Sebi mulls mandating AIFs to offer direct plan for investors; proposes steps to curb mis-selling

Capital markets regulator Sebi has proposed mandating alternative investment funds (AIFs) to offer direct plans to investors, and suggested a trail model for distribution commission to curb misselling in such funds.

In addition, the regulator has suggested mandating the dematerialisation of units of AIFs. As part of the first phase of this mandate, all schemes of AIFs with a corpus of more than Rs 500 crore should compulsorily dematerialise their units by April 1, 2024.

Also, the regulator has recommended a review of eligibility criteria for the key investment team of the manager of an AIF and prescribed qualifications for them.

Further, Sebi has suggested that AIF should not buy or sell investments, except with the approval of 75 per cent of investors by value of their investment in the AIF from or to associates; or schemes of AIFs managed or sponsored by its manager, sponsor or their associates.

The Securities and Exchange Board of India (Sebi) has made the suggestions through five consultation papers and sought comments from the public till February 18 on these proposals aimed at making the AIFs more investor friendly.

AIFs can raise funds from any investor by way of issuance of units which represents beneficial interest of the investors in the scheme. The units may be fully or partly paid up.

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In its consultation paper, the regulator suggested that AIFs should be mandated to offer the option of a direct plan for investors. Such a direct plan should not entail any distribution or placement fees for the investor.

Also, to address the issue of probable misselling of AIFs, the regulator has suggested adopting a trail model of distribution commission, according to consultation.

While mutual funds as well as portfolio managers' rules mandate trail commissions to distributors rather than upfront commission to reduce misselling, there are no regulatory guidelines in place with respect to the commission in the case of AIFs.

Of late, industry feedback suggests that at least in some cases, the quantum of upfront commissions for AIF distribution has gone up to around 4-5 per cent of committed amount. Such high upfront commissions, particularly in sharp contrast to the trail commissions for other products, increase the chances of mis-selling of AIF schemes.

In case of Category III AIFs, investors may be charged distribution fee on a trail basis. In case of Category I AIFs and Category II AIFs, investors may also be charged on trail basis, however, certain higher amount of distribution fee -- one-third of the present value of the total distribution fee may be paid upfront in the first year, Sebi suggested.

Further, the regulator has proposed to replace the experience criteria for the key investment team members of the manager of an AIF with the requirement of obtaining a relevant certification from an institution notified by Sebi. Also, it has suggested that the compliance officer of the manager of an AIF may also be required to obtain relevant certification.

"The requirement of having experience in terms of ...AIF Regulations may act as a barrier for new age/ first generation managers who may not have requisite experience to satisfy the regulatory requirement but have competence and expertise in fund management and generating returns for the investors," Sebi said.

At present, the key investment team of the Manager of an AIF is required to have adequate experience, with at least one key personnel having at least five years of experience in managing fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities.

Further, at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking.

The capital markets watchdog recommended to provide an option to AIFs and their investors to carry forward unliquidated investments of a scheme upon expiry of its tenure while ensuring proper recognition of asset value and fund performance.

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