Guidelines on disclosures, reporting and clarifications under AIF Regulations

Circular, CIR/IMD/DF/14/2014, dated 19th June, 2014

Guidelines on disclosures, reporting and clarifications under AIF Regulations

SEBI (Alternative Investment Funds) Regulations, 2012 were notified on May 21, 2012. A Circular no.CIR/IMD/DF/10/2013 dated July 29, 2013 was also subsequently issued for operational, prudential and reporting requirements for AIFs. Certain amendments were also made to the AIF Regulations on September 16, 2013. It is decided to provide certain clarifications on the AIF Regulations, increase transparency to the investors and provide reporting norms for AIFs as under:

1. Submission of information to SEBI under sub-regulation (1) of Regulation (3) of AIF Regulations

a. Circular no. CIR/IMD/DF/10/2013 dated July 29, 2013 requires that all Category III AIFs 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.

b. It has been observed that with respect to reporting of amount of leverage at the end of the day, the AIF is dependent on various parties in order to calculate and submit to the custodian the amount of leverage as at the end of the day. Such various parties provide information at varied time periods due to which the AIFs are finding it difficult to report to the custodian the amount of end-of-day leverage on the same day.

c. Therefore, in part modification of the aforesaid circular dated July 29, 2013, all Category III AIFs shall report to the custodian the amount of leverage at the end of the day (based on closing prices) by the end of next working day.

2. Disclosures in placement memorandum

a. Disclosure on fees and charges and litigations

i. It has been observed that fee structure applicable to the investors in an AIF is generally complex in nature. Therefore, for better understanding, every AIF shall, in its placement memorandum, add by way of an annexure, a detailed tabular example of how the fees and charges shall be applicable to the investor including the distribution waterfall.

ii. While Regulation 11(2) requires that an AIF shall include disciplinary actions in its placement memorandum, it has been observed that many AIFs have not been including the same in their placement memorandum.

In view of the above, it is clarified that all AIFs shall include in their placement memorandum, disciplinary history of:

(1) AIF, sponsor, manager and their Directors/partners/promoters and associates

(2) If applicant is a trust, Trustees or trustee company and its directors

Such disciplinary history shall, inter alia, include:

(1) Details of outstanding/pending and past cases (where the person has been found guilty) of litigations, criminal or civil prosecution, disputes, non-payment of statutory dues, overdues to/defaults against banks or financial institutions, contingent liabilities not provided for, proceedings initiated for economic offences or civil offences, adverse findings with respect to compliance with securities laws, penalties levied, disputed tax liabilities, etc.

(2) any disciplinary action taken by the Board or any other regulatory authority.

In case of operational actions such as administrative warnings/deficiency letters, the same may be grouped together and summarized. However, if the investor seeks details of the summarized portion, the same shall be provided by the AIF to the investor.

Any further litigations/cases, etc. as may arise in the course of the activities of the AIF shall be appropriately incorporated in the placement memorandum and intimated to the investors.

iii. Existing AIFs shall send the annexure as stated in clause (a)(i) above and disciplinary actions, if not already included, to all their investors as an addendum to the existing placement memorandum within 30 days of this circular. A copy of the same shall also be filed with SEBI at least 7 days prior to sending the same to the investors.

b. Changes to placement memorandum

i. At the time of submission of final placement memorandum to SEBI, any changes which have been made vis-à-vis the draft placement memorandum submitted to SEBI at the time of application shall be listed clearly in the covering letter. Further, the changes shall also be highlighted in the copy of the final placement memorandum.

ii. Further, it has been observed in several cases that changes are being made to the placement memorandum without intimation to or consent from unit holders, which is not in the interest of the investors.

iii. All AIFs shall intimate any change to the placement memorandum to all unit holders (including investors who have provided commitment to the AIF) within 7 days of making such change, specifically indicating the changes made. Such changes shall also be intimated to SEBI.

iv. However, in cases of material changes significantly influencing the decision of the investor to continue to be invested in the AIF, the process as mentioned hereunder shall be complied with. Such changes shall include, but not be limited to the following:

a. Change in sponsor/manager (not including an internal restructuring within the group)

b. Change in control of sponsor/manager

c. Change in fee structure or hurdle rate which may result in higher fees being charged to the unit holders

The following process shall be followed by the AIF:

a. Existing unit holders who do not wish to continue post the change shall be provided an exit option. The unit holders shall be provided not less than one month for expressing their dissent.

b. In case the scheme of the AIF is open-ended, the exit option may be provided by either of the following:

(1) Buying out of units of the dissenting investors by the manager/ any other person as may be arranged by manager, valuation of which shall be based on market price of underlying assets.

(2) Redemption of units of the investors through sale of underlying assets.

c. In case the scheme of the AIF is close-ended, the exit option may be provided as under:

(1) The exit option shall be provided by buying out of units of the dissenting investors by the manager/ any other person as may be arranged by manager.

(2) Prior to buying out of such units, valuation of the units shall be undertaken by 2 independent valuers and the exit shall be at value not less than average of the two valuations.

d. The responsibility to provide exit to the dissenting investors shall be on the manager. The expenses for the entire process shall be borne by the manager/sponsor/proposed new manager or sponsor and shall not be charged to the unit holders.

e. The entire process of exit to dissenting investors shall be completed within 3 months from the date of expiry of last date of the offer for dissent.

f. The trustee of AIF (in case AIF is a trust)/ sponsor (in case of any other AIF) shall be responsible for overseeing the process, ensuring compliance and regularly updating SEBI on the developments.

3. Clarification on certain aspects of the AIF Regulations

a. For the purpose of Regulation 10(b) of the AIF Regulations, in case the corpus of an open-ended scheme falls below rupees twenty crores:

i. The AIF shall intimate to SEBI within 2 days of receiving request for redemption from the client.

ii. The AIF shall take necessary action to bring back the scheme size to twenty crores within 3 months from the date of such breach.

iii. In case the AIF fails to bring back the corpus within the prescribed period, it shall redeem entire units of all investors.

iv. In case of repeated violations by the AIF, SEBI may take action against the AIF, as may be appropriate.

b. With respect to units of AIF issued to the employees of the manager of the AIF for profit-sharing, Regulation 10(c) shall not be applicable in cases where such units do not entail any contribution/investment from the employees.

c. With respect to investment by the sponsor/manager in the AIF, the sharing of loss by the sponsor/manager shall not be less than pro rata to their holding in the AIF vis-à-vis other unit holders.

d. With respect to Regulation 10(c), an AIF may accept the following as joint investors for the purpose of investment of not less than one crore rupees:

i. an investor and his/her spouse

ii. an investor and his/her parent

iii. an investor and his/her daughter/son

With respect to the above investors, not more than 2 persons shall act as joint-investors in an AIF. In case of any other investors acting as joint-investors, for every investor, the minimum investment amount of one crore rupees shall apply.

e. For the purpose of maintaining continuing interest under Regulation 10(d) of the AIF Regulations, such interest may be maintained pro-rata to the amount of funds raised (net) from other investors in the AIF.

f. An AIF shall not invest in units of another AIF unless it is fund of AIFs as specified under the Regulations.

g. For the purpose of Regulation 15(1)(c), in case the AIF proposes to invest into real estate or infrastructure projects, every such investee company shall hold not less than one project.

h. For the purpose of Regulation 15(1)(e), prior to every investment in an associate, approval of the investors as specified shall be obtained.

i. In case of an AIF which is open-ended, the first single lump-sum investment amount received from the investor should not be less than the minimum investment amount. Further, in case of request for partial redemption of units by an investor in an open-ended AIF, the AIF shall ensure that after such redemption, the amount of investment retained by the investor in the fund does not fall below the prescribed minimum limit as provided under the Regulations.

j. With respect to an in-principle approval is granted to an applicant, in case the registered trust deed or duly filed partnership deed is not submitted within the prescribed time period, the applicant shall file a fresh application for registration under the Regulations.

k. Pooling vehicles shall not be created solely for the purpose of investing in an AIF unless the pooling vehicles are registered with SEBI as AIFs (acting as Fund of AIFs).

l. With respect to Regulation 17(a), it is clarified that the term 'primarily' is indicative of where the main thrust of Category II AIFs ought to be. The investment portfolio of a Category II AIF ought to be more in unlisted securities as against the aggregate of other investments.

m. All circulars/guidelines as may be issued by SEBI with respect to KYC requirements, Anti-Money Laundering and Outsourcing of activities shall be applicable to AIFs and the manager of the AIF shall be responsible for compliance with such circulars/guidelines.

4. Compliance Test Report (CTR)

a. At end of financial year, the manager of an AIF shall prepare a compliance test report on compliance with AIF Regulations and circulars issued thereunder in the format as specified in the Annexure to this circular.

b. In case the AIF is a trust, the CTR shall be submitted to the trustee and sponsor within 30 days from the end of the financial year. In case of other AIFs, the CTR shall be submitted to the sponsor within 30 days from the end of the financial year.

c. In case of any observations/comments on the CTR, the trustee/sponsor shall intimate the same to the manager within 30 days from the receipt of the CTR. Within 15 days from the date of receipt of such observations/comments, the manager shall make necessary changes in the CTR, as may be required, and submit its reply to the trustee/sponsor.

d. In case any violation of AIF Regulations or circulars issued thereunder is observed by the trustee/sponsor, the same shall be intimated to SEBI as soon as possible.

5. Submission of information to SEBI under sub-regulation (1) of Regulation (3) of AIF Regulations

a. Under fourth proviso to Regulation 3(1) of AIF Regulations, 'such existing funds, which do not propose to accept any fresh commitments after commencement of these regulations shall not be required to obtain registration under these regulations subject to submission of information on their activities to the Board in the manner as may be specified.'

b. Funds falling under the purview of the aforesaid proviso shall disclose to SEBI information in the manner as specified hereunder:

i. Such funds shall download the excel sheet provided on SEBI website under the Section Info forà Alternative Investment Fundsà"Information to be filled by unregistered funds"

ii. The fund shall not add any additional rows/columns to the excel sheet or fill any information other than the information sought in the excel sheet.

iii. Once filled, the excel sheet shall be emailed to aifreporting@sebi.gov.in.

iv. The aforesaid information shall be sent only by email. No physical copy of the aforesaid sheet shall be sent to SEBI.

v. The information shall be sent to SEBI within 30 days from the date of this circular.

c. Funds which have been closed/wound up (where all moneys have been returned to all the investors) on the date of commencement of the AIF Regulations need not submit the aforesaid information. Funds which have not been wound up and which have launched multiple schemes shall submit information only for those schemes which have not been closed/ wound up as on the date of commencement of the AIF Regulations.

This Circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992. 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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Source: Securities and Exchange Board of India.

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Revised guidelines for Liquidity Enhancement Scheme in the Equity Cash and Equity Derivatives Segments

CIRCULAR, CIR/MRD/DP/14/2014, dated 23rd April, 2014

Revised guidelines for Liquidity Enhancement Scheme in the Equity Cash and Equity Derivatives Segments

To

All Stock Exchanges

1. SEBI vide circular CIR/DNPD/5/2011 dated June 02, 2011 and circular CIR/MRD/DP/14/2010 dated February 08, 2013 permitted stock exchanges to introduce liquidity enhancement schemes in the equity derivatives and equity cash segments to enhance liquidity in illiquid securities.

2. Based on the experience of stock exchanges in offering liquidity enhancement schemes in the equity cash and equity derivatives segments, and based on the discussions held in Secondary Market Advisory Committee, it has been decided to revise the framework for providing liquidity enhancement schemes as given below.

3. Introduction of liquidity enhancement schemes - The stock exchange may introduce liquidity enhancement schemes in equity cash and equity derivatives segments subject to the following:

3.1. The scheme shall have the prior approval of the Stock Exchange’s Board and its implementation and outcome shall be monitored by the Board at quarterly intervals.

3.2. The scheme shall be objective, transparent, non-discretionary and non-discriminatory.

3.3. The scheme shall specify the incentives available to the market makers / liquidity providers and such incentives may include discount in fees, adjustment in fees in other segments, cash payment or issue of shares, including options and warrants.

3.4. The scheme shall not compromise market integrity or risk management.

3.5. The effectiveness of the scheme shall be reviewed by the stock exchange every six months and the stock exchange shall submit half-yearly reports to SEBI.

3.6. The scheme, including any modification therein or its discontinuation, shall be disclosed to the market atleast 15 days in advance.

3.7. Outcome of the scheme (incentives granted and volume achieved – market maker wise and security wise) shall be disseminated monthly.

3.8. The scheme shall comply with all the relevant laws.

4. Securities eligible for liquidity enhancement schemes - The stock exchange shall formulate it's own benchmarks for selecting the securities for liquidity enhancement with the broad objective of enhancing liquidity in illiquid securities.

4.1. The stock exchanges shall introduce liquidity enhancement schemes on any security for a maximum period of three years. Once the scheme is discontinued, the scheme can be re-introduced on the same security provided it is less than the three year period since the introduction of scheme on that security.

4.2. Further, a stock exchange may introduce liquidity enhancement schemes in securities where liquidity enhancement scheme has been introduced in another stock exchange. Such schemes cannot be continued beyond the period of liquidity enhancement schemes of the initiating stock exchange.

4.3. The list of securities eligible for liquidity enhancement shall be disseminated to the market.

5. The incentives under liquidity enhancement schemes shall be transparent and measurable, and may take either of the following two forms:

5.1. Discount in fees, adjustment in fees in other segments or cash payment - The incentives during a financial year shall not exceed 25% of the net profits or 25% of the free reserves of the stock exchange, whichever is higher, as per the audited financial statements of the preceding financial year.

5.2. Shares, including options and warrants, of the stock exchange - The shares that may accrue on exercise of warrants or options, given as incentives under all liquidity enhancement scheme, during a financial year, shall not exceed 25% of the issued and outstanding shares of the stock exchange as on the last day of the preceding financial year. Further, the stock exchange shall ensure that this is in compliance with the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 at all times.

6. Market integrity - The stock exchange shall ensure the following:

6.1. The stock exchange shall have systems and defined procedures in place to monitor collusion between stock brokers indulging in trades solely for seeking incentives and prevent payment of incentives in such cases.

6.2. Incentives shall not be provided for the trades where the counterparty is self, i.e., same Unique Client Code (UCC) is on both sides of the transaction.

6.3. Any violations of clauses in this para shall be viewed most seriously.

7. Market maker / liquidity enhancer - The exchange shall prescribe and monitor the obligations of liquidity enhancers (liquidity provider, market-maker, maker-taker or by whatever name called)

7.1. All market maker / liquidity enhancer orders / trades should be identifiable by the stock exchange.

7.2. A conflict of interest framework shall be put in place by the stock exchange for the liquidity enhancement scheme. Such a framework shall provide for obligation on the part of the market maker / liquidity enhancer to disclose any conflict of interest while participating in the scheme. The same shall be disclosed by the stock exchange on their website.

8. This circular shall not be applicable to securities listed on SME Platform or SME Exchange.

9. This circular shall supersede earlier SEBI circulars viz. CIR/DNPD/5/2011 dated June 02, 2011 and CIR/MRD/DP/14/2010 dated February 08, 2013 on liquidity enhancement in the equity derivatives and equity cash segments.

10. Stock Exchanges are directed to:

10.1. take necessary steps to put in place systems for implementation of the circular, including necessary amendments to the relevant byelaws, rules and regulations;

10.2. bring the provisions of this circular to the notice of the stock brokers and also disseminate the same on its website;

10.3. communicate to SEBI the status of implementation of the provisions of this circular.

11. This circular is being 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.

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Click here to download the complete text of above Circular in PDF Format.

Source: Securities and Exchange Board of India.

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Guidelines for Arrest and Bail in relation to Offences Punishable under the Finance Act, 1994

Circular 171/6/2013-Service Tax, F.No. 137/47/2013-Service Tax, dated 17^th September, 2013

Section 103 (K) of the Finance Act, 2013 has introduced Sections 90 & 91 in the Finance Act, 1994, with effect from  10^th May, 2013.  In terms of section 90 of the Finance Act , 1994, as amended, offences under section 89(1) (ii) shall be cognizable and all other offences shall be non-cognizable and bailable. In terms of section 91(1) read with section 89(1) (i) and (ii) of the Finance Act, 1994, as amended, the power to arrest has been introduced in cases involving evasion of service tax covered under section 89(1) (i) and (ii) of the Finance Act, 1994, as amended and the amount of service tax evaded exceeds rupees fifty lakh. In this context, the following points may be noted for strict compliance:-

1.2 The following cases are covered under section 89(1) (i):

1.2.1 where a person knowingly evades the payment of service tax, or

1.2.2 avails and utilizes  credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules, or  

1.2.3 maintains false books of accounts or fails to supply any information which he is required to supply or supplies false information, and the amount of service tax involved is more than fifty lakh rupees.

In such cases, the Assistant Commissioner or  the Deputy Commissioner shall, for the purpose of releasing an arrested person on bail or otherwise,  have the same powers and be subject to the same provisions as an officer in-charge of a police station has, and  is subject to, under Section 436 of the Code of Criminal Procedure, 1973( 2 of 1974). This is in terms of section 91(3) of the Finance Act, 1994, as amended.

1.3 The following cases are covered under section 89(1) (ii):

1.3.1 where a person has collected any amount exceeding fifty lakh rupees as service tax but fails to pay the amount as collected to the credit of the Central Government beyond a period of six months from the date on which such payment becomes due.

In such cases,   after following the due procedure of arrest, the arrested person must be produced before the magistrate without unnecessary delay, and definitely within 24 hours. This is in terms of section 91(2) of the Finance Act, 1994, as amended. The magistrate will decide on whether or not to grant bail.

2.0. Conditions Precedent

2.1 Since arrest impinges on the personal liberty of an individual, this power must be exercised carefully.  The Finance Act 1994, as amended, has specified categories of offences in respect of which only powers of arrest may be exercised and these offences are covered under clause (i) or clause (ii) of sub-section (1) of section 89 of the Finance Act, 1994.  Further, the Finance Act 1994 has also prescribed value limits of evasion of service tax exceeding Rs 50 lakh, for exercising the powers of arrest.

2.2 The legal stipulations in the Finance Act 1994, as amended, contained in section 91 read with section 89 must be strictly adhered to. An officer of Central Excise not below the rank of Superintendent of Central Excise can carry out an arrest on being authorized by the Commissioner of Central Excise. To authorize the arrest the Commissioner should have reason to believe that the person proposed to be arrested has committed an offence specified in clause (i) or clause (ii) of sub-section (1) of section 89. The reason to believe must be based on credible material which will stand judicial scrutiny.

2.3 Apart from fulfilling the legal requirements, the need to ensure proper investigation, prevention of the possibility of tampering with evidence or intimidating or influencing witnesses and large amounts of service tax evaded are relevant factors before deciding to arrest a person.

3.0. Procedure for Arrest

3.1 The provisions of the Code of Criminal Procedure 1973 (2 of 1974) relating to arrest and the procedure thereof must be adhered to.  It is therefore advised that the Commissioner should ensure that all officers are fully familiar with the provisions of the Code of Criminal Procedure 1973 (2 of 1974).

3.2 There is no prescribed format for arrest memo but an arrest memo must be in compliance with the directions in D.K Basu vs State of West Bengal reported in 1997(1) SCC 416 ( see paragraph 35). The arrest memo should include:

3.2.1 brief facts of the case;

3.2.2 details of the person arrested;

3.2.3 gist of evidence against the person;

3.2.4 relevant section (s) of the Finance Act, 1994 or other laws attracted to the case and to the arrested person;

3.2.5 the grounds of arrest must be explained to the arrested person and this fact noted in the arrest memo;

3.2.6 a nominated person (as per the details provided by arrested person) of the arrested person should be informed immediately and this fact also may  be mentioned in the arrest memo;

3.2.7 the date and time of arrest may be mentioned in the arrest memo and the arrest memo should be given to the person arrested under proper acknowledgment;

3.2.8 a separate arrest memo has to be made and provided to each individual/arrested person. This should particularly be kept in mind in the event that there are several arrests in a single case.

 

3.3 Further there are certain modalities that should be complied with at the time of arrest and pursuant to an arrest, which include the following:

3.3.1 A female should be arrested by or in the presence of a woman officer;

3.3.2 Medical examination of an arrested person should be conducted by a medical officer in the service of Central or State Governments and in case the medical officer is not available, by a registered medical practitioner, soon after the arrest is made. If an arrested person is a female then such an examination shall be made only  by, or under supervision of a female medical officer, and in case the female medical officer is not available, by  a female registered medical practitioner.

3.3.3 It shall be the duty of the person having the custody of an arrested person to take reasonable care of the health and safety of the arrested person.

4.0. Post Arrest Formalities

4.1 The procedure is separately outlined for the different categories as listed in section 89(1) (i) and (ii) of the Finance Act, 1994, as amended:

4.1.1. In cases covered under section 89(1) (i), the Assistant Commissioner or Deputy Commissioner is bound to release a person on bail against a bail bond. The bail conditions should be informed   in writing to the arrested person and also informed on telephone to the nominated person of the person (s) arrested .The arrested person should be also allowed to talk to a nominated person. The conditions will relate to, inter alia, execution of a personal bail bond and one surety of like amount given by a local person of repute, appearance before the investigating officer when required and not leaving the country without informing the officer. The amount to be indicated in the personal bail bond and security will depend, inter alia, on the amount of tax involved.

4.1.2. If the conditions of the bail are fulfilled by the arrested person, he shall be released by the officer concerned on bail forthwith.   However, only in cases where the conditions for granting bail are not fulfilled, the arrested person shall be produced before the appropriate Magistrate without unnecessary delay and within twenty-four (24) hours of arrest.  The arrested person may be handed over to the nearest police station for his safe custody, within 24 hours, during the night under a challan, before he is produced before the Court.

4.2 In cases covered under section 89(1) (ii) and only in the event of circumstances preventing the production of the arrested person before a Magistrate without unnecessary delay, the arrested person may be handed over to nearest Police Station for his safe custody, within 24 hours, under a proper challan, and produced before the Magistrate on the next day, and the nominated person of the arrested person may be also informed accordingly.

4.3 Formats of the relevant documentation i.e. the Bail Offer Letter, the Bail Bond and the Challan for handing over to the police, in the Code of Criminal Procedure, 1973. (2 of 1974) may be followed.

4.4 Every Commissionerate should maintain a Bail Register which will have the details of the case, arrested person, bail amount, surety amount. The money/instruments/documents received as surety should be kept in safe custody. The money should be deposited in the treasury. The other instruments/documents should be kept in the custody of a single nominated officer. It should be ensured that the instruments/documents received as surety are kept valid till the bail is discharged. 

5.0. Reporting System

5.1 A report on every person arrested should be sent to the jurisdictional Chief Commissioner with a copy to DGCEI (Headquarters) the same day or on the next day.

5.2 Chief Commissioners shall send a report on every arrest to the Zonal Member within 24 hours of the arrest giving such details as prescribed in the monthly report. To maintain an all India record of arrests made in service tax, a monthly report of all persons arrested in the Zone shall be sent by the Chief Commissioner to DGCEI (Headquarters), New Delhi, by the 5^th of the succeeding month, in the following format:

Monthly Report on Persons Arrested in a Zone

S. No	Name, designation and age of arrested person	Date of Arrest	Commissionerate	Name and Registration Number of Company	Amount of duty evaded	Role in evasion and nature of evidence collected
Total

Source: Directorate of Service Tax.

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