SEBIAn Introductory Guide to Private Placement Memorandum – PART II

As discussed in our previous blog, An Introductory Guide to Private Placement Memorandum – Part I, a PPM stands as a critical document in the realm of private placements, offering a comprehensive overview of an investment opportunity while ensuring compliance with regulatory requirements.

In this blog, we shall take a look at the important factors to be incorporated while drafting a PPM.

EXCLUSIVE INVITATION

As mentioned previously, as a PPIV, AIFs are catered towards seasoned and high-capital investors. As such, this is to the exclusion of others and especially the general public. The AIF Regulations strictly prohibit the PPMs from being released, marketed, or publicized in any way to the general public.

In essence, AIF’s are only allowed to exclusively raise funds from sophisticated investors through private placement, rather than making a public offering. Private placement involves selling shares or bonds to a select group of investors and institutions, typically a limited number of chosen individuals.

The SEBI template for PPMs is made keeping the above exclusivity in mind. Additionally, SEBI has mandated the inclusion of an Investor Charter within the PPM.

The Investor Charter is a concise document that outlines the services provided to investors, the grievance redressal process, investor responsibilities, and other relevant details in a user-friendly format. This requirement aims to inform investors about various AIF-related matters and enhance transparency regarding the resolution process for investor complaints.

CURATING PRIVATE PLACEMENT MEMORANDUM 

There was no particular format or level of disclosure for PPMs that was mandated till 2020. This changed when the SEBI released a template that must be followed by present and prospective AIFs. The format focuses on disclosures and presentation of necessary information in the PPM.

The template divides the information into two categories:

Firstly, a section for minimum disclosures, and secondly a supplementary section to allow full flexibility to the fund in order to provide any additional information, which it deems fit.

It is mandatory for AIFs to carry out an annual audit of such compliance in order to ensure compliance with the terms of PPM. The audit shall be carried out by either an internal or external auditor/legal professional. However, audit of sections of PPM relating to ‘Risk Factors’, ‘Legal, Regulatory and Tax Considerations’, and ‘Track Record of First Time Managers’ shall be optional.

The AIF Regulations provide an exhaustive list of requirements that should be taken into consideration while drafting a PPM. Following is a curated list of the most important points:

1. Investment committee & manager –

a. Appointment of manager – the investment manager should be appointed through an investment management agreement. The AIF is required to disclose all the essential information of the manager like, name, registered address, etc, in their private placement memorandum.

b. Fees of the manager – it is mandatory to disclose the management fees which is to be charged by the manager; it can be fixed fee or variable which could be a as per the funds’ performance.

c. Activity track records of the manager – The activity records of investment manager should be disclosed in the PPM as investors of the AIF may choose whether to invest in the AIF considering the history of the manager and also determine the skill, experience and capacity of the manager before following the investment.

2. Strategy and process of investment – The detailed strategy behind the investment should be provided in a tabular chart in the PPM which should outline the areas of investment and strategies related to the investment in different portfolios of companies.

3. Charter of investors – This portion of the PPM should contain details of services provided to investors, responsibilities, and redressal tools. It was introduced by the SEBI to keep investors updated regarding the activities and plays of AIFs.

4. Annual audit and risk factors – Every AIF contains potential risk factors and thus, such risks should disclosed in PPM in order to help investors make clear investment decisions. The risk factors must be drafted with specific industry type and offering structure and investment plans. It can be a risk related to portfolio, fund, regulatory risk or general risk like economical or unforeseen event. Annual audit reports should also be disclosed by companies in PPM.

5. PPM through SEBI registered merchant banker – PPM should be filed through merchant banker at least 30 days prior to launch of the scheme, and the merchant banker should independently exercise due diligence of all the disclosure in memorandum and as par satisfaction they will issue due diligence certificate.

6. The requirement of audit compliance with the terms of PPM shall not apply to AIFs that have not raised any funds from the investors. However, such AIFs shall submit a certificate from a Chartered Accountant to the effect that no funds have been raised, within 6 months from the end of the Financial Year.

In addition to the above, Regulation 11 of the AIF Regulations provides the following exhaustive list of details which should be provide in an Offering Memorandum/PPM:

• Basic information about the AIF and the AIF Manager,
• Background of key investment team of the Manager,
• The targeted investors,
• The fees charged and including all other expenses proposed to be charged,
• Proposed tenure of the AIF,
• Conditions or limits on redemption,
• Investment Strategy,
• Risk management tools and parameters employed,
• Key service providers
• Conflict of interest and procedures to identify and address them,
• Disciplinary history,
• Terms and conditions on which the manager offers investment services, any and all affiliations with other intermediaries,
• Manner of winding up of the AIF,
• Such other information as may be necessary for the investor to take an informed decision on whether to invest in the AIF.

 Declaration Of First Close  

First Close refers to the initial closing whereby AIFs are able to obtain a certain level of commitment from the investors in the form of funds/capital in order to start their operations. It is usually the period after the closure  of the Initial Public Offer.

As per SEBI Guidelines on Declaration of First Close, vide Circular No. SEBI/HO/AFD-1/PoD/P/CIR/2022/155, AIFs, who had not declared their First Close as of November 17, 2022, shall declare their First Close not later than November 16, 2023.

Further, Existing AIF schemes whose PPMs were taken on record prior to November 17, 2022, and have not declared their First Close, shall submit an updated PPM with SEBI, through a SEBI registered merchant banker, along with a due diligence certificate from the merchant banker as specified in Annexure A of the Guidelines.

CHANGE IN THE CATEGORY OF AIFs

AIF Regulations prohibit AIFs from changing their category post registration except with the approval of SEBI, where such AIFs have not yet made any investment under the category in which they were registered.

An application for change in category shall be made to SEBI along with a fee of Rs. 1 Lakh under Form A, supporting documents and rationale for the proposed change. Until approval from SEBI is granted, the AIF cannot invest in liquid funds or bank deposits. Further, upon approval of the request, a copy of the revised PPM shall be sent by the AIF to all investors.

REPORTING REQUIREMENTS TO BE FULFILLED BY AIFs

All AIFs are required to submit a report on their activities to SEBI on a quarterly basis within 10 calendar days from the end of each quarter in the formats specified.

The Manager of the AIF is required to prepare a Compliance Test Report (CTR) at the end of each financial year and submit the same within 30 days from the end of the financial year to trustees or sponsors.

AMLEGALS REMARKS

In conclusion, crafting a PPM is a meticulous process that requires attention to detail, clarity of communication, and adherence to regulatory standards. As evidenced throughout this discussion, a well-curated PPM serves as a cornerstone for private investment endeavours, offering both issuers and investors a comprehensive understanding of the opportunity at hand.

By thoroughly reviewing the PPM, investors can make informed decisions about whether to invest in the AIF, thereby mitigating risks and ensuring alignment with their investment objectives. The role of merchant bankers as a crucial intermediary in the entire process of filing the PPM is intended to bring transparency to the operations of the AIF and thereby boost investor protection.

Further, the introduction of a standardized PPM template by SEBI aims to streamline the information and disclosure requirements, ensuring consistency and clarity in the presentation of essential information to investors.

-Team AMLEGALS

For any query or feedback, please feel free to get in touch with mridusha.guha@amlegals.com or jason.james@amlegals.com