SEBI tells AIFs to offer direct plans, opens route for investment without distribution fee

The market regulator bats for AIF investors' interest

The Securities and Exchange Board of India (SEBI) on April 11 directed Alternative Investment Funds (AIFs) to furnish the facility of direct investment to their investors.

The SEBI circular serves to eliminate any distribution or placement fee as far as any direct plan is concerned. The circular has been released to "provide flexibility to investors for investing in AIFs, bring transparency in expenses and curb mis-selling", the market regulator said.

AIFs typically cater to high networth individuals (HNIs) as they entail an investment of more than Rs 1 crore and above in one go.

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The circular says schemes of AIFs shall have an option of a “direct plan” for investors. Such a plan shall not entail any distribution fee or placement fee.

AIFs will also have to ensure that investors who approach them through a SEBI registered intermediary, which separately charges the investor a fee (such as an advisory fee or portfolio management fee), are on-boarded via the direct plan route only.

The market regulator has also directed AIFs to disclose the distribution fee or placement fee, if any, to the investors at the time of onboarding.

Category III AIFs shall charge a distribution fee or placement fee, if any, to investors only on an equal trail basis ie no upfront distribution fee or placement fee is to be charged by Category III AIFs directly or indirectly to their investors.

Any distribution or placement fee paid by the AIF shall be borne from the management fee received by the managers of the category III AIFs.

Category I and II AIFs may pay up to a third of the distribution fee or placement fee to the distributors upfront, and the remaining can be paid on an equal trail basis over the tenure of the fund.

The circular will be applicable for onboarding from May 1.

The regulations were progressive and would help build investor confidence in AIFs, Anshu Kapoor, President & Head of Nuvama Asset Management, said. AIFs were still a small category standing at about Rs 7 trillion compared with mutual funds and PMS space which was close to Rs 40 trillion, he said.

"Introduction of direct plans can result in a larger allocation from institutions and informed investors. What's more, it will help if SEBI allows asset managers more flexibility in marketing, promoting AIF schemes and in creating tools for investors to discover, research and evaluate AIF products. Today, the ability to share information about AIFs in the public domain is very limited," Kapoor said.

He also credited the circular for recognising the needs of category II and III AIF funds. "These AIF categories enable access to asset classes like private equity, real estate, private credit and infrastructure. The regulator has recognised that these categories are yet to reach scale - distribution effort is needed in reaching more investors," he said.