SEBI enhances accountability of Investment Committee for AIFs

Author: thinkinglegal | November 4, 2020 - 01:54 | Tags: Regulatory Advisory & Dispute Resolution

On October 19, 2020, the Security and Exchange Board of India (“SEBI”) amended the SEBI (Alternative Investment Funds) Regulations, 2012 (“Amendment”) and laid down the criteria for the key investment team of Manager of Alternate Investment Funds (“AIFs”) and the constitution of Investment Committee to approve investment decisions of AIFs.

Role of Investment Committee in Investment Decisions of AIFs

The Amendment has introduced the sub-regulation (6) to Regulation 20 that has brought the constitution of Investment Committee (“IC”) within the purview of SEBI. The names of the members are required to be disclosed in the PPM and if the PPM does not mention such names, consent of 75% of the investors is required for appointment of such members.

The Amendment has placed joint accountability on the Investment Manager and members of the IC to ensure the AIF’s compliance with the 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 AIF. The Amendment has clearly delineated the roles and responsibilities of the Managers and members of IC.

Clarification on non-resident members

SEBI vide circular dated October 22, 2020 issued clarification in respect of applications for registration of AIFs, 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 an AIF 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 AIF being owned and controlled by persons resident outside India, AIFs may have to reconsider the constitution of their ICs.

Eligibility Criteria for the Key Investment Team of Manager of AIF

The Amendment has inserted clause 4(g)(i), which prescribes the professional qualification criteria for the key personnel of investment team of Manager. Before the amendment, the Regulation 4(g) of the AIF Regulations provided for the Manager of an AIF to mandatorily have a key investment team, with at least one key personnel having not less than 5 years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and relevant professional qualifications. However, the AIF Regulations did not specify what constituted ‘relevant professional qualification’.

In this background, few applications were received where requests were made to broaden the professional qualification criteria for the key personnel of Manager’s investment team. Therefore, to ensure consistency in considering relevant professional qualification, SEBI has clarified that at least one member of the key investment team is required to have professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by the Board.


The Amendment has been brought in with the objective that it is ensured that all such members who are involved in approving the investment decisions are also held accountable for such investment decisions. While this is a welcome move for the investors of the AIF as it helps in protecting their interests in the fund, this move may discourage individuals from becoming a part of the IC in light of the increased accountability and scrutiny by SEBI. This may also lead to more individuals opting for an observer status on the IC.

Further, the clarification requested by SEBI will be important as it will be a determinant factor in the constitution of the IC for AIFs. Watch this space for further developments on this issue.

This post has been contributed by Ms. Vaneesa Agrawal and Mr. Milind Raj Dixit.

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