SEBI mandates benchmarking of AIFs

In a step towards making Alternative Investment Funds (AIFs) more transparent, the Securities and Exchange Board of India has made it mandatory for AIFs to report performance against appropriate benckmarks. The benchmarks shall be specified by benchmarking agencies which will in turn be appointed by an industry association that has at least 51% of AIFs as its members. An example of a benchmark is an index like the Nifty 50. Thus an instance of benchmarking could be a comparison of an AIF with the Nifty.

The SEBI rule will apply to all benchmarks including venture capital funds. However angel funds will be exempt from this requirement. Angel funds typically provide seed funding to new ventures and start-ups. These benchmarks must be mentioned in all marketing material put out by the AIF where performance is mentioned. The report of the benchmarking agency should also be attached while reporting performance to existing investors. AIFs which have completed 1 year since ‘first close’, should report scheme-wise valuation data and cashflows to the benchmarking agency, according to SEBI. First close is the completion of the first instance of fund raising by an AIF. An AIF can start deploying the money it has raised after the first close, even if it subsequently raises more money.

“AIFs are a product for High Networth Individuals (HNIs) only and that remains the case. However the SEBI move has made the product a little more transaparent,” said Amol Joshi, founder, Plan Rupee Investment Advisors. “Some have argued that benchmarks are restrictive as happened with mutual funds but I believe their transparency benefits outweigh such concerns,” he said. AIFs have a minimum investment threshold of ₹1 crore.

The SEBI notification laid out a deadline of 1st July 2020 for the first industry benchmark. This would be for the performance up to September 30, 2019.