On October 19, 2020, the Securities and Exchange Board of India (“SEBI”) had amended the SEBI (Alternative Investment Funds) Regulations, 2012 (“Regulations”) and laid down the criteria for the constitution of Investment Committee to approve investment decisions of Alternative Investment Funds (“AIF”).

Role of Investment Committee in Investment Decisions of AIFs

Sub-regulations (6), (7), (8), (9) and (10) to Regulation 20 provide that the names of the members are required to be disclosed in the Private Placement Memorandum (“PPM”) and if the PPM does not mention such names, consent of 75% of the investors is required for appointment of such members. Prior to this amendment, the Regulations did not mention the Investment Committee (“IC”) and therefore, there was no regulatory provision governing the IC.

Ever since, SEBI has placed joint accountability on the Investment Manager and members of the IC to ensure the Fund’s compliance with SEBI regulations, PPM, other fund documents and the applicable law. Further, it provides for equal responsibility of the Managers and the members of the IC with regard to investment decisions of the Fund. Additionally, the Regulations clearly list out the roles and responsibilities of the members of IC.

Regulation awaited on non-resident members’ eligibility

SEBI through its circular dated October 22, 2020 issued clarification in respect of applications for registration of funds, in respect of IC, which consists of external members who are not ‘resident Indian citizens’. As per SEBI, such applications can only be processed after the Government of India and the RBI issue clarification on the applicability of clause (4) of Schedule VIII under FEM (Non-debt Instruments) Rules, 2019, which states that downstream investment by a fund shall be considered foreign investment if the Sponsor or Investment Manager is owned and controlled by persons resident outside India.

For the time being, only those applications shall be duly processed wherein the Investment Committee consists of external members who are ‘resident Indian citizens’.

If the RBI clarifies that non-residents becoming a part of the IC would amount to the Fund being owned and controlled by persons resident outside India, Funds may have to reconsider the constitution of their ICs.

Conclusion

While the increased accountability of the members of IC is favorable for Limited Partners (LPs) of Fund as it helps in protecting their interests in the Fund, it has also been viewed to discourage individuals from becoming a part of the IC in light of the increased accountability and scrutiny by SEBI. Many individuals tend to opt for an observer status on the IC, and recently, we have also seen Funds set up advisory boards to accommodate them.

Further, the clarification requested by SEBI with respect to external members being non-resident Indians still remain unanswered but once a response is received it will be a significant factor determining constitution of ICs of Funds.

This post has been contributed by Ms. Vaneesa Agrawal, Founding Partner and Ms. Sanyukta Srivastav, Senior Associate.

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