Specific Due Diligence for AIF Investors and Investments  

Purpose:

to prevent AIFs from facilitating ineligible investors in availing benefits designated for QIBs

Note: AIFs designated as QIB in terms of regulation 2(ss) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

The Investor(s) is/ are:

– QIBs themselves; OR

– entities established, owned or controlled by the Central Government or a State Government or the Government of a foreign country, including the central banks and sovereign wealth funds.

Where the investor(s) is an AIF or a fund set up outside India or in International Financial Services Centres in India – if the above-mentioned conditions are met on a look through basis.

Note: ‘Look-through basis’: To consider the true economic value of the underlying holdings, rather than just the reported value of the investment itself; this is often used when analysing investments in entities like mutual funds or private equity funds to understand the full exposure to different assets within the portfolio.

Note: The manager of the AIF is required to independently verify and provide an appropriate confirmation on above conditions being met to the Stock Exchange, Lead Manager or Merchant Banker or any other concerned authority before availing the QIB benefits.

Purpose:

to prevent AIFs from facilitating ineligible investors in availing benefits designated for QBs

Note: AIFs notified as QBs under section 2(1)(u) of the SARFAESI Act, and are eligible to subscribe to security receipts (SRs) issued by Asset Reconstruction Companies (ARCs).

The Investor(s) is/ are:

– QBs themselves; OR

– entities established, owned or controlled by the Central Government or a State Government or the Government of a foreign country, including the central banks and sovereign wealth funds.

Where the investor(s) is an AIF or a fund set up outside India or in International Financial Services Centres in India – if the above-mentioned conditions are met on a look through basis.

Purpose: To address the issue of ever-greening of stressed loans/assets through AIFs and to prevent circumvention of norms with respect to Income Recognition, Asset Classification, Provisioning and Restructuring of stressed loans/assets specified by RBI for its regulated lenders.

–        whose manager or sponsor is an entity regulated by RBI; OR

–        has an investor regulated by RBI (Regulated Investor) who:

(a)   individually or along with investors of the same group contribute 25% or more to the corpus of the scheme; OR

(b)   is an associate of the manager/sponsor of the AIF; OR

(c)   by itself, or through its representatives(s)/nominee(s) has majority or veto power in voting over decisions of the investment committee set up by the manager to approve investment decisions of the scheme.

Step 1: identify: (a) Regulated Investors of the scheme or (b) investors that are funds having contribution from lenders regulated by RBI;

Step 2: collect all details of financial lenders/ creditors/ investors (regulated by RBI) of the proposed investee company, along with details of its outstanding financial obligations;

Step 3: if the Regulated Investor of the scheme is a lender or investor of the proposed investee company, the manager shall collect details of the financial credit/ loan/ investment from the books of such Regulated Investor;

Step 4: check if the Regulated Investor would be in breach of any prohibition or limit imposed under Master Circulars and/or Master Directions with respect to prudential norms, asset classification, provisioning etc. as provided below, in case the Regulated Investor were to directly lend to/invest in proposed investee company:

Applicable Master Circulars:

(a)  RBI’s Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances;

(b)  Master Circular – Income Recognition, Asset Classification, Provisioning and Other Related Matters – UCBs;

(c)  Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023.

Note: The manager shall obtain a confirmation from Chief Compliance Officer or a person of the rank of Chair of the Audit Committee or Chairman of the Board or Executive Director of the Regulated Investor that:

–     there is no restriction on the Regulated Investor to lend to or invest in the investee company directly; and

–     if the Regulated Investor would be required to make any disclosure in terms of circulars provided in Clumn (B), all necessary disclosures as per the above-mentioned circulars shall be made by the Regulated Investor.

If the proposed investment does not satisfy the due diligence checks in Column (B) prior to making the investment:

§  either such investor(s) will be excluded from the investment, subject to necessary disclosure in the private placement memorandum for exclusion of investors; or

§  the investment should not be made by the AIF/ scheme.

Existing Investments:  

§  For schemes of AIFs mentioned above in Column (A), the due diligence checks under Column (B) are required to be carried out for existing investments held by the schemes as on date of this Circular i.e., 08 October 2024, and the reporting requirements as mentioned below must be complied with.

§  The Circular does not clarify whether any enforcement action will be taken against such AIFs/ schemes which are not satisfying the diligence checks in respect of existing investments.

Reporting Requirement upon due diligence checks for existing investments of the schemes:

§  If the due diligence checks are not satisfied – details of such investments shall be reported to the custodian of the AIF on or before April 07, 2025, in the format prescribed under the Circular.

§  If the due diligence checks are not satisfied – manager of the AIF shall submit an undertaking to this effect to the custodian, on or before April 07, 2025.

(a)   who are citizens of/ residents in a country which shares land border with India; or

(b)   whose beneficial owners are citizens of/ resident in a country which shares land border with India, prior to making any investment.

AND

The proposed investment results in the scheme holding 10% or more equity/ equity-linked securities issued by the Company (on a fully diluted basis).

Note: ‘Beneficial Owners’ are as per Rule 9(3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

Step 1: collect information on the country details/ residence status of the investors and their beneficial owners;

Step 2: check whether 50% or more of the corpus of the scheme is contributed by investors, who themselves or their beneficial owners, are citizens of/ residents in a country which shares land border with India.

Reporting Requirement for existing AIF scheme:

In relation to the existing investments of scheme, where the scheme holds 10 percent or more of equity/equity-linked securities issued by an investee company (on a fully-diluted basis), the details of the existing investments shall be reported to the Custodian before April 07, 2025, as prescribed as per paragraph D.3 of the SFA implementation standard.