SEBI Mandates Annual Audit of PPMs for PE / VC

Author: thinkinglegal | June 15, 2020 - 13:13 | Tags: PE / VC

On February 5, 2020, India’s capital market regulator, the Securities and Exchange Board of India (“SEBI”) had issued a circular mandating that in order to ensure compliance with the terms of Private Placement Memorandum (“PPM”), it will be mandatory for Alternative Investment Funds (“AIFs”) to carry out an annual audit of compliance with the terms of the PPM. However, audit of sections of PPM relating to ‘Risk Factors’, ‘Legal, Regulatory and Tax Considerations’ and ‘Track Record of First Time Managers’ are optional.

This audit has to be carried out by either internal or external auditor/legal professional. The findings of the audit, along with corrective steps, have to be communicated to the trustee of the AIF, board of the Investment Manager and SEBI. SEBI has now clarified that that the audit has to be conducted at the end of each financial year and the findings have to be communicated within six months from the end of the financial year.

The requirement of audit of compliance with terms of PPM do not apply to AIFs which:

  1. have not raised any funds from their investors. However, such AIFs are required to submit a Certificate from a Chartered Accountant to the effect that no funds have been raised, within 6 months from the end of the Financial Year;
  2. are registered as Angel Funds under the SEBI (Alternative Investment Funds), Regulations 2012; or
  3. are AIFs/Schemes in which each investor commits to a minimum capital contribution  of INR  70  crores (USD  10 million or  equivalent,  in  case  of capital commitment in non-INR currency) and also provides a waiver to the fund from  the  requirement  of  annual audit of terms of PPM.

For the financial year 2019-2020, the findings have to be communicated to the trustee of the AIF, board of the Investment Manager and SEBI by December 31, 2020.

Generally, private equity and venture capital funds in India are registered as AIFs and have to ensure that the audit of compliance with PPM for this year is done before December 31, 2020. If the effects of Covid-19 persist, it is possible that this deadline may be extended.


This post has been contributed by Ms. Vaneesa Agrawal.

[DISCLAIMER:  This article is for academic purpose and is solely to provide readers with general information regarding developments in Indian law. The information contained herein does not constitute legal or a professional advice.]