Liability for Investment Committees

Introduction

SEBI vide an modification dated October 19, 20201 notified sure key amendments (“Modification”) to be made to the SEBI (Different Funding Funds) Laws, 2012 (“AIF Laws”), together with increasing the interpretation of the time period ‘related skilled qualification’ underneath Regulation 4(g) of the AIF Laws. A key modification made vide the notification, is with respect to the structure of an funding committee (“ICOM”) by the supervisor of the Different Funding Fund (“AIF”) for approving funding choices and the collective tasks of the supervisor and members of such ICOM.

The amended AIF rules now present for shared tasks for the members of the ICOM with the funding supervisor, which is a big shift from the observe earlier than such Modification. We talk about under, the extent of liabilities that will now been imposed on the members of ICOM.

New Function and Duties for ICOM Members

Versus the supervisor being solely accountable and accountable for the funding choices to SEBI, whatever the suggestions supplied by the ICOM, the Amendments present for the under in instances the place an ICOM is ready up for the AIF for approving funding choices:

ICOMs will likely be equally accountable alongside the AIF managers for funding choices of the AIF;

ICOM and AIF supervisor will likely be collectively and severally accountable for compliance of the AIF investments with the AIF Laws, governing paperwork of the AIF and different relevant legal guidelines;

Exterior members of the ICOM not recognized within the AIF paperwork on the time of on-boarding of buyers should be added to the ICOM solely upon receiving consent of not less than 75% of buyers by worth; and

Compliance of another situations as could also be specified by SEBI.

Accountability of the ICOM Alongside the AIF Supervisor:

The legal responsibility and tasks of the members of the ICOM has considerably elevated with the Modification, consequently if the ICOM, constituted by the supervisor, performs a pivotal function within the funding determination making course of for the AIF, then not solely will the supervisor, but in addition the members of ICOM will be held accountable for such choices straight by the regulator, underneath the AIF Laws. Contemplating that the legal responsibility for contravention of the AIF Laws ties up with part 15EA the Securities and Alternate Board of India Act,1992 (“SEBI Act”), ICOM members could also be liable to penalty for breach of their newly launched statutory obligations, for not less than one lakh rupees extending as much as one lakh rupees for every day throughout which such failure continues topic to a most of 1 crore rupees or thrice the quantity of beneficial properties made out of such failure (in that case decided), whichever is larger.

Previous to the Modification, the members of ICOM, who had the decision-making powers solely underneath the AIF paperwork, owed a fiduciary duty in the direction of the AIF and its buyers, while the first duty of guaranteeing regulatory compliance was pinned onto the supervisor who could be accountable for any contraventions of the AIF Laws.

Compliance With the AIF Laws:

The members of the ICOM shall be accountable for compliance of the AIF investments, with the AIF Laws, governing paperwork of the AIF and different relevant legal guidelines. This transformation specifically, is opposite to the worldwide practices and requirements, because the members of ICOM are usually not normally anticipated to be concerned within the day-to-day actions of the fund and don’t ordinarily hold a test on requisite compliances underneath varied relevant legal guidelines. To maintain a test on the authorized and statutory compliances of the AIF, has ordinarily been the mandate of the AIF supervisor and the compliance officer.

As per Part 272 (i.e. contravention by corporations) of the SEBI Act, each one who on the time the offence was dedicated was in command of, and was accountable for the conduct of the enterprise, in addition to the corporate, shall be deemed to be responsible of the offence and shall be liable to be proceeded towards besides when such individual is ready to set up that he had no information of the contravention or that he exercised due diligence to stop such fee of offence.

Due to this fact, arguably, if a member of the ICOM is allegedly concerned in a violation of the provisions of relevant legislation by the supervisor firm, will probably be on such member to determine that he didn’t consent or approve or didn’t have information of the actions taken by the ICOM or the AIF supervisor, with respect to such violation. What comes as a very good defence in such instances is a correct and complete noting of the minutes of the ICOM conferences the place every member’s opinion/ reservation/ acceptance or rejection with causes is recorded.

Conclusion

The Modification appears to be an try by SEBI to (i) present flexibility and luxury to the AIF managers in constituting their key funding groups and designing the choice – making course of for the AIFs; and (ii) tighten its grip across the members of the ICOM, with respect to compliance of AIF investments with the relevant legal guidelines, most significantly the AIF Laws. The Modification is probably going to make sure that the members of the ICOM, who’re concerned within the decision-making technique of the AIF are coated by acceptable insurances by the AIF supervisor.

As a response to the suggestions obtained from the trade at massive, SEBI whereas offering a statutory blessing to the idea of ICOMs, appears to have stretched a bit far, including important tasks on the members of the ICOM.

1 https://www.sebi.gov.in/authorized/rules/oct-2020/securities-and-exchange-board-of-india-alternative-investment-funds-amendment-regulations-2020-_47914.html

2 Securities and Alternate Board of India Act, 1992- Part 27.(1) The place an offence underneath this Act has been dedicated by an organization, each one who on the time the offence was dedicated was in command of, and was accountable to, the corporate for the conduct of the enterprise of the corporate, in addition to the corporate, shall be deemed to be responsible of the offence and shall be liable to be proceeded towards and punished accordingly: Supplied that nothing contained on this sub-section shall render any such individual liable to any punishment supplied on this Act, if he proves that the offence was dedicated with out his information or that he had exercised all due diligence to stop the fee of such offence