Skip to main content

Legal Capsule by Acuity Law

Private placement memorandum

Alternative Investment Funds (“AIFs”/ “Funds”) are privately pooled investment vehicles which collects funds from investors, whether Indian or foreign, for investing such funds in accordance with a defined investment policy for the benefit of their investors. AIFs in India are governed by the Securities and Exchange Board of India (Alternative Investment Regulations), 2012 (“AIF Regulations”) and regulated by the Securities and Exchange Board of India (“SEBI”). AIF Regulations are based on the premise that AIFs are a high-risk asset class, in which only sophisticated and well-informed investors participate. AIF Regulations, therefore, emphasize on the investors being informed of all material information regarding the AIFs and whenever any material changes are introduced therein, investor consent is sought prior to executing such changes. To read more about the structure of an AIF and key participants involved in the AIFs, please click here.

Private Placement Memorandum (“PPM”) is considered the information memorandum for AIFs which contains all the necessary information about the AIFs. PPMs are required to contain all material information about the AIF including respect to (i) background of the key investment team of the manager, (ii) targeted investors, (iii) tenure of the AIF or scheme, (iv) investment strategy, (v) risk management tools, etc. Therefore, PPM is a document created with the intention to sell investments in securities to private investors and explain the details of an investment to potential investors.

Prior to the year 2020, there was no prescribed format for PPM. Therefore, there was a risk that investor may receive information in a complex form and / or receive less information related to AIFs, such as, little information on potential conflict of interests, risk factors etc. To ensure that minimum standard of information is available and facilitate the processing of AIF registration applications in a time bound manner, SEBI has issued a template for PPM for all categories of AIFs. The template PPM focus’ on increasing disclosures and streamlines presentation of necessary information in the PPM. The templates for PPM as issued by SEBI can be accessed here.

 Following are certain important sections in a PPM which a Fund or a scheme under a Fund (“Scheme”) may consider while drafting the PPM:

 1.  Investment manager and investment committee

(i)   Appointment of investment manager - The AIF Regulations contemplate that the manager of a Fund / Scheme must be distinct from the AIF. Such investment manager must be appointed by way of investment management agreement. The Fund / Scheme is required to disclose all the essential details of the investment manager such as, name of the entity, registered address, etc. in their PPM.

(ii)  Management fees of the investment manager – A management fee is charged for the management services provided by the investment manager of the Fund. The Fund / Scheme is required to disclose the management fees proposed to be charged by such investment manager. It is pertinent to note that, the AIF Regulations do not define the manner / quantum of management fees which may be charged by an investment manager. The investment manager may either charge a fixed fee, or a variable which could be a function of the Fund’s performance, or in any other manner as commercially considered appropriate by the investment manager and agreed with the investors.

(iii) Track record of the investment manager – The Fund / Scheme shall be required to disclose in the PPM the track record of the investment manager since investors would be interested to know the skill, experience, and competence of the investment manager before making an investment.

(iv)  Investment committee – The Fund / Scheme shall be required to disclose details with respect to the terms of reference of the investment committee constituted for approving the decisions of the Fund / Scheme in their PPM. The investment manager may constitute an investment committee (by whatever name called), to approve the decisions of the Fund / Scheme. Such constitution of the investment committee will be subject to conditions specified by SEBI from time to time. The investment committee may comprise internal and / or external members such as employees / directors / partners of the investment manager, nominees of the sponsor, employees of group companies of the sponsor / manager, domain experts, investors, or their nominees, etc.

The Fund / Scheme may also note that, in the event an external member is appointed in the investment committee, the name of such external member must be disclosed in the PPM. If the name of such external member is not disclosed in the PPM or agreement made with the investor or any other scheme documents at the time of on boarding investors, then such external member must be appointed only with the consent of at least 75% (seventy-five per cent) of the investors by value of their investment in the Fund / Scheme.

 2.  Investment strategy and process –The Fund / Scheme may provide a tabular chart in the PPM to outline the areas of investment and strategies related to investment in various portfolio companies. The Fund / Scheme may also incorporate a process in their PPM depicting the investment decision-making process. This will give investors a comprehensive idea of the ultimate investment objective and strategy.  

 3.  Investor charter – An Investor Charter is a brief document containing details of services provided to investors, grievance redressal mechanism, responsibilities of the investors etc., at one single place for ease of reference. SEBI has mandated the Fund / Scheme to incorporate a section in the PPM on the ‘Investor Charter’. This was introduced with a view to keep the investors informed about various activities pertaining to AIFs and aimed at bringing further transparency about investor grievance redressal mechanism.

 4.  Risk factors - Risk factors are disclosures of the potential risks that every Fund / Scheme may consider disclosing to their investors in order to help investors to take an informed investment decision. Risk factors must be drafted with specificity, tailored for each industry type, offering structure, and investment strategy or business plan. SEBI has laid down certain risk factors in its template PPM. The list is not exhaustive in nature and the Fund / Scheme may amend the list based on its requirement. We have mentioned a few risk factors below:

 (i)  Risk related to portfolio investments – Fund / Scheme shall disclose the following common risk associated with the portfolio investments such as (a) return of capital contributions from such portfolio investments; (b) risk related to the exit of the Fund / Scheme from such portfolio investments and possibility of distribution in kind; (c) risk with regards to ability of the Fund / Scheme to raise significant capital, etc

(ii)  Risk related to Fund / Scheme structure - This section will be specific to the structure adopted and attendant risks associated with the structure of the Fund / Scheme. Certain common themes across Fund / Scheme structure could be: (i) performance risk; (ii) concentration risk; and (iii) risk associated with reliance on the trustee (in case applicant is the trust), manager and other decision-making committees, etc.

 (iii)  Regulatory risk factors - Risk associated with obtaining SEBI registration and cancellation / suspension of SEBI certificate / other action by SEBI that may impact the operations of the Fund / Scheme. Other regulatory risks may include company law, takeover code, enforcement risks, regulatory approvals including loss of registration etc.

(iv)   General risk factors – Fund / Scheme should list out the factors other than regulatory and statutory risks such as political, social, and economic risks in India and how investments of the Fund / Scheme may be impacted as a result of changes to it.

5.   Annual audit - The Fund / Scheme shall be required to make a disclosure related to annual audit in the PPM. The Fund / Scheme shall be required to communicate the findings of such audit to the trustee or board or designated partners of the AIF, board of the manager and SEBI. It is to be noted that the requirement of annual audit is exempted for angel funds and Fund / Scheme where each investor commits to a minimum capital contribution of INR 700,000,000/- (Indian Rupees Seven Hundred Million).

 6.  Other key Scheme documents – The PPM is a disclosure document describing the offering, including its structure, strategies or business plan, risks, and management. The following contracts/documents shall constitute Scheme documents and shall be required to be filed with the PPM:

(i)  Constitutional documents (depending on the structure of the Fund / Scheme, i.e., LLP, company, trust, body corporate);

(ii)  Investment management agreement as executed between the trustee and the investment manager

(iii)  Contribution agreement of the respective investor as executed between the trustee, the investment manager, and the relevant investor

(iv)  Indenture executed between the settlor and the trustee; and

(v)   Any other documents designated as Fund / Scheme document by the manager. Further, it is to be noted that, the Fund / Scheme should clarify in its documents as to which Fund / Scheme document prevails in case of any conflicts.

7.  Distribution waterfall - A distribution waterfall records the order in which gains from pooled investment are allocated between investors in the Fund / Scheme. Generally, there are 4 (four) tiers in a distribution waterfall schedule

(i)  Return of capital - First, 100% (one hundred percent) to the investors in proportion to their respective investment until the entire capital contributed by them is returned.

(ii)  Preferred return – Second, 100% (one hundred percent) of further distributions go to investors until they receive the preferred return on their investment.

(iii)  Catch-up tranche – Third, 100% (one hundred percent) of the distributions go to the sponsor or manager of the Fund / Scheme until it receives a certain percentage of profits

(iv)  Carried interest - Fourth, in addition to the management fee, the investment manager will be entitled to a percentage share in the profits accrued upon realization of the Fund’s investments. This share in profits is known as carried interest and is typically paid out only after investors have been returned their capital contributions, together with a preferred return.

 Additionally, a feature called "clawback" is frequently included in the PPM and is meant to protect investors from paying more incentive fees than required. In case of such an occurrence, the manager is obligated to pay back the excess fees. The Fund / Scheme shall be required to disclose a detailed flow of distribution waterfall in the PPM.

 8.  Filing of PPM through SEBI registered merchant banker - SEBI has mandated that PPM must be filed with SEBI through a merchant banker at least 30 (thirty) days prior to launch of the Scheme. SEBI has also mandated that the merchant banker must independently exercise due diligence of all the disclosures in the PPM and issue a due diligence certificate. The Fund / Scheme is required to submit such due diligence certificate along with the PPM to SEBI. 

Our thoughts

PPM is typically the ‘first’ fundamental document shared with a prospective investor by the investment manager. The PPM creates the first impression for a Fund / Scheme especially if it’s a Fund started by a new fund manager and is considered as an important component in the development of mutually beneficial long-term relations between the investor and the Fund / Scheme. The AIF should carefully draft its PPM and should disclose all material, correct, and true information in a defined manner to ensure proper representation of the fundamentals and operations of the AIF. Further, the Fund / Scheme makes all necessary disclosures in the PPM to avoid any unwarranted liability which may arise out of misrepresentation / non-disclosure of material information. The PPM also forms the basis on which the contribution agreement is finalized under which investors invest in the Fund / Scheme.  Therefore, it is recommended that utmost caution and effort is spent in drafting and finalizing the PPM.


Authors: Souvik Ganguly, Managing Partner, Akhil Ramesh, Senior Associate and Yogesh Chhajer, Associate.


The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident or any other cause.

Popular posts from this blog

Nasscom announces Short-listed Cos for EMERGE Product Showcase 2010

Software industry association Nasscom has released a shortlist of companies which will be showcased as part of the "EMERGE Product Showcase for 2010" at its Product Conclave 2010 event: Aikon Labs Pvt. Ltd. – A comprehensive idea and initiative management platform that utilizes Web 2.0 and social networking technologies integrated with process management, content management and analytics. The platform helps Enterprises & Academic/Research institutions in tapping ideas from stakeholders in their ecosystem and take them through a stage-gated process to execution. Elina Networks Pvt. Ltd. – Elina creates software based networking and IT management solutions that deliver business continuity and visibility, through robust network security, reliable connectivity, and effective remote IT management. Essentia Soft Solutions – Communities on the Cloud (community as a cloud service) Interviewstreet – Interviewstreet helps you to create your own customized programming tests

"Leveraged stock purchase led Arvind Rao to go astray": Forbes India

Forbes India has an article on the series of events leading to the recent controversial exit of Arvind Rao, Co-founder & CEO of listed Mobile VAS firm OnMobile. On November 23, 2010, Arvind Rao, the 53-year-old co-founder and CEO of OnMobile, bought approximately 6 lakh shares of his company from the open market, representing a little over 1 percent of the company’s total shares....At Rs 277 a share, he had to pony up nearly Rs 16.5 crore to acquire them....So he went ahead and borrowed money to buy the shares, thinking nothing of the interest it entailed or the fact that he’d need to put up nearly half his existing shareholding as collateral...OnMobile’s shares continued to fall from those levels, while Rao’s interest payments ballooned. ...Motivated by OnMobile’s growth all these years, he had never paid much attention to his salary, most of which went towards the monthly rental on his sea-facing apartment in Mumbai and his BMW 7-Series, both paid directly by the company. He r

VC Interview: Shailendra Singh of Sequoia Capital India

In a recent interview to Venture Intelligence, Shailendra Singh discussed some of the firm’s newer investments in the early stage segment including in the online payments space, the progress at a few existing portfolio companies and the active role the firm is playing in helping its portfolio companies scale and succeed in India and globally. Prior to joining the firm in 2006, Singh was a strategy consultant at Bain & Company in New York and before that, an entrepreneur in the digital media industry. Venture Intelligence: How does Sequoia go about identifying potential early stage investments in India? Is there anything different you are doing today than, say, a couple of years back? Shailendra Singh: There is a lot more focus on technology investing and early stage investing. In general, as you might remember a few years ago, we were doing primarily growth investing but in the past 18-odd months, we have had a very strong focus on early stage and that’s continuing. In terms

PE-VC Investments in 2021 hit all time high of $63 Billion

Press Release: Private Equity - Venture Capital (PE-VC) firms invested a record $63 Billion (across 1,202 deals) in Indian companies during 2021, registering  a 57% rise over the   $39.9 Billion (across 913 deals) invested in the previous year ,  reports  Venture Intelligence , a research service focused on private company financials, transactions, and their valuations. (Note: These figures include Venture Capital type investments, but exclude PE investments in Real Estate). India minted a total of 44 " Unicorn"  companies (VC-funded startups valued at $1 Billion or more)  in 2021, 15 of them during Q4'21. The $23.4 Billion invested into the Information Technology sector dominated list of  Unicorns  accounted for more than 37% of the overall value of PE-VC investments in 2021. The October-December 2021 quarter (Q4'21) saw over $5 Billion (across 25 deals) being invested in such companies.  2021 witnessed eight investments worth $1 Billion or more, led by Flipkart'

LSE Podcast with Apax Founder Ron Cohen

Click Here to download an interesting lecture and interaction (at the London School of Economics) with Ron Cohen , founder of global PE firm Apax Partners. Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at