To serve the interest of alternate investment fund (AIF) investors, the Securities and Exchange Board of India (SEBI) came out with a few key proposals on February 3.
In a recent consultation paper, SEBI has proposed that AIFs be mandated to offer the option of direct plans – with no distribution or placement fees – to investors. The securities market regulator has also proposed the introduction of a trail model for the distribution commission in AIFs.
The introduction of direct plans is to prevent AIF investors from being charged twice. As the release points outs, currently under the SEBI regulations, AIFs can raise funds from investors only on a private placement basis. Investors can also invest in an AIF through a SEBI-registered investment adviser (RIA) or portfolio manager. Investors who invest via an RIA or a portfolio manager can land up being charged twice, once in the form of the advisory fee or portfolio management fee, and another time via the AIF distribution fee.
As per the proposals, AIFs will have to ensure that any investor approaching them through an intermediary invests only through the direct plan route. Investors who are taken via the direct plan will have to be provided for an adjusted higher number of units (given the lower distribution charges) such that the net asset value or NAV remains the same for all the AIF investors.
Unlike in the case of mutual funds and portfolio management services (PMS), there are no regulatory guidelines on commission or distribution fees in the case of AIFs. As per the release, industry feedback suggests that in some cases the quantum of upfront commissions for AIF distribution has gone up to around 4%-5% of the committed amount. When compared with the trail commission model of other products, this can result in mis-selling of AIF schemes.
In light of this, SEBI has proposed that investors in Category III AIFs be charged fees on a trail basis. Those in Category I AIFs and Category II AIFs may also be charged on a trail basis, but a certain higher amount of placement/ distribution fee (one-third of the present value of the total distribution fee) may be paid upfront in the first year.
The regulator, in a separate consultation paper, has also proposed mandatory dematerialisation of units of AIFs. As part of the first phase, all schemes of AIFs with a corpus of more than ₹500 crores will have to compulsorily dematerialise their units by April 1, 2024.
The regulator has invited public comments on all the proposals made.