In an effort to reduce mis-selling and help investors make informed decisions, SEBI has proposed to introduce benchmarking framework to disclose fund performance. Simply put, AIFs will have to disclose their performance against their respective benchmark..
In a consultative paper, SEBI said, “One important factor on which a prospective investor of AIFs relies while taking investment decision is the returns on investment generated by the Manager for the Fund(s) managed by him. At present, in the absence of any standards or norms for disclosure of past performance, AIFs disclose their performance to prospective investors on a standalone basis, without reference to an appropriate benchmark. These investors do not have any authenticated source either to verify the performance of such AIFs or to compare with performance of comparable AIFs and AIF industry. Therefore, it is felt that there is a need to provide a framework to benchmarking the performance of AIFs to be available for the investors and to minimize potential of mis-selling.”
Here are the proposals on performance disclosure:
- All funds having existence of 3 years will have to report audited performance report with respect to external benchmark
- In all marketing and promotion communication, AIFs will have to disclose performance with respect to benchmark
- AIFs to provide audited data on cash flows and valuation
- Performance should be disclosed on six months basis
- Performance reporting should be disclosed on pre-tax net NAV
- Benchmarking agencies have to compile data from all AIFs separately since 2012
- Performance disclosure should be reported in both INR and USD terms
- Performance benchmarking should be on a half yearly basis
Another key proposal is to standardise private placement memorandum issued by AIFs to their clients. Private placement is sale of the fund’s units to a limited group of individuals. Typically, AIFs target affluent HNIs and UHNIs, foreign offshore investors and corporates. While any individual can invest in a mutual fund NFO or equity IPO independently, AIF investments are through offer only. Generally, an investor’s financial advisor at times accompanied by the AIF’s sales personnel share the placement memorandum (similar to an SID in mutual fund parlance) of the fund with prospective investors.
SEBI said, “While there is no standard format for PPMs presently, AIFs submit draft PPMs to SEBI before launch of their schemes for incorporation of comments received from the Board in the PPM. It is observed that there is significant variation in the manner in which various clauses, explanations and illustrations are incorporated in the PPMs. Therefore, the investors may receive Placement Memorandum which provides information in a manner which is too complex to easily comprehend or with too little information on important aspects of the AIF, for e.g. potential conflict of interests, risk factors specific to AIF or its investment strategy, etc. Considering the importance of PPM to investors, to ensure that minimum standard of information be available in PPM and to facilitate the processing of AIF applications in a time bound manner, Alternative Investment Policy Advisory Committee (AIPAC) recommended that the matter be deliberated with the stakeholders.”
SEBI has invited feedback from stakeholders by December 25, 2019.
