is directly with SEBI without the requirement to appoint a merchant banker. Further, LVFs can launch subsequent schemes by submitting the private placement memorandum (PPM) and the undertaking of the AIFM with SEBI rather than seeking comments on the PPM from SEBI through the merchant banker.
    • Extension of term of the LVF: While a non-LVF can extend the term of the scheme/fund for up to 2 years with 2/3rd approval, the term of the LVF can be extended beyond 2 years subject to terms and conditions in the contribution agreement, other fund documents and other specific conditions prescribed under the circular.
  • Compliance officer for all AIFs

    To align the requirements of the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) with other SEBI regulations governing SEBI intermediaries, SEBI has now made it mandatory for every AIFM to designate an employee or director other than the CEO (or such other equivalent role) as the compliance officer. The compliance officer will be responsible for monitoring compliance with the SEBI Act, 1992 (SEBI Act), AIF Regulations and other circulars thereunder.

  • Prior approval for change in control of portfolio managers

    SEBI has released a circular under the SEBI (Portfolio Managers) Regulations, 2020 (PM Regulations) to streamline the process of change in control of PMs (Change in Control). To effect a Change in Control, the PM is now required to apply for approval of SEBI for Change in Control. It needs to intimate its existing investors about the proposed Change in Control and provide an exit option to the existing dissenting investors without any exit load. Within six months of the approval of SEBI, the PM should apply for fresh registration as PM.

    Further, the SEBI has now extended the process for change in control prescribed for AIFMs in case of a scheme of arrangement under the Companies Act, 2013 for PMs. Consequently, if there is a Change in Control pursuant to a scheme of arrangement, the applicant should apply to SEBI for an in-principle approval before filing with the National Company Law Tribunal (NCLT) and thereafter, upon receipt of the NCLT order, the applicant is required to obtain final approval from SEBI for Change in Control.

  • IFSC Regulations for GIFT AIFs

    In our previous quarterly milestones update, we discussed the key features of the draft IFSCA (Fund Management) Regulations, 2022 which were released by the IFSCA for providing impetus to the development of alternative investment funds in International Financial Services Centre – GIFT City. Based on the comments received on the draft regulations, the IFSCA notified the finalised regulations on 19 April 2022 in a similar shape and form as the draft guidelines.

    (To read our detailed update on SEBI’s guidelines on change in control of AIFMs and the draft IFSCA (Fund Management) Regulations, 2022 in our previous issue, click here.)

Given the greater clarity provided by SEBI in respect of LVFs, the market is now awaiting SEBI’s clarification on Special Situation Funds (SSFs) as various fund managers evaluate options between SSF, Asset Reconstruction Company and Category II AIF. In the meanwhile, SEBI released amendments to provide impetus to social venture funds on 25 July 2022 which is likely to result in increased activity in the ESG fund management space.

[1] As per section 2(1)(pa) of SEBI (Alternative Investment Funds) Regulations, 2012 ‘large value fund for accredited investors’ means an Alternative Investment Fund or scheme of an Alternative Investment Fund in which each investor (other than the Manager, Sponsor, employees or directors of the Alternative Investment Fund or employees or directors of the Manager) is an accredited investor and invests not less than INR 700 million (US$ 8.90 million).

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