Sebi proposes comparative performance evaluation, standardization of draft documents by IDA

New Delhi, December 5 () With the aim of creating an enabling environment for a solid Alternative Investment Fund (FIA), Sebi has proposed introducing minimum benchmarks for the disclosure of the performance history of such asset class and standardization of the draft of the document issued to investors by them.

FIAs are privately grouped investment funds that raise funds from investors, whether Indian or foreign, to invest in accordance with an investment policy defined for the benefit of their investors. There are three different categories of FIA.

The market regulator said that the investments of registered FIAs have grown 75% year-on-year in the last two years. The total investments made by the FIAs have increased from more than Rs 35,000 million in March 2017 to Rs 61,400 million in March 2018 to Rs 1.1 million in March 2019.

However, at present, there is no disclosure by the FIAs that indicate the performance of their investments and, in turn, their performance available in the public domain, Sebi said when issuing the draft documents.

In addition, there is currently no standard format for the draft document or private placement memorandum (PPM), which provides the necessary information that a potential investor would need to make an informed decision to invest in a particular FIA.

This class of assets presents drafts of PPM to Sebi before the launch of its schemes to incorporate the comments received from the regulator in said drafts of documents. The regulator has observed that there is a significant variation in the way in which several clauses, explanations and illustrations are incorporated in the PPM.

Consequently, Sebi has proposed to introduce these measures to create an enabling environment for a strong IDA.

The regulator has requested public comments on these proposals until December 25 and the final regulation will be implemented after taking into account the suggestions of all interested parties.

With respect to the introduction of minimum benchmarks for the disclosure of FIA performance history, the regulator has proposed that FIAs registered in Sebi for at least 3 years, report their audited performance data according to the scheme to agencies single or multiple benchmarking (to be identified later), to evaluate the performance of the individual fund with the comparable performance of the industry.

In each and every one of the documents and means to market or promote the IDA, if any information about the performance of said asset class is mentioned, the IDA reference report provided by the comparative evaluation agency will also be provided. In addition, a copy of this report should be provided to all investors.

Any investment manager of an existing unregistered fund, including foreign funds, will provide data on their investments in Indian companies, to comparative evaluation agencies, when they seek to register as IDA, Sebi said in the proposal.

If any performance data based on the previous experience of the investment manager is mentioned in the fund documents or in the marketing material provided to Sebi, it must be accompanied by the reference report received by the applicant, he added.

Sebi said that any registered FIA association that, in terms of membership, represents at least 50 percent of said class of registered assets, can propose one or more comparative evaluation agencies, which must reach an agreement with the FIA to carry out the comparative evaluation process.

All FIAs that have registered for more than 3 years will provide the necessary information to all agencies.

Taking into account the importance of PPM for investors, to ensure that the minimum standard of information is available in these drafts and to facilitate the processing of IDA applications on a temporary basis, Sebi proposed the standardization of PPM and issued template drafts for PPM prepared for the three categories of FIA.

The draft templates focus on clarifying the risk of investment in FIA, the sequence of presentation of the information, as well as the list of minimum information that must be provided under each heading in the PPM.

Annually, Sebi has proposed that an auditor conduct an audit of compliance with the AIF with the terms of the PPM, with special emphasis on the impact of secondary letters on other investors. The results of the audit would be communicated to the administrator, the board of the investment manager and Sebi.

In case of adverse findings, the corrective steps taken will also be presented.

Initially, the audit can be performed by an internal or external auditor. In the future, Sebi may notify that the audit would be performed only by an external auditor. In addition, according to the proposal, the summary of the audit results regarding compliance with the PPM terms would be shared with all investors. SP ANU