Private Funds: SEBI introduces investor diligence requirements for AIFs

SEBI has issued a circular directing managers to ensure that investors in an AIF satisfy certain diligence criteria at the time of being on-boarded as well as at the time of drawing down capital. This is the first time that SEBI has cast a direct obligation in respect of investor diligence of AIFs. This circular could impact fundraising from investors in the UAE and Cayman Islands since these jurisdictions are part of the FATF ‘grey list’.

 

In this piece, we examine the new investor diligence obligations on AIF managers and analyse some of the operational issues that may arise in respect of fund economics and governance on account of these new obligations.

Key Takeaways:
  • SEBI has cast new investor diligence obligations on AIF managers, which extends to underlying investors
  • As per the new rule, the manager of an AIF is not permitted to on-board new investors or draw down capital from existing investors unless the diligence conditions have been complied with
  • SEBI has not provided any grandfathering mechanism, which means that some AIFs may face immediate or near-term deal-completion issues
  • In the longer term, the new rule may lead to negotiations on various terms of fund economics and governance

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