SEBI issues key proposals to serve interests of AIF buyers
- ByStartupStory | February 4, 2023
On February 3, the Securities and Exchange Board of India (SEBI) issued a number of key proposals to serve the interests of alternate funding fund (AIF) buyers.
SEBI has proposed in a recent session paper that AIFs be required to offer buyers a choice of direct plans with no distribution or placement fees. The securities market regulator has also proposed the implementation of a path model for the distribution fee in AIFs.
The introduction of direct plans is intended to prevent AIF purchasers from being charged twice. According to the release, AIFs can currently raise funds from buyers solely on a personal placement basis under SEBI regulations. Buyers can invest in an AIF through a SEBI-registered funding adviser (RIA) or portfolio manager. Customers who invest through an RIA or a portfolio manager may be charged twice: once for the advisory fee or portfolio administration fee, and again for the AIF distribution fee.
According to the proposals, AIFs should ensure that any investor who approaches them through a middleman invests solely through the direct plan route.Buyers who use the direct plan should be offered for a greater variety of items (due to lower distribution costs), so that the net asset worth or NAV remains the same for all AIF buyers.
Unlike mutual funds and portfolio management firms (PMS), there are no regulatory guidelines on fee or distribution charges in the case of AIFs. According to the release, business suggestions indicate that in some cases, the amount of upfront commissions for AIF distribution has risen to around 4%-5% of the dedicated amount. When compared to the path fee model of different merchandise, this may result in the mis-selling of AIF schemes.
In light of this, SEBI has proposed that buyers in Class III AIFs be charged on a path basis. Class I and Class II AIFs may also be charged on a path basis, but a larger amount of placement/distribution price (one-third of the current worth of the overall distribution price) may be paid upfront within the first year.
In a separate session paper, the regulator also proposed the necessary dematerialisation of AIF items. As part of the primary part, all AIF schemes with a corpus of more than 500 crores must dematerialize their items by April 1, 2024.
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