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Photo: Reuters
Photo: Reuters

SEBI proposes mandatory benchmarking of AIFs

  • 'Presently there is no disclosure by AIFs indicating returns on their investments and in turn their performance available in public domain,' said the SEBI paper
  • The focus of large banks and wealth managers has increasingly turned to AIFs for HNI clients

On 5th December, the Securities and Exchange Board of India (SEBI) floated a consultation paper on Alternative Investment Funds (AIFs). In it, the regulator proposed mandatory benchmarking of AIFs which have completed at least a 3 year history. Benchmarking is the comparison of an AIF’s performance with a benchmark (such as an industry average or index) and allows an investor to understand whether the AIF has delivered outperformance or not. The benchmarking agencies are to be appointed by an industry body of AIFs which must include at least 50% of registered AIFs. The focus of large banks and wealth managers has increasingly turned to AIFs for HNI clients as commissions for mutual funds have shrunk due to SEBI mandated expense ratio cuts in 2019. Assets under management in AIFs rose from 35,099 crore in March 2017 to 109,780 crore in March 2019.

“Presently there is no disclosure by AIFs indicating returns on their investments and in turn their performance available in public domain," said the SEBI paper. “In the absence of any standards or norms for disclosure of past performance, AIFs disclose their performance to prospective investors on a standalone basis, without reference to an appropriate benchmark. These investors do not have any authenticated source either to verify the performance of such AIFs or to compare with performance of comparable AIFs and AIF industry," it added. As per the paper, AIFs which have been registered for at least with 3 years with SEBI shall disclose their scheme wise performance to a benchmarking agency to compare the fund’s performance with industry performance. The benchmark report thereby compiled shall be disclosed to all the AIF’s investors and also in any marketing material of the AIF in which its performance data is mentioned. The benchmarking agencies will also compile benchmarks of industry performance and make them available to the public. The benchmark comparison of an AIF shall be reported in Indian rupees and US dollars depending on which currency the AIF raises its capital in. It shall be a half yearly exercise.

Unregistered AIFs would have to report details of their investments in Indian companies to benchmarking agencies. If any performance data based on previous experience of the Investment Manager is referred in the fund documents or marketing material furnished to SEBI, the same shall be accompanied by a benchmark Report.

In addition, SEBI has proposed a standard format for the private placement memorandum (PPM) that is used by AIFs in the process of acquiring clients. “There is significant variation in the manner in which various clauses, explanations and illustrations are incorporated in the PPMs. Therefore, the investors may receive Placement Memorandum which provides information in a manner which is too complex to easily comprehend or with too little information on important aspects of the AIF," the paper said while laying down 2 draft templates for PPMs.

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