13 Understanding the Obligations: A Comprehensive Guide to the Responsibilities of AIFs' Managers, Sponsors, and Trustees

Key Takeaways:

- AIFs must designate a Compliance Officer responsible for monitoring adherence to regulations and circulars.

- Managers must appoint registered custodians for safekeeping of securities and establish written policies to mitigate conflicts of interest.

- Transparency is paramount, with AIFs required to disclose financial, risk management, operational, portfolio, and transactional information to investors.

- AIFs must implement the Stewardship Code for investments in listed equities, promoting active engagement and responsible governance.

- Comprehensive policies and procedures are essential to ensure compliance with regulations, placement memorandums, and investor agreements.

Detailed Narrative:

The Alternative Investment Fund (AIF) industry is a dynamic and rapidly evolving landscape, and it is imperative that all stakeholders operate within a framework of robust governance and ethical conduct. This chapter provides a comprehensive guide to the obligations and responsibilities that AIFs, their managers, sponsors, and trustees must uphold to maintain the integrity and transparency of the industry.

At the heart of these obligations lies the appointment of key personnel and the establishment of robust policies and procedures. AIFs are mandated to designate a Compliance Officer, distinct from the Chief Executive Officer or equivalent role, to monitor adherence to the Securities and Exchange Board of India (SEBI) Act, AIF Regulations, and circulars issued thereunder. This Compliance Officer acts as a watchdog, ensuring that every decision made by the AIF is in compliance with the applicable laws, regulations, and internal policies.

Furthermore, the chapter emphasizes the importance of appointing registered custodians for the safekeeping of securities. In accordance with Regulation 20(11) of the AIF Regulations, the sponsor or manager of the AIF must appoint a SEBI-registered custodian to safeguard the fund's assets. This requirement extends to Category III AIFs, where the custodian must also keep custody of securities and goods received in delivery against the physical settlement of commodity derivatives.

Recognizing the potential for conflicts of interest, the chapter mandates that managers establish and implement written policies to mitigate such situations. These policies should clearly identify potential conflicts, outline procedures for addressing them, and ensure that the interests of investors are prioritized over those of the entity or its associates.

Transparency is a cornerstone of the AIF industry, and this chapter underscores the obligation of AIFs to disclose financial, risk management, operational, portfolio, and transactional information to investors. This transparency fosters trust and enables investors to make informed decisions about their investments.

In a significant move towards promoting responsible governance, the chapter introduces the Stewardship Code, which all categories of AIFs must mandatorily follow in relation to their investments in listed equities. The Stewardship Code outlines principles that encourage active engagement with investee companies, monitoring of performance, corporate governance, and environmental, social, and governance (ESG) risks, as well as responsible voting practices.

Underpinning these obligations is the requirement for AIFs to establish comprehensive policies and procedures to ensure compliance with regulations, placement memorandums, agreements with investors, and other fund documents. These policies must be reviewed regularly and updated as necessary, reflecting the dynamic nature of the industry and the evolving regulatory landscape.

The chapter also addresses the responsibilities of managers, sponsors, and trustees in upholding a code of conduct that prioritizes the interests of unitholders. This includes acting in a fiduciary capacity, maintaining high standards of integrity and fairness, and refraining from offering assured returns or engaging in practices that may be prejudicial to the interests of investors.

By providing a detailed roadmap for navigating the obligations and responsibilities of AIFs, their managers, sponsors, and trustees, this chapter aims to foster a culture of accountability, transparency, and ethical conduct within the industry. It serves as a guiding light, ensuring that the AIF ecosystem operates on a foundation of professionalism, investor protection, and adherence to regulatory frameworks.

FAQs:

Q1: What is the role of the Compliance Officer in an AIF?

A1: The Compliance Officer is responsible for monitoring the AIF's adherence to the SEBI Act, AIF Regulations, and circulars issued thereunder. They ensure that every decision made by the AIF is in compliance with applicable laws, regulations, and internal policies.

Q2: Why is the appointment of a registered custodian important for AIFs?

A2: The appointment of a SEBI-registered custodian is crucial for the safekeeping of the AIF's securities and assets. This measure helps to protect the interests of investors and ensures proper custody and management of the fund's holdings.

Q3: How do AIFs mitigate conflicts of interest?

A3: AIFs are required to establish and implement written policies to identify and manage potential conflicts of interest. These policies should outline procedures for addressing conflicts and ensure that the interests of investors are prioritized over those of the entity or its associates.

Q4: What is the significance of the Stewardship Code for AIFs?

A4: The Stewardship Code promotes responsible governance and active engagement with investee companies. It encourages AIFs to monitor performance, corporate governance, ESG risks, and exercise responsible voting practices in relation to their investments in listed equities.

Q5: Why are comprehensive policies and procedures important for AIFs?

A5: Comprehensive policies and procedures are essential for ensuring compliance with regulations, placement memorandums, agreements with investors, and other fund documents. These policies must be regularly reviewed and updated to reflect the dynamic nature of the industry and evolving regulatory landscape.

Key Precedents:

1. Regulation 20(11) of the AIF Regulations:

This regulation mandates the appointment of a SEBI-registered custodian by the sponsor or manager of the AIF for the safekeeping of securities.

2. Regulation 20(11A) of the AIF Regulations:

This regulation outlines the conditions under which an associate of the sponsor or manager may act as the custodian for an AIF.

3. SEBI Circular No. SEBI/HO/AFD/PoD/CIR/2024/5 dated January 12, 2024:

This circular provides specific guidelines and timelines for the appointment of custodians by AIFs, including existing schemes with a corpus below a certain threshold.

4. SEBI Circular No. CIR/IMD/DF/7/2015 dated October 01, 2015:

This circular outlines the code of conduct that AIFs, their managers, trustees, and sponsors must adhere to, emphasizing the prioritization of unitholders' interests and maintaining high standards of integrity and fairness.

5. SEBI Circular No. CIR/CFD/CMD1/168/2019 dated December 24, 2019:

This circular introduces the Stewardship Code, which AIFs must follow in relation to their investments in listed equities, promoting active engagement, monitoring, and responsible voting practices.

6. SEBI Circular No. CIR/IMD/DF/14/2014 dated June 19, 2014:

This circular highlights the obligation of AIFs to ensure transparency and disclose financial, risk management, operational, portfolio, and transactional information to investors.

These precedents, including regulations, circulars, and notifications issued by SEBI, form the foundation upon which the obligations and responsibilities of AIFs, their managers, sponsors, and trustees are built. They provide a comprehensive framework for ensuring compliance, transparency, and ethical conduct within the AIF industry.

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Here's AIF Circular's verbatim Chapter 13

Chapter 13 - Obligations of manager, sponsor and trustee of AIFs

13.1. Appointment and designation of personnel of AIF and manager{38}

13.1.1. AIFs shall ensure that Manager of AIF designates an employee or director as Compliance Officer who shall be a person other than Chief Executive Officer of the Manager or such equivalent role or position depending on the legal structure of Manager. The compliance officer shall be responsible for monitoring compliance with the provisions of the SEBI Act, AIF Regulations and circulars issued thereunder.

13.1.2. For the purpose of provisions of AIF Regulations, ‘key management personnel’ shall mean:

(i) members of key investment team of the Manager, as disclosed in the PPM of the fund;

(ii) employees who are involved in decision making on behalf of the AIF, including but not limited to, members of senior management team at the level of Managing Director, Chief Executive Officer, Chief Investment Officer, Whole Time Directors, or such equivalent role or position;

(iii)any other person whom the AIF (through the Trustee, Board of Directors or Designated Partners, as the case may be) or Manager may declare as key management personnel.

13.1.3. AIFs shall disclose the names of all the key management personnel of the AIF and Manager as specified in para 13.1.2 above, in their PPMs. Any change in key management personnel shall be intimated to the investors and the Board.

13.2. Appointment of custodian for AIFs{39}

In terms of Regulation 20(11) of AIF Regulations, the Sponsor or Manager of the AIF shall appoint a custodian registered with the Board for safekeeping of the securities of the AIF, in the manner as may be specified by the Board from time to time. Further, in terms of Regulation 20(11A) of AIF Regulations, a custodian which is an associate of the Sponsor or Manager of an AIF may act as a custodian for that AIF only when the conditions specified in the said Regulations are met. In this regard, the following is specified:

13.2.1. The custodian for a scheme of an AIF shall be appointed prior to the date of first investment of the scheme.

13.2.2. Existing schemes of Category I and II AIFs having corpus less than or equal to INR 500 crore and holding at least one investment as on January 12, 2024 shall appoint custodian on or before January 31, 2025.

13.2.3. In case of AIFs with custodians that are associates of their manager or sponsor, managers of such AIFs shall ensure compliance with Regulation 20(11 A) of AIF Regulations on or before January 31, 2025.

13.2.4. The information necessary to ascertain compliance with the provisions of this sub-chapter shall be incorporated in the format for quarterly reporting by AIFs in SEBI Intermediary Portal (www.siportal.sebi.gov.in). The manager of AIF shall provide the requisite information accordingly while submitting the quarterly report to SEBI.

13.3. Code of conduct{40}

13.3.1. All managers shall:

(i) organise, operate and manage the AIFs and its schemes in the interest of unitholders of the AIF/scheme.

(ii) carry out all the activities of the AIF in accordance with the placement memorandum circulated to all unit holders and as amended from time to time in accordance with AIF Regulations and circulars issued by SEBI.

(iii) ensure that the placement memorandum is provided to the investors prior to providing commitment or making the investment in the AIF and ensure that an appropriate acknowledgement is received from the investor for such receipt.

(iv) ensure scheme-wise segregation of bank accounts and securities accounts.

(v) not make any exaggerated statement, whether oral or written, either about their qualifications or capability to render investment management services or their achievements.

13.3.2. The AIF, manager, trustee and sponsor shall:

(i) act in the interest of unitholders of the AIF/scheme and not take any action which is prejudicial to the interest of the unitholders and not place the interest of the sponsor/manager/trustee of the AIF or any of their associates above the interest of the unitholders of the scheme/AIF.

(ii) maintain high standards of integrity and fairness in all their dealings and in the conduct of the business and render at all times high standards of service, exercise due diligence and exercise independent professional judgment.

(iii) not offer any assured returns to any prospective investors/ unitholders.

13.4. Stewardship Code{41}

All categories of AIFs shall mandatorily follow the Stewardship Code as placed at Annexure 10, in relation to their investment in listed equities.

13.5. Other obligations{42}

All circulars/guidelines as may be issued by SEBI with respect to KYC requirements, Anti-Money Laundering and Outsourcing of activities shall be applicable to AIFs and the manager of the AIF shall be responsible for compliance with such circulars/guidelines.

Notes:-

{38}SEBI Circular No. SEBI/H0/AFD/RAC/CIR/2022/088 dated June 24, 2022 and SEBI Circular No. SEBI/HO/IMD-I/DF6/P/CIR/2021/584 dated June 25, 2021

{39}SEBI Circular No. SEBI/HO/AFD/PoD/CIR/2024/5 dated January 12, 2024

{40}SEBI Circular No. CIR/IMD/DF/7/2015 dated October 01, 2015

{41}SEBI Circular No. CIR/CFD/CMD1/168/2019 dated Dec 24, 2019

{42}SEBI Circular No. CIR/IMD/DF/14/2014 dated June 19, 2014