NISM Series XIX-A · Unit 9 of 13 · about 10% of the paper
Legal documents and negotiations: investor perspective: NISM Series XIX-A notes and practice questions
What documents govern an AIF investment and which clauses protect investors.
What to know in Unit 9
- PPM, subscription and contribution agreements.
- Trust deed and IMA.
- Side letters and key clauses.
Key terms, examples and exam traps
Private placement memorandum
The PPM is the principal disclosure document describing the fund's strategy, terms, fees, risks and governance.
Example. A prospective investor reads the PPM before signing.
Exam trap. This statement is false: The PPM is signed by the investor as a contract.
Contribution agreement
The contribution (or subscription) agreement is the contract in which the investor commits capital to the fund on set terms.
Example. An investor signs to commit ₹3 crore under the fund's terms.
Exam trap. This statement is false: A contribution agreement is a loan agreement.
Trust deed
The trust deed sets up the fund as a trust, defining the roles of trustee, sponsor and manager, and the rights of beneficiaries.
Example. A legal document creates the trust and sets its rules.
Exam trap. This statement is false: The trust deed is a marketing brochure.
Investment management agreement
The IMA appoints the manager and sets its duties, authority, fees and standards of care.
Example. A contract between the trustee and the investment manager.
Exam trap. This statement is false: The IMA is an agreement among investors only.
Side letter
A side letter gives an individual investor special rights or terms, such as reporting or fee discounts, separate from the main documents.
Example. A large investor negotiates a lower fee in a separate letter.
Exam trap. This statement is false: A side letter changes terms for all investors.
Most-favoured-nation clause
An MFN clause lets an investor elect the better terms granted to other investors in comparable side letters.
Example. An investor opts for a lower fee granted to another investor.
Exam trap. This statement is false: An MFN clause gives the manager the best terms.
Default provisions
If an investor fails to meet a capital call, the fund can impose penalties, such as forfeiting part of the interest or reducing its holding.
Example. A defaulting investor loses part of its stake.
Exam trap. This statement is false: Missing a capital call has no consequences.
No-fault removal
A no-fault removal clause lets investors remove the manager by a supermajority vote without proving misconduct.
Example. Investors vote to replace the manager though no wrongdoing is alleged.
Exam trap. This statement is false: The manager can be removed only for fraud.
Indemnification
Indemnification clauses protect the manager from liability for acts in good faith but should exclude fraud, gross negligence and wilful default.
Example. The manager is protected unless it acts fraudulently.
Exam trap. This statement is false: The manager is indemnified for fraud.
Distribution provisions
These set how and when proceeds are distributed, including the waterfall, reinvestment rights and in-specie distributions.
Example. The fund pays investors in cash or in shares as per terms.
Exam trap. This statement is false: Distributions are at the manager's whim.
Term and extension
The term clause states the fund's life and the conditions under which it can be extended, normally needing investor approval.
Example. A fund can extend by two years with the vote of investors.
Exam trap. This statement is false: The manager may extend the term at any time.
Investor transfer rights
The documents set conditions for transferring units, usually needing manager consent, as the fund is illiquid.
Example. An investor needs approval to sell her units.
Exam trap. This statement is false: Units can be freely traded on exchanges.
Negotiating priorities
Investors, especially large ones, negotiate on fees, governance rights, reporting, key-person triggers and transfer terms.
Example. An anchor investor seeks a seat on the advisory committee.
Exam trap. This statement is false: Investor terms cannot be negotiated.
Governing law and disputes
The documents specify governing law, jurisdiction and dispute resolution, often through arbitration.
Example. Disputes go to arbitration in India as per the agreement.
Exam trap. This statement is false: Documents are silent on disputes.
Disclosures of risk factors
The PPM must list material risks; investors should read them and not rely on verbal assurances.
Example. An investor relies on the written risk factors.
Exam trap. This statement is false: Verbal assurances override written documents.
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 term is described here? An MFN clause lets an investor elect the better terms granted to other investors in comparable side letters.
- Strategy fit
- Minimum investment
- Most-favoured-nation clause
- Ongoing manager review
Q2. Which term is described here? These set how and when proceeds are distributed, including the waterfall, reinvestment rights and in-specie distributions.
- Hurdle rate
- Portfolio concentration review
- Leverage risk
- Distribution provisions
Q3. Which term is described here? Investors, especially large ones, negotiate on fees, governance rights, reporting, key-person triggers and transfer terms.
- In-specie distribution
- Negotiating priorities
- Fund due diligence
- Ongoing manager review
Q4. Which statement best describes “Indemnification”?
- Indemnification clauses protect the manager from liability for acts in good faith but should exclude fraud, gross negligence and wilful default.
- The returns of a private fund rely on exits via IPO, sale or buyback, which depend on market conditions and may be delayed.
- Distributors should document the due diligence and reasons for recommending a fund, to evidence suitability.
- Returns depend on the skill and continuity of the manager's team; the departure of key people can damage a fund.
Q5. Which term is described here? The PPM is the principal disclosure document describing the fund's strategy, terms, fees, risks and governance.
- Private placement memorandum
- Indemnification
- TDS on distributions
- Business income of AIF
Q6. Which term is described here? The trust deed sets up the fund as a trust, defining the roles of trustee, sponsor and manager, and the rights of beneficiaries.
- No-fault removal
- Trust deed
- Red flags
- Category II AIF
Frequently asked questions
How much of NISM Series XIX-A comes from Unit 9?
Unit 9 (Legal documents and negotiations: investor perspective) 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 9?
PPM, subscription and contribution agreements. Trust deed and IMA. Side letters and key clauses.
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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