In a bid to enhance compliance and curb the circumvention of regulatory frameworks, the Securities and Exchange Board of India (SEBI) has issued new guidelines requiring Alternative Investment Funds (AIFs) and their managers to perform rigorous due diligence on both investors and investments. These directives are aimed at ensuring that AIFs, particularly those classified as Qualified Institutional Buyers (QIBs) or Qualified Buyers (QBs), adhere to stricter standards of compliance.
According to SEBI’s circular, AIFs and their managers must conduct thorough background checks to ensure that only eligible investors, particularly those meeting QIB or QB criteria, benefit from the advantages offered by AIF structures. This move is designed to prevent ineligible investors from exploiting these benefits improperly.
In addition to investor scrutiny, SEBI has also warned AIFs against aiding in the “evergreening” of stressed loans and assets—an issue closely monitored by the Reserve Bank of India (RBI). AIFs involved in such practices must comply with RBI’s norms concerning income recognition, asset classification, provisioning, and restructuring of assets.
Furthermore, AIFs are required to perform additional due diligence when dealing with investments from countries that share land borders with India, in line with Foreign Exchange Management Rules. The new measures also mandate a more stringent due diligence process for any scheme where a single investor or a group of investors contributes 50% or more to the fund’s assets.
For schemes that include RBI-regulated entities, SEBI emphasized the need for enhanced checks to ensure these entities comply with all relevant guidelines.
The market regulator has set a deadline of April 7, 2025, for AIFs to complete due diligence checks or report compliance for existing investments. If an investor fails to meet the due diligence requirements, they may be excluded from the investment process. Additionally, AIF managers must submit reports on the status of existing investments by the same deadline.
SEBI’s updated guidelines aim to foster greater transparency and ensure that AIFs operate within the bounds of both SEBI and RBI regulations. These measures are expected to tighten the governance of the alternative investment landscape in India and strengthen regulatory compliance across the sector.
