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Increased Scrutiny Of SEBI On Trustees Of Alternative Investment Funds In India

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Balancing the need for accountability with a fair and comprehensive evaluation of trustees’ contributions is crucial in maintaining the integrity of the Alternative Investment Fund sector

In recent times, Alternative Investment Funds (AIFs) in India, which were previously overlooked by the Securities and Exchange Board of India (SEBI), have come under regulatory scrutiny. The past year has witnessed several amendments to the SEBI (AIF) Regulations, 2012, resulting in stricter norms. However, the issuance of show cause notices by SEBI to trustees for the lapses of fund houses has created a dilemma within the sector.

Registration of ‘Fit and Proper’ AIFs

According to Regulation 3 of the AIF Regulations, no entity or individual can act as an AIF without obtaining a certificate of registration from SEBI. Regulation 4 outlines the eligibility criteria for AIF registration. Furthermore, Regulation 4(f) states that the applicant, sponsor, and manager of the AIF must meet the ‘fit and proper’ criteria as specified in the SEBI (Intermediaries) Regulations, 2008.

While the AIF Regulations explicitly require the applicant, sponsor, and manager to meet the ‘fit and proper’ criteria, there is no specific mention of trustees. This raises the question of whether the ‘fit and proper’ requirement under the Intermediaries Regulations applies to trustees or not.

Trustees and AIFs

Schedule II of the Intermediaries Regulations states that the ‘fit and proper person’ criteria apply to the applicant/intermediary, principal officer, directors or managing partners, compliance officer, key management persons, promoters or persons holding controlling interest, and those exercising control over the applicant or intermediary, directly or indirectly. The definition of ‘control’ is determined based on individual regulations for each intermediary.

Therefore, in the case of AIFs, it is essential to examine whether trustees exercise control over them. SEBI and the Securities Appellate Tribunal (SAT) have ruled in several instances that control includes the right to appoint a majority of directors, holding majority voting rights, and/or influencing management and policy decisions.

Although trustees of AIFs are primarily responsible for safeguarding investor funds and ensuring their management aligns with investors’ interests, they are not involved in day-to-day fund management. Nonetheless, trustees establish broad guidelines and compliance checkpoints to protect investors’ interests.

The AIF Regulations also attribute various other responsibilities to trustees. For example, trustees, along with the Key Management Persons (KMPs) of the AIF, must ensure compliance with the Code of Conduct. Additionally, trustees are responsible for segregating the assets and liabilities of different AIF schemes and can recommend the winding up of an AIF if it is in the investors’ best interest, with the reasons communicated to the investors.

It is evident that trustees of AIFs play an active role in overseeing the conduct and functioning of the funds, even though they are not directly involved in investment decisions. While they may not have complete control over management and policy decisions, trustees have authority over significant matters, such as the winding up of AIFs. SEBI’s decision to seek responses from trustees for fund house lapses further emphasises their involvement.


Considering the active role played by trustees in overseeing AIFs, they fall under the category of persons exercising control over these funds. Consequently, they must meet the ‘fit and proper’ conditions under the intermediary regulations. If a trustee receives a show cause notice under the SEBI Act, the AIFs associated with that trustee will be ineligible for registration for a period of one year from the date of the notice or until the conclusion of the proceedings, whichever comes first. Additionally, all AIFs associated with the trustee will fail to meet the ‘fit and proper’ conditions.

While disqualifying trustees solely based on the issuance of notices may have disruptive effects, it is necessary for trustees to act as the initial checkpoint to prevent any violations. Balancing the need for accountability with a fair and comprehensive evaluation of trustees’ contributions is crucial in maintaining the integrity of the AIF sector.