AIFs reeling under rising regulatory demands

Compliance requirements result in higher costs and overlaps, say industry experts

practice of due diligence done by merchant bankers and other reporting requirements to SEBI. It may be good to consolidate the audit and certification requirements into one intermediary,” said Yashesh Ashar, Partner, Illume Advisory.

The AIF’s PPM has to be certified by a merchant banker and trustee even if the PPM is in SEBI prescribed format. The PPM has to be again annually updated even for changes which are not regulatorily prescribed such as updation of disciplinary actions or class of units.

“The same PPM needs to be annually audited and now uploaded in an excel format. Further, there is an annual Compliance Test Report which needs to be submitted to the sponsors and trustees within 30 days from the end of financial year, notifying exceptions to compliance which

SETTING THE BAR HIGH

AIFs to submit quarterly reports on their activity

Consolidated reporting of any changes to the PPM

Annual audit report detailing findings and corrective steps on PPM compliance

Periodic reporting of leverage employed

Immediate report on violation of AIF regulations, decision to suspend redemptions, systemic risks includes compliances of PPM as well,” said Leelavathi Naidu, Partner, IC Universal Legal. “All these could be merged into one requirement with certain breather in timelines and eased out for better monitoring.”

ONUS ON MANAGERS

The new amendment mandating obligations on the manager and KMPs to conduct due diligence of the investors puts an additional layer of obligation that goes beyond the KYC mandates under KRA/CKYC or PMLA laws. “The managers will no longer be able to rely on representations from investors to their eligibility of investing in the fund and in case of any lapses the manager will become liable,” said Ashar.

Until now, an investment made by an investment vehicle into an Indian entity was reckoned as indirect foreign investment if the sponsor or the investment manager was not owned and not controlled by resident Indian citizens or was owned or controlled by persons resident outside India.

“From now on, even if the sponsor or investment manager are owned and controlled by persons resident in India, the AIF would have to ensure that the foreign investor is not using the AIF structure to circumvent FEMA,” said Vinod Joseph, Partner, ELP.

“Some of these compliance burdens may be streamlined, such as having to provide a “no change” declaration every year rather than providing a full audit report or compliance test report.” More specific guidelines may be formulated by the pilot Industry Standards Forum for AIFs, in consultation with the regulator in order to ensure that the due-diligence requirements are not open-ended or subject to interpretation.

REGULATIONS GALORE

The three new diktats are in addition to scores of other regulatory requirements. For instance, AIF trustees have to prepare what is called a trustee compliance report.

AIFs have to maintain about a dozen policies that include those dealing with conflict of interest, AML, insider trading, stewardship code, risk management and valuation. AIFs have to do central KYC, KRA registration, dematerialise their units and comply with SCORES and FIUIND requirements.