SEBI proposes standardised private placement memorandum and benchmarking for AIFS- levelling the playground?

Ø   

Minimum benchmarks for disclosure of performance history of AIFs-comparing the likes

SEBI expressed its concerns over the prevalent practice for AIF managers to only provide standalone performance data for their AIFs to paint a pretty picture for the investors, often cherry-picking the crown jewels of their past performance record. With there being no stringent disclosure norms regarding disclosure of past performance of AIFs or mandatory benchmarking requirement for AIFs, investors are often left without verified sources of information as to the performance of AIFs and have no means to compare performance of such AIFs.

What will change in relation to benchmarking of AIFs?

To curb mis-selling of AIFs to investors, SEBI has proposed to introduce a framework to facilitate performance benchmarking of AIFs, including the following measures:

§    

Reporting of audited performance data by AIFs to benchmarking agencies: AIFs which are registered with SEBI for a minimum of 3 years, will be required to report their audited scheme-wise performance data to SEBI empanelled benchmarking agencies, for benchmarking the individual AIF’s performance with comparable industry performance.

§    

Inclusion of benchmarking report for AIFs in marketing material: Benchmark reports prepared by benchmarking agencies for AIFs must be included in all documents and media coverage dealing with performance of such AIFs.

§    

Furnishing copy of benchmarking report to investors: A copy of the benchmark report received by the AIF from the benchmarking agencies must be provided to all investors.

§    

Provision of data on Indian investments by AIF applicants and foreign funds to benchmarking agencies: Investment managers of existing unregistered AIFs, including foreign funds, are required to provide data on their investments in Indian companies, to benchmarking agencies, at the time of seeking registration with SEBI. If existing investment managers furnish any performance data to SEBI, that is based on their previous experience, for application of AIF registration with SEBI, such fund document/marketing material must include the relevant benchmark report.

What are the steps to be taken for benchmarking of AIFs?

To effectuate implementation of the above-mentioned measures in relation to benchmarking, the following principal steps are proposed by SEBI:

§    

Provision of audited data in prescribed format: All AIFs will be required to provide audited data on cash flows and valuation of their scheme-wise investments to the benchmarking agencies in the format prescribed by them.

§    

Valuation process for AIFs: Periodicity of valuation of investments will be as per the SEBI (AIF) Regulations 2012. Further, AIFs will be required to provide the historical data of valuation of investments to benchmarking agency as a one-time exercise. Valuation of investments will be as per the provisions contained in such regard in the PPM. Any change in the valuation mechanism must be promptly intimated to benchmarking agencies, by the AIF.

§    

Calculation for the purposes of benchmarking: Assets under Management for the purpose of reporting and benchmarking will be considered the value of total capital draw down for an AIF. Further, performance reporting and benchmarking will be carried out on pre-tax net asset value of the AIF.

§    

Function of the benchmarking agencies: Benchmarking agencies are required to compile the data received from AIFs and create comparable industry performance benchmarks, separately for each year since 2012. The industry performance benchmark(s) will be accessible to public.

§    

Parameters for benchmarking to be diverse: In lieu of the diverse investment strategies and avenues for same category AIFs, performance benchmarks may be based on certain other parameters (besides those covered under the Consultation Paper). However, performance benchmarking must be based on objectively verifiable parameters like instrument of investment, tenure/vintage of the fund, focus sectors, etc.

§    

Benchmarking report: Benchmarking agencies are required to provide a benchmark report to the individual AIFs vis-à-vis the industry benchmark for AIFs. Benchmarking agencies must clearly provide the basis of benchmarking of individual AIFs as well as calculation of industry benchmark in the report.

§    

Terms of benchmarking: The performance data and benchmarks will be reported in both INR and USD terms, based on the denomination of currency(s) of the capital drawn down. Further, performance benchmarking for AIFs will be on a half yearly basis.

§    

Eligible benchmarking agencies: Any association of SEBI registered AIFs which in terms of membership in this asset class, represent at least 50% of the registered AIFs, may propose benchmarking agencies.

Ø   

Standardization of the PPM: SEBI acts as the cartographer for AIF prospectus map