Investor and Investment Scrutiny Now a Necessity for AIFs, Managers, and KMPs


Three points you will get to know in this article:

  • SEBI mandates due diligence for AIFs, managers, and KMPs.
  • Aim is to prevent regulatory circumvention.
  • Approval given for managing investments without immediate buyers.

What is SEBI?

The Securities and Exchange Board of India, known as SEBI, plays a crucial role in overseeing both the securities and commodity markets within India. It operates under the Ministry of Finance, a key department in the Indian government. Initially formed on April 12, 1988, SEBI began as an executive body and later gained statutory authority on January 30, 1992, with the enactment of the SEBI Act, 1992. Originally conceived as a non-statutory body to regulate the securities market, SEBI evolved over time. Its headquarters are situated in Mumbai’s bustling business hub, the Bandra Kurla Complex. Additionally, SEBI has established regional offices across India in New Delhi, Kolkata, Chennai, and Ahmedabad, catering to the diverse needs of investors in different parts of the country. Furthermore, SEBI previously maintained 17 local offices nationwide to enhance investor education. However, as of Dec 2023, a restructuring initiative led to the closure of 16 of these offices, reflecting SEBI’s commitment to efficient operations and resource management.

SEBI Mandates Due Diligence for AIFs

The Securities and Exchange Board of India (SEBI) has announced that alternative investment funds (AIFs), along with AIF managers and their key management personnel (KMPs), will now be required to carry out specific due diligence on their investors and investments. This decision comes after SEBI held a meeting with its Board on Friday (March 15). The aim is to prevent AIFs from circumventing the regulations set by financial sector regulators.

Emphasis on Verifiable Compliance

SEBI emphasized in a statement that implementing these due diligence measures will ensure verifiable compliance. This, in turn, will provide the necessary regulatory assurance to introduce other proposals or measures for AIFs aimed at enhancing the ease of doing business (EoDB). Ultimately, this move is geared towards fostering continuous capital formation. Detailed standards outlining these procedures are set to be issued shortly.

Making sure that we have clear guidelines and rules in place, the Industry Standards Forum for AIFs, in collaboration with SEBI, will define specific standards for conducting thorough due diligence on both investors and investments. This ensures that there’s no room for ambiguity or confusion.

Facilitating Investment Management

Additionally, the Board has given the green light to a proposal that allows AIFs to manage investments that can’t be sold immediately due to a lack of buyers. These investments can be retained within the same AIF scheme and a dissolution period can be initiated, providing a smoother process during winding-up.

The worth of these investments moving into the dissolution period will be acknowledged following SEBI guidelines, which help track the manager’s performance and report to performance benchmarking agencies.

Extension of AIF Schemes

Now, instead of launching a new scheme (Liquidation Scheme), there’s the option to enter a dissolution period. Plus, the Board has given the green light to extend AIF schemes by one year to handle investments that haven’t been liquidated beyond their usual period, given certain conditions.

SEBI has mandated due diligence for AIFs, their managers, and key personnel on investors and investments to prevent regulatory circumvention. The move assures verifiable compliance and aims to facilitate ease of doing business and continuous capital formation. Detailed standards will be issued soon, ensuring clarity and cooperation with the Industry Standards Forum for AIFs. A proposal allowing AIFs to manage investments unable to be immediately sold has also been approved, with the option to enter a dissolution period, streamlining the winding-up process. SEBI has also granted extensions for AIF schemes to handle unliquidated investments under specific conditions.

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