An Alternative Investment Fund (AIF) is a body that pools the funds of high-net-worth individuals and invests it as per the needs of the investors. To regulate the unregulated funds and ensure stability and market efficiency, encourage new capital formation, and protect the interest of the investors, SEBI proposed to frame SEBI (Alternative Investment Funds) Regulations, 2012 (SEBI (AIF) Regulations, 2012). This Regulation replaced the SEBI (Venture Capital Funds) Regulations 1996. The need for a regulatory framework arises to detect fraud, unfair trade practices and to minimize conflicts of interest. Role of a sponsor or a manager is a person who ensures that the investment of funds in an AIF is done as per the regulatory requirements.
Who is a Sponsor?
Sponsors are person or persons who set up an AIF. The sponsor includes a promoter in the case of a company and a designated partner in the case of a Limited Liability Partnership (LLP). A Manager of the AIF who as per the SEBI (AIF) Regulation 2012 is a person or an entity who is appointed to manage the investments. A sponsor can also be a manager of the Fund. Continue reading this blog, to know about the role of a sponsor or manager in AIF.
What is the role of a Sponsor or Manager in an AIF?
The role of a sponsor or manager in an AIF is as follows:
- A sponsor or a manager is a person who manages AIF or schemes of AIF.
- The sponsor or a manager has a continuing interest in the AIF. The continuing interest should be of the following amount:
|Category of AIF||Continuing Interest|
|Category I and II AIF||Not less than 2.5% of the corpus or INR 5 crore, whichever is lower.|
|Category III AIF||Not less than 2.5% of the corpus or INR 50 lakh, whichever is lower.|
- The sponsor or manager has to disclose their investments in AIFs to the AIF investors.
- The role of a sponsor or manager is to appoint a custodian. The custodian should be registered with SEBI for the safekeeping of securities. This is to be done only when the corpus of the AIF is greater than INR 5 crore. However, for category III AIF appointment of a custodian is mandatory irrespective of the size of the corpus.
- The sponsor has to make periodic disclosure to the investor of any fees ascribed or charged by the sponsor or manager to the AIF or the investee company.
- Sponsor and Manager act in a fiduciary capacity towards the investors and also disclose to investors all conflicts of interest as and when they arise or seem to arise.
- An investment by a sponsor or manager of a company shall be on normal terms as offered by the AIF and not on favourable terms as per their whims and fancies.
- The role of a sponsor or manager of an AIF is to ensure that the maximum investment in an investee company is restricted to 25% of the corpus in the case of Category I and II AIF and 10% of the corpus in the case of Category III AIF.
- The sponsor or manager of the AIF must ensure that the maximum number of investors should not be more than 1000 in cases of one scheme. However, AIF may have more than 1000 investors in cases where there exists more than one scheme in an AIF.
- The role of a sponsor or manager of an AIF is to ensure that the funds are raised through private placement and not public issues. However, private placement can take place from domestic as well as international investors. A private placement is what distinguishes AIF from Collective Investment Scheme (CIS) or Mutual Fund.
- Sponsors and Managers have to formulate and implement written policies and procedures for identifying, monitoring, and mitigating conflicts of interest.
- The role of a sponsor or manager of an AIF is fiduciary in nature. They shall act in a fiduciary capacity and disclose all conflicts of interest to the investors. The following disclosure should be made:
- Periodic disclosure of financial risk management, portfolio, and transactional information regarding investments, operational reporting, etc.
- Any fee charged by the sponsor or manager from the AIF or investee company.
- Information regarding any inquiry, investigation, or legal action by legal or regulatory bodies.
- Any information regarding breach of a provision relating to the placement memorandum of agreement made by the investor or any other document of the fund.
- Intimate about the change in control of sponsor or manager or Investee Company.
- Sponsors or managers of an AIF have to report to the investors on an annual basis and within 180 days from the end of the year, the following information:
- Financial information of Investee Company.
- Material risks involved and the measures to manage them.
- Quarterly reports by Category III AIF are provided to the investors within 60 days from the end of the quarter.
- Any significant change in the investment team.
- Any information regarding systematic risk purposes to SEBI as and when required.
- Sponsors or managers of AIFs maintain records of the assets under the scheme, valuation policies and practices, investment strategies, rationale behind the investments made, and particulars of investors and their contributions.
As seen above, the role of a sponsor or manager is quite vast. Apart from managing the AIF, the sponsor or manager also ensures that proper reporting is done to the investors as well as to SEBI. They also ensure that the funds of the AIF are properly invested. Thus, it can be said that sponsors or managers play a vital role in the functioning of an AIF.
Read our Article: Operational Aspect of Amendment to SEBI AIF Regulations
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