Specific due diligence of investors and investments of AIFs

SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/135 · 2024-10-08 · SEBI

Summary

This circular mandates specific due diligence for AIFs, managers, and key personnel regarding investors and investments to prevent regulatory circumvention. It specifies four regulatory frameworks requiring enhanced scrutiny: QIB benefits under ICDR, QB status under SARFAESI, RBI norms on ever-greening stressed assets, and FDI rules for border-sharing countries. The document outlines detailed thresholds for investor contributions and requires reporting of existing and new investments to custodians by April 7, 2025. Paragraphs 12 through 16 mandate compliance reporting, effective date, legal authority, and publication details for the circular. Annexure I provides a specific format for AIFs to report existing investments that failed due-diligence checks to their custodians. The document concludes with the signatory details of the Deputy General Manager from SEBI.

Text

Every AIF, Manager of the AIF and Key Management Personnel of the Manager and the AIF shall exercise specific due diligence, with respect to investors and investments of the AIF, to prevent facilitation of circumvention of such laws, as may be specified by SEBI from time to time.

The specific due diligence... are being specified in this circular - I. Provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018... II. Provisions of the ‘Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’... III. Prudential norms specified by Reserve Bank of India (RBI)... IV. Rule 6 of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019...

For every scheme of AIFs having an investor, or investors belonging to the same group, who contribute(s) 50 percent or more to the corpus of the scheme, necessary due diligence as per the implementation standards formulated by Standard Setting Forum for AIFs (‘SFA’), shall be carried out prior to availing benefits available to QIBs under ICDR Regulations and other SEBI Regulations.

For every scheme of AIFs having an investor, or investors belonging to the same group, who contribute(s) 50 percent or more to the corpus of the scheme, necessary due diligence as per the implementation standards formulated by SFA, shall be carried out prior to making any investments in SRs issued by ARCs or availing benefits designated for QBs under the SARFAESI Act.

For every scheme of an AIF: (a) whose manager or sponsor is an entity regulated by RBI; or, (b) that has investor(s) regulated by RBI who: (i) individually or along with investors of the same group contribute(s) 25 percent or more to the corpus of the scheme; or, (ii) is an associate of the manager/sponsor of the AIF; or, (iii) by itself, or through its representative(s)/nominee(s), has majority or veto power in voting over decisions of the investment committee... necessary due diligence as per the implementation standards formulated by SFA, shall be carried out.

For schemes falling under the ambit of provision at para 5.1.1 above, the manager shall ensure that the scheme does not make any investment that would lead to the RBI regulated lender/entity acquiring or holding an interest/exposure in the investee company indirectly... that they are not permitted to acquire or hold directly.

Schemes of AIFs falling under the ambit of provisions at paras 3.2.1, 4.2.1 and 5.1.1 above, shall proceed with the proposed investment in accordance with the respective implementation standards as formulated by SFA. If the proposed investment does not satisfy the due diligence checks specified by SFA for making investment:

either such investor or investors of same group as referred at paras 3.2.1, 4.2.1 and 5.1.1 above shall be excluded from the investment, subject to necessary disclosure in the PPM for exclusion of investors;

the investment shall not be made.

For schemes of AIFs falling under the ambit of provisions at paras 3.2.1, 4.2.1 and 5.1.1. above, due-diligence checks prescribed as per the implementation standards formulated by SFA shall also be carried out for existing investments held by the schemes as on date of this circular.

If any of the existing investments of such schemes does not satisfy the due diligence checks for making investment, details of such investments shall be reported to the custodian of the AIF on or before April 07, 2025, in the format as specified at Annexure I.

If all the existing investments of such schemes satisfy the respective due diligence checks for making investment, then manager of the AIF shall submit an undertaking to this effect to the custodian, on or before April 07, 2025.

Source: SecMarx — Specific due diligence of investors and investments of AIFs. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.