Protecting Investor Interests: SEBI Moves To Govern Excusal/Exclusion Provisions And Distributor Expenses

• Jurisdiction: India
• Law Firm: Khaitan & Co LLP
• Subject Matter: Finance and Banking, Corporate/Commercial Law, International Law, International Trade & Investment, Securities, Fund Finance
• Author: Mr Siddharth Shah, Chirayu Heddthale and Shambhavi Sinha
• Published date: 24 April 2023

The Securities and Exchange Board of India (SEBI) has been bringing in a plethora of changes to the existing landscape of the alternative asset industry. The SEBI circular no. SEBI/HO/IMD/DF6/CIR/P/2020/24 dated 5 February 2020, which introduced the template(s) for Private Placement Memorandum (PPM) for alternative investment funds (AIFs) marked the beginning of this slew of changes.

In line with SEBI's initiative to streamline disclosure standards in the growing AIF space, SEBI has released circular no. SEBI/HO/AFD-1/PoD/P/CIR/2023/053 dated 10 April 2023 on guidelines with respect to excusing or excluding an investor from an investment of AIF (Circular on Excuse); and circular no. SEBI/HO/AFD/PoD/CIR/2023/054 also dated 10 April 2023 on direct plan for schemes of AIFs and trail model for distribution commission in AIFs (Circular on Distribution Fees).

Circular on Excuse

Legal considerations for Excuse / Exclude provisions

The template PPM has a section on "Excuse and Exclusion" which if the AIF proposed to have, then the manager was required to disclose reasons for excuse / exclusion and the consequences of such excuse and exclusion of investors. The template PPM offered flexibility to the manager to have its own terms for excusing / excluding investors in the AIF.

SEBI in its Circular on Excuse has noted that owing to inconsistency and lack of adequate disclosure from the fund managers with respect to certain industry practices, it has now prescribed a list of reasons / circumstances under which only can an investor be excused / excluded from participating in a particular investment. Below is our analysis on such circumstances prescribed by SEBI:

1. Excuse rights of the investors:

There are two instances under which an investor can request to get excused from participating in a particular investment opportunity. The first being, where participation by the investor in an investment opportunity leads to any violation of an applicable law or regulation, then such an investor may be excused. However, such a request from the investor is required to be substantiated with an opinion from a legal professional / legal advisor, confirming the above.

We note that this would lead to an increase in burden on the investors, from a cost perspective. The cost for the legal opinion would have to be borne by the excused investor. However, the expense issue can be mitigated by procuring an opinion from inhouse legal team which, as a market practice, is considered...