NISM Series XIX-A · Unit 4 of 13 · about 10% of the paper
Regulatory framework: Indian context: NISM Series XIX-A notes and practice questions
The SEBI (Alternative Investment Funds) Regulations, 2012 and what they require of funds, sponsors, managers and distributors.
What to know in Unit 4
- Registration and categories.
- Investment conditions.
- Sponsor commitment and tenure.
- Obligations of distributors.
Key terms, examples and exam traps
SEBI AIF Regulations 2012
These regulations govern registration, investment conditions, disclosure and operation of AIFs in India.
Example. The rules under which the fund must register and operate.
Exam trap. This statement is false: AIFs are outside SEBI's regulation.
Registration
An AIF must be registered with SEBI under one of the three categories before it raises funds.
Example. A fund obtains a certificate before collecting commitments.
Exam trap. This statement is false: An AIF can start raising money before registration.
Private placement memorandum
The PPM is the offer document of an AIF, filed with SEBI through a merchant banker, describing strategy, fees, risks and terms.
Example. An investor reads the document before committing to the fund.
Exam trap. This statement is false: The PPM is not required for AIFs.
Sponsor and manager commitment
Sponsor or manager must invest in the fund as 'skin in the game': 2.5% of the corpus or ₹5 crore, whichever is lower, for Category I and II.
Example. The sponsor puts its own money in the fund.
Exam trap. This statement is false: Sponsors need not invest in the AIF.
Tenure of Category I and II
Category I and II AIFs must be closed-ended with a minimum tenure of three years, and extension is allowed with investor consent.
Example. A PE fund has a ten-year life with a possible extension.
Exam trap. This statement is false: A Category II fund can be open-ended.
Concentration limit
Category I and II AIFs may not invest more than 25% of investable funds in one investee company.
Example. A fund limits any single investee to a quarter of its funds.
Exam trap. This statement is false: A Category II AIF may invest all funds in one company.
Leverage limits
Category I and II AIFs cannot borrow except for short-term needs, within strict limits, while Category III may use leverage up to a stated limit.
Example. A Category II fund cannot use borrowing to magnify returns.
Exam trap. This statement is false: Category II AIFs may leverage up to 5 times.
Investments in associates
Investments in associates and the manager's related parties need to be disclosed and approved by investors as per the regulations.
Example. A fund invests in a related company only with proper approval.
Exam trap. This statement is false: Related-party investments need no disclosure.
Custodian
AIFs are required to appoint a custodian to safekeep their securities, as mandated by SEBI.
Example. An independent custodian holds the fund's assets.
Exam trap. This statement is false: AIFs hold securities with no custodian.
Benchmarking and reporting
AIFs must report performance to benchmarking agencies recognised by SEBI, supporting comparability and transparency.
Example. A fund's performance is reported to an independent benchmarking provider.
Exam trap. This statement is false: AIFs never report performance.
Distributor requirements
Distributors of AIFs must hold the NISM XIX-A certification and follow the code of conduct, including disclosure and suitability.
Example. A distributor with a valid certificate offers a Category II fund.
Exam trap. This statement is false: Any person may distribute AIFs without certification.
Direct plan
AIFs must provide an option for investors to invest directly, without a distributor, and distribution commissions should be transparent.
Example. An investor chooses to invest without paying a distributor.
Exam trap. This statement is false: AIFs may not be bought directly.
No public offering
AIFs cannot raise money through a public offer; they raise capital only by private placement.
Example. A fund cannot advertise a public offer.
Exam trap. This statement is false: An AIF may issue an IPO for its units.
Disclosure and investor reporting
Managers must give investors periodic reports, including audited financials and NAV, within timelines set by SEBI.
Example. A fund sends quarterly updates and an annual audit.
Exam trap. This statement is false: Managers need not report to investors.
Winding up
On the end of tenure, the fund must liquidate or distribute assets in specie, with approvals as required.
Example. At term end, assets are sold or handed to investors.
Exam trap. This statement is false: A fund continues forever after the tenure ends.
Penalties
SEBI can penalise AIFs, managers and distributors for violations, including by suspension or cancellation.
Example. A distributor is penalised for mis-selling an AIF.
Exam trap. This statement is false: SEBI has no power over AIF distributors.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Direct plan”?
- AIFs must provide an option for investors to invest directly, without a distributor, and distribution commissions should be transparent.
- Category II AIFs, such as private equity and debt funds, do not undertake leverage except for day-to-day operational needs and are not given specific incentives.
- Distributors of AIFs must hold the NISM XIX-A certification and follow the code of conduct, including disclosure and suitability.
- Funds set up in GIFT City's IFSC can pool money in foreign currency and are governed by a separate regulatory framework.
Q2. Which term is described here? AIFs cannot raise money through a public offer; they raise capital only by private placement.
- Disclosure and investor reporting
- IPEV guidelines
- Operational due diligence
- No public offering
Q3. Which statement best describes “Sponsor and manager commitment”?
- Distributors should document the due diligence and reasons for recommending a fund, to evidence suitability.
- Attribution separates returns due to skill from those due to market conditions, leverage or one lucky investment.
- Sponsor or manager must invest in the fund as 'skin in the game': 2.5% of the corpus or ₹5 crore, whichever is lower, for Category I and II.
- A catch-up lets the manager receive a larger share of distributions after the hurdle until it has received its full carry percentage of total profits.
Q4. Which term is described here? Distributors of AIFs must hold the NISM XIX-A certification and follow the code of conduct, including disclosure and suitability.
- Sponsor
- Contribution agreement
- Distributor requirements
- Liquidity risk in AIFs
Q5. Which statement best describes “Investments in associates”?
- Investments in associates and the manager's related parties need to be disclosed and approved by investors as per the regulations.
- Managers should allocate opportunities fairly across funds and co-investors according to policy.
- The trust deed sets up the fund as a trust, defining the roles of trustee, sponsor and manager, and the rights of beneficiaries.
- Category I and II AIFs may not invest more than 25% of investable funds in one investee company.
Q6. Which term is described here? AIFs must report performance to benchmarking agencies recognised by SEBI, supporting comparability and transparency.
- Benchmarking and reporting
- Sponsor
- Commission disclosure
- Governing law and disputes
Frequently asked questions
How much of NISM Series XIX-A comes from Unit 4?
Unit 4 (Regulatory framework: Indian context) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XIX-A Unit 4?
Registration and categories. Investment conditions. Sponsor commitment and tenure. Obligations of distributors.
Are these NISM Series XIX-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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