Marking a significant departure from the erstwhile position, SEBI has mandated that Cat I and II AIF managers should procure Portfolio Management license for facilitating Co-investments
Fund managers desirous of facilitating Co-investments for contributors, sponsors or themselves, in connection with their Category I or Category II AIFs (“Cat I and/or II AIFs”), shall be required to register themselves with SEBI as ‘Co-investment Portfolio Manager’ (as defined below) i.e. a new category of portfolio managers under SEBI (Portfolio Managers) Regulations, 2020 (“SEBI PM Regulations”), effective from December 9, 2021.
The salient features of the licensing regime prescribed by SEBI are stated below:
‘Co-investment’ is defined under the SEBI (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regulations”) as:
“Co-investment” means investment made by a Manager or Sponsor or investor of Category I and II Alternative Investment Fund(s) in investee companies where such Category I or Category II Alternative Investment Fund(s) make investment:
Provided that Co-investment by investors of Alternative Investment Fund shall be through a Co-investment Portfolio Manager as specified under the Securities and Exchange Board of India (Portfolio Managers) Regulations, 2020.”
‘Co-investment Portfolio Manager’ is defined under the SEBI PM Regulations as:
“Co-investment Portfolio Manager” means a Portfolio Manager who is a Manager of a Category I or Category II Alternative Investment Fund(s); and:
(i) provides services only to the investors of such Category I or Category II Alternative Investment Fund(s); and
(ii) makes investment only in unlisted securities of investee companies where such Category I or Category II Alternative Investment Fund(s) make investments:
Provided that the Co-investment Portfolio Manager may provide services to investors from any other Category I or Category II Alternative Investment Fund(s), which are managed by them and are also sponsored by the same Sponsor(s).”
- Permitted Investments – The Co-investment Portfolio Manager shall invest 100% of the assets under management in unlisted securities of investee companies where Cat I and II AIFs managed by it as manager, has made investments.
- Registration Criteria – A separate registration form has been prescribed by SEBI for a Co-investment Portfolio Manager. The application must be filed along with the draft Disclosure Document and draft Client Agreement with SEBI. Notably, the SEBI PM Regulations prescribe detailed requirements on the mandatory contents of the Client Agreement.
- Waiver from Net worth Requirement – Net worth criteria for registration as a portfolio manager has been waived off for Co-investment Portfolio Managers.
- Principal Officer Requirement – The Co-investment Portfolio Manager may designate a member of the Key Investment Team of the manager as the ‘Principal Officer’ (mandated by SEBI PM Regulations), who fulfils the criteria specified under the SEBI AIF Regulations (i.e. 5 years’ experience criteria and professional qualifications criteria). In such a scenario, a separate ‘Principal Officer’ need not be appointed. The role of the compliance officer, for purposes of the SEBI PM Regulations, may be discharged by the same person.
- Terms of Co-investments – Investment by the co-investor should be on the same terms as Cat I or II AIF. Timing of exit by the co-investor has to be the same as that of the Cat I or II AIF.
- Documentation Requirement – The amendment seems to suggest that Disclosure Document (as is required to be prepared by portfolio managers) is not required to be made available on the website of the manager. However, it is still required to be filed with SEBI.
- Minimum Investment Criteria – Importantly, the minimum INR 50 lakh investment criteria applicable to clients of a portfolio manager has not been made applicable to Co-investment Portfolio Managers and hence, investors of Cat I or II AIFs may invest amounts lower than the said limit.
- Withdrawal from Co-investments – Investors participating in Co-investment with respect to Cat I and II AIFs would not have any regulatory right to withdraw from Co-investments on account of voluntarily or compulsorily terminating the portfolio management services with the Co-investment Portfolio Manager, unlike the right given to the clients of a regular portfolio manager under the SEBI PM Regulations. This is because Cat I and II AIFs are close ended funds having fixed tenures.
- Custodian – The requirement to appoint a custodian separately for Co-investments by Co-investment Portfolio Manager has been waived off (as against the same being applicable to regular portfolio managers). This is since investments are permitted only in unlisted securities, and only AIFs having a corpus of more than INR 500 crore are required to appoint custodians.
In conclusion, an AIF manager needs to evaluate whether he/ she intends to offer Co-investment option to investors of Cat I or II AIFs, and if so, then he/ she would be required to apply for registration with SEBI as a Co-investment Portfolio Manager. The registration requirement will elongate the setup time for fund platforms, as it would require additional filings with SEBI and also increase costs of compliance for fund managers.