Private Funds - SEBI Introduces Investor Diligence Requirements For AIFs: Resolut Partner Analysis

Resolut Partners Update

The Securities and Exchange Board of India has cast new investor diligence obligations on alternative investment fund managers, which extends to underlying investors. These include:

• The manager of an AIF is not permitted to on-board new investors or draw down capital from existing investors unless the diligence conditions have been complied with.

• The new rule appears to specifically target Financial Action Task Force ‘grey list’ jurisdictions and may impact fundraising from the UAE and the Cayman Islands.

• SEBI has not provided any grandfathering mechanism, which means that some AIFs may face immediate or near-term deal-completion issues.

• In the longer term, the new rule may lead to negotiations on various terms of fund economics and governance.

There can be little quarrel with SEBI’s intent behind introducing these diligence conditions for on-boarding investors in AIFs (as well as for drawing down commitments from already on-boarded investors in existing AIFs).

Similar diligence conditions were introduced for non-banking financial companies i.e. investors of existing NBFCs were permitted to continue with their investments or bring in additional investments to support continuity of business in India if their initial contribution was made prior to their jurisdiction being classified as an FATF non-compliant jurisdiction.

The Reserve Bank of India was also mindful to only prohibit new investors of non-compliant jurisdictions from exercising ‘significant influence’ in the NBFC.

So, it may have been more equitable if SEBI had provided for a similar grandfathering mechanism for existing AIFs (as they may now have some immediate issues with deal completion) and applied the diligence requirement only to the on-boarding of investors.

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