CIRCULAR, CIR/IMD/DF/10/2013,
dated July 29, 2013
To
All
Alternative Investment Funds
All
custodians of Category III Alternative Investment Funds
1. SEBI (Alternative Investment
Funds) Regulations, 2012 (“AIF Regulations”) were notified on May 21, 2012.
Regulations 18 (c) and (d) of the SEBI (Alternative Investment Funds) Regulations,
2012 (“AIF Regulations”) state as under
Reg 18(c)- ‘Category III
Alternative Investment Funds may engage in leverage or borrow subject to
consent from the investors in the fund and subject to a maximum limit, as may
be specified by the Board
Reg 18(d)- ‘Category III
Alternative Investment Funds shall be regulated through issuance of directions
regarding areas such as operational standards, conduct of business rules,
prudential requirements, restrictions on redemption and conflict of interest as
may be specified by the Board.’
2. Further, under Regulation 28 of
the said Regulations, the Board may at any time call upon the Alternative
Investment Fund to file such reports, as the Board may desire, with respect to
the activities carried on by the Alternative Investment Fund.
3. In this regard, it is specified
as under:
3.1 Risk Management and
Compliance
All
Category III AIFs which employ leverage shall:
i. have a comprehensive risk
management framework supported by an independent risk management function,
appropriate to the size, complexity and risk profile of the fund.
ii. have a strong and independent
compliance function appropriate to the size, complexity and risk profile of the
fund supported by sound and controlled operations and infrastructure, adequate
resources and checks and balances in operations.
iii. maintain appropriate records of
the trades/transactions performed and such information should be available to
SEBI, whenever sought
iv. provide full disclosure and
transparency about conflicts of interest and how they manage them from time to
time to investors in accordance with Regulation 21 of the AIF Regulations and
any other guidelines as may be specified by SEBI from time to time. Such
conflicts shall be disclosed to the investors in the placement memorandum and
by separate correspondences as and when such conflicts may arise. Such
information shall also be disclosed to SEBI as and when required by SEBI.
3.2 Submission of reports to SEBI
i. Under Regulation 28 of the AIF
Regulations, All AIFs shall submit periodical reports to SEBI relating to their
activity as an Alternative Investment Fund.
ii. Category I and II AIFs and the
Category III AIFs which do not undertake leverage shall submit report to SEBI
on a quarterly basis in the format as specified in Annexure I.
iii. Category III AIFs which
undertake leverage shall submit a report to SEBI on a monthly basis in the
format as specified in Annexure II.
iv. Reports shall be submitted by
AIFs online through the online reporting system provided by SEBI. However, till
such online system is made available, reports shall be sent by email to
aifreporting@sebi.gov.in. Excel sheet to be filled in this regard is available
on SEBI website under the section 'Info for'Ã 'Alternative Investment Funds'.
Once the online system is made available by SEBI, no reports shall be sent by
email. Further, AIFs are advised to note that no physical reports shall be
filed with SEBI.
v. The reports for the period upto
the quarter ended June 30, 2013 for AIFs which are already registered with SEBI
shall be sent vide email to the aforesaid email address within one month from
the date of this circular.
vi. Reports shall be submitted
within 7 calendar days from the end of quarter/ end of month as the case maybe.
3.3 Redemption Norms
i. These norms shall apply to open
ended Category III AIFs for all their existing and new schemes.
ii. The Manager of such AIFs shall
ensure adequate and sufficient degree of liquidity of the scheme/ fund in order
to allow it, in general, to meet redemption obligations and other liabilities.
iii. the Manager shall establish,
implement and maintain an appropriate liquidity management policy and process
to ensure that the liquidity of the various underlying assets is consistent
with the overall liquidity profile of the fund/scheme while making any
investment.
iv. The Manager of such AIFs shall
clearly disclose the possibility of suspension of redemptions in exceptional
circumstances to investors in the placement memorandum.
v. Suspension of redemptions by the
Manager shall be justified only:
1. in exceptional circumstances
provided that such suspension is exclusively in the best interest of investors
of the AIF , or
2. if the suspension is required
under the AIF regulations or required by SEBI.
vi. The Manager of such AIFs shall
build the operational capability to suspend redemptions in an orderly and
efficient manner. During the suspension of the redemptions, the Manager shall
not accept new subscriptions.
vii. The decision by the Manager to
suspend redemptions, in particular the reasons for the suspension and the
planned actions shall be appropriately documented and communicated to SEBI and
to the investors.
viii. The suspension shall be
regularly reviewed by the Manager. The Manager shall take all necessary steps
in order to resume normal operations as soon as possible having regard to the
best interest of investors.
ix. The Manager of such AIFs shall
keep SEBI and investors informed about the actions undertaken by the manager
throughout the period of suspension. The decision to resume normal operations
shall also be communicated to SEBI and the investors as soon as possible.
3.4 Prudential Requirements
All
Category III AIFs which undertake leverage, whether through investment in
derivatives or by borrowing or by any other means shall comply with the
following prudential requirements:
i. For the purpose of arriving at
leverage undertaken by an AIF, leverage shall be calculated as the ratio of the
exposure to the Net Asset Value of the AIF.
ii. Leverage shall be calculated as
under:
Leverage =Total exposure {Longs+Shorts
(after offsetting as permitted)}
Net Asset Value (NAV)
iii. The leverage of a Category III
AIF shall not exceed 2 times of the NAV of the fund. i.e. If an AIF’s NAV is
Rs. 100 crore, its exposure (Longs+shorts) after offsetting positions as
permitted shall not exceed Rs. 200 crore.
Calculation of exposure and NAV
i. The total exposure of the fund
for the purpose of computing leverage shall generally be the sum of the market
value of all the securities/ contracts held by the fund. The total exposure at
any point of time will be a sum of exposure through instruments in both the
spot market and the derivative market.
ii. Exposure shall generally be
calculated as below:
1. Futures (long and short)=
Futures Price * Lot Size * Number of Contracts
2. Options bought= Option Premium
Paid * Lot Size * Number of Contracts
3. Options sold= Market price of
underlying * Lot size * Number of contracts
4. In case of any other
derivative exposure, the exposure is proposed to be calculated as the notional
market value of the contract
iii. Idle cash and cash equivalents
shall not be included in the calculation of total exposure. Long put positions
shall be considered as short exposure and short put positions shall be
considered as long exposure. Short selling of a stock through SLBM shall be
treated as short exposure. Temporary borrowing arrangements which relate to and
are fully covered by capital commitments from investors need not be included in
calculation of leverage.
iv. Offsetting of positions shall be
allowed for calculation of leverage for transactions entered into for hedging
and portfolio rebalancing as provided in the circular No. MFD/CIR/21/
25467/2002 dated December 31, 2002 and to the extent as specified in the circular.
v. Sum of all exposures without
offsetting transactions for hedging and portfolio rebalancing shall be termed
as 'gross exposure' and the ratio of such gross exposure and Net Asset Value
shall be termed as 'gross leverage'.
vi. Net Asset Value (NAV) of the AIF
shall be the sum of value of all securities adjusted for Mark to market
gains/losses (including cash and cash equivalents). The NAV shall exclude any
funds borrowed by the AIF.
vii. All the above
restrictions/limits shall apply at the scheme-level.
Breach of Leverage Limits
i. All Category III AIFs shall have
adequate systems in place to monitor their exposures. It shall be
responsibility of the AIFs to shall ensure that the leverage shall not exceed
the prescribed limit at all times.
ii. All Category III AIFs shall
report to the custodian on a daily basis the amount of leverage at the end of
the day (based on closing prices) and whether there has been any breach of
limit during the day.
iii. In case of a breach in limit:
a. Obligation of AIF:
i. The AIF shall send a report to
the custodian in accordance with point (ii) above.
ii. The AIF shall send a report to
all its clients before 10 a.m. on the next working day stating that there is a
breach in the limit along with reasons for the same.
iii. The AIF shall square off the
excess exposure and bring back the leverage within the prescribed limit by end
of next working day. This shall however not prejudice any action that may be
taken by SEBI against the AIF under SEBI (Alternative Investment Funds)
Regulations, 2012 or the SEBI Act.
iv. A confirmation of squaring off
of the excess exposure shall be sent to all the clients by the AIF by end of
the day on which the exposure was squared off.
b. Obligation of custodian:
i. The custodian shall report to
SEBI providing name of the fund, the extent of breach and reasons for the same
before 10 a.m. on the next working day.
ii. A confirmation of squaring off
of the excess exposure shall be sent to SEBI by the custodian by end of the day
on which the exposure was squared off
4. Further, all AIFs shall ensure
that all marketing documents of the fund/ scheme, if any, can be distributed on
a private basis only to its proposed investors and shall be in accordance with
the placement memorandum of the fund/scheme.
5. This Circular is issued in
exercise of powers conferred under Section 11(1) of the Securities and Exchange
Board of India Act, 1992 to protect the interests of investors in securities
and to promote the development of, and to regulate the securities market.
6. This Circular is available on
SEBI website at www.sebi.gov.in under the
categories “Legal Framework” and “Alternative Investment Funds”.
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