SEBI Mandates AIFs To Conduct Due Diligence Of Investors To Prevent Evasion Of Regulations
SEBI aims to strengthen due diligence processes among AIF managers and protect the interests of eligible investors.
The Securities and Exchange Board of India (SEBI) has issued new measures that Alternative Investment Funds (AIFs), their managers, and key personnel must follow to prevent the bypassing of regulations. SEBI’s circular takes effect immediately.
These measures particularly address cases where investors might seek benefits reserved for qualified institutional buyers or qualified buyers without being eligible. AIFs have been recognised as QIBs under SEBI regulations. To prevent ineligible investors from availing themselves of associated benefits through AIFs, SEBI has called for strict due diligence.
If an investor or group of investors contributes 50% or more to an AIF's corpus, the AIF must ensure compliance with the Standard Setting Forum for AIFs. SEBI also recognises AIFs as QBs under the SARFAESI Act, allowing them to invest in security receipts issued by Asset Reconstruction Companies. Due diligence has been mandated in this area as well.
SEBI has taken steps to prevent the "ever-greening" of stressed loans by lenders regulated by the RBI through AIFs. If an AIF involves an investor or manager regulated by the RBI, it must conduct due diligence. Additionally, these AIFs cannot invest in a way that allows an RBI-regulated lender to indirectly hold an interest in a company that it would not be allowed to hold directly.
AIFs are also required to conduct due diligence when receiving investments from entities or individuals from countries that share a land border with India. If investors from such countries contribute 50% or more to the corpus of an AIF scheme, compliance with standards laid out by the SFA is necessary. The details of these investments must be reported to custodians within 30 days.
SEBI has set April 7, 2025, as the deadline for AIFs to complete due diligence checks on their existing investments. Custodians must compile this information and submit it to SEBI by May 7, 2025. Furthermore, compliance with the circular will be included in the 'Compliance Test Report' prepared by AIF managers.
