SEBI Introduces Code of Conduct for Fund Managers and IC Members

As decided by SEBI in its Board meeting on March 25, 2021, SEBI vide gazette notification dated May 05, 2021 (“Amendment”) has amended the SEBI (Alternative Investment Funds) Regulations, 2012 (“Regulations”). One of the key amendments that SEBI has done is the introduction of a code of conduct for key persons of the fund. An interesting aspect of the code of conduct is the requirement for the manager to record investment decisions along with justification for the investment in writing. SEBI has also liberalised the investment conditions for Alternative Investment Funds (“AIF”), including removing the negative list specific for venture capital undertakings and aligning the definition of startups with the definition specified by Department of Promotion of Industry and Internal Trade.

Code of Conduct for AIF, Manager and IC

SEBI has introduced a code of conduct to be followed by all those associated with the governance and management of AIFs. The newly inserted Schedule 4 contains three separate codes of conduct to be followed by (i) the AIF; (ii) the managers of the AIF and key management personnel of the managers and the AIF; and (iii) the members of the Investment Committee, trustee, trustee company, directors of the trustee company, directors or designated partners of the Alternative Investment Fund. SEBI has put the onus on the manager and the trustee of the AIF to ensure compliance with the Code of Conduct

For Managers: The code of conduct for the manager and key management personnel of the AIF contains the most number of obligations, including the requirement to (i) record in writing, the investment, divestment and other key decisions, together with appropriate justification for such decisions; (ii) abide by the policies of the AIF to identify, monitor and appropriately mitigate any potential conflict of interest throughout the scope of its business; and (iii) maintain confidentiality of information received from investee companies and companies seeking investments from the AIF, unless explicit confirmation is received that such information is not subject to any non-disclosure agreement.

For Trustees/IC Members: The obligations on the trustee and members of Investment Committee include the requirement to: (i) disclose details of any conflict of interest relating to any/all decisions in a timely manner to the manager, and wherever necessary, recuse themselves from the decision making process; and (ii) not indulge in any unethical practice or professional misconduct or any act, whether by omission or commission, which tantamount to gross negligence or fraud.

Modifications in Investment Conditions for AIFs

Angel Funds

The Amendment has inserted the definition of “startup” which has been linked to the definition of the term as amended from time to time by the Department of Promotion of Industry and Internal Trade (“DPIIT”). After this amendment, angel funds can investment in all startups. Prior to the amendment, angel funds could only invest in startups that had a turnover of less than twenty five crore rupees, whereas the turnover threshold for startups specified by DPIIT had been revised to hundred crore rupees. The amendment has removed any confusion or ambiguity with respect to investments by angel funds and aligned the definition with the DPIIT notification as amended from time to time.

Category I AIF

The definition of “venture capital undertaking” has been modified to only refer to “a domestic company which is not listed on a recognised stock exchange at the time of making investments”. Prior to the amendment, the definition excluded domestic entities engaged in activities of gold financing, non-banking financial companies, activities not permitted under industrial policy of the Government of India or any other activity which may be specified by the Board in consultation with Government of India from time to time. The amendment to the definition of “venture capital undertaking” has widened the scope of investment by Category I AIFs as the investment in companies engaged in gold financing or non-banking financial activities shall now be included in the definition of the entities in which a Category I AIF may invest.

General investment conditions

SEBI has also made amendments to enable all AIFs to simultaneously invest directly in securities of investee companies and in units of other AIFs without labelling themselves as Fund of AIFs. However, the amendment has expressly disallowed AIFs authorised under the fund documents to invest in units of other AIFs from offering their units for subscription to other AIFs.

Further, AIFs can invest in associates or units of AIFs managed or sponsored by its manager, sponsor or associates of its manager or sponsor subject to approval of 75% of investors by value of investment.

Conclusion

AIFs are a growing asset class and investments in AIFs are likely to keep increasing. Looking at the growth of AIFs, it was the right time to introduce formal code of conducts to be followed by those who are part of the governance structure of AIFs. Further, the amendments carried out by SEBI have liberalised a number of investment conditions based on feedback from stakeholders and these changes will go a long way in increasing operational flexibility for AIFs.

This post has been contributed by Ms. Vaneesa Agrawal and Ms. Sanyukta Srivastav.

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