NISM Series XIX-A · Chapter 10: Fund Monitoring, Reporting and Exit

L1 · Foundation

Foundation — Monitoring the fund and the regulatory reporting framework

Why monitoring matters after the money is committed, Regulation 20(1), the nine transparency and disclosure obligations of Regulation 22, record maintenance under Regulation 27, the Annual and Quarterly Activity Reports, and the limits of monitoring.

20 min read · Worth 5% of the paper · Written from pages 208–220 of the official NISM workbook · Updated 18 September 2026

10.1 Why monitoring does not stop at commitment

Considering the basic nature of alternative investments (long-term and illiquid), investors may assume that there is little to be done during the fund cycle once the due diligence process has been completed and the commitment to the fund has been made. This is far from the truth.

Ongoing fund monitoring throughout its life cycle is a necessary control mechanism. While investment managers perform their duty of maximising returns at fund level by regularly making, monitoring, nurturing and exiting underlying investments, it is necessary for them to report the fund performance on an on-going basis to investors. On their part investors have to go through the performance reports regularly and ensure that their interests are being served taking corrective action wherever necessary through regular engagement with the managers and the fund governance mechanism.

Note that the duty runs both ways. The manager must report; the investors must go through the performance reports regularly and take corrective action wherever necessary. A report nobody reads protects nobody.

This chapter carries 5 marks, but it contains a large number of precise timelines and thresholds. Read it as a list of numbers.

10.2 Regulation 20(1) — the general duty

Under Regulation 20(1) of the AIF Regulations, there is a general responsibility that the AIF shall review policies and procedures, and their implementation, on a regular basis, or as a result of business developments, to ensure their continued appropriateness. This would mean that investment managers as well as investors need to engage on a regular basis to monitor the fund's policies and performance.

Two triggers for review: on a regular basis, or as a result of business developments. The standard is continued appropriateness — a policy that was right at launch may not be right in year five.

10.2.1 Regulation 22 — transparency and periodic disclosure

Under Regulation 22 of the AIF Regulations, all AIFs shall ensure transparency and disclosure of information to investors on the following:

(a) financial, risk management, operational, portfolio, and transactional information regarding fund investments shall be disclosed periodically to the investors.

Five kinds of information: financial, risk management, operational, portfolio, and transactional.

(b) any fees ascribed to the Manager or Sponsor; and any fees charged to the AIF or any investee company by an associate of the Manager or Sponsor shall be disclosed periodically to the investors.

Read (b) carefully. It covers two separate things: fees to the manager or sponsor, and fees charged by an associate of the manager or sponsor to the AIF or any investee company. The second is where the real mischief lives — a manager's affiliate consulting firm billing a portfolio company is exactly the conflict Chapter 8 warned about under competing or outside interests.

(c) any inquiries/legal actions by legal or regulatory bodies in any jurisdiction, as and when occurred.

(d) any material liability arising during the AIF's tenure shall be disclosed, as and when occurred.

(e) any breach of a provision of the placement memorandum or agreement made with the investor or any other fund documents, if any, as and when occurred.

Items (c), (d) and (e) all carry the same timing standard — as and when occurred, not at the next quarterly report.

(f) change in control of the Sponsor or Manager or Investee Company.

This one produces sample question 4, so read it precisely. It is a change in control — not any change in a board of directors, not a change of a single director. Control is a much higher threshold.

(g) AIF shall provide at least on an annual basis, within 180 days from the year end, reports to investors including the following information:

A. Financial information of investee companies.

B. Material risks and how they are managed which may include:

Risk	Level at which it is reported
concentration risk	at fund level
foreign exchange risk	at fund level
leverage risk	at fund and investee company levels
realisation risk (i.e. change in exit environment)	at fund and investee company levels
strategy risk (i.e. change in or divergence from business strategy)	at investee company level
reputation risk	at investee company level
extra financial risks, including environmental, social and corporate governance risks	at fund and investee company level

That table is worth memorising as it stands, because the exam can ask at which level a particular risk is reported. Note the pattern: concentration and foreign exchange are fund-level only; strategy and reputation are investee-company-level only; leverage, realisation and ESG risks are at both.

Note also the parenthetical definitions the workbook supplies: realisation risk is change in exit environment, and strategy risk is change in or divergence from business strategy.

(h) any significant change in the key investment team shall be intimated to all investors.

This connects directly to the key man clause of Chapter 8.

(i) AIFs shall provide, when required by SEBI, information for systemic risk purposes (including the identification, analysis and mitigation of systemic risks).

Systemic risk is defined in a footnote: business practices that may lead to a wider financial risk for an AIF much beyond a particular investment risk. For e.g. if an AIF is heavily invested in a particular sector and there are sectoral issues, a larger part of the AIF portfolio may face a risk of erosion in value.

The 180-day figure in (g) is the most examinable number in this section — it is the answer to sample question 1, and it matches the Investor Charter timeline you met in Chapter 9: Category I and II – within 180 days from the year end or earlier as per the fund documents.

10.2.2 Regulation 27 — records to be maintained

Under Regulation 27 of the AIF Regulations, the Manager or Sponsor shall maintain the following records:

the assets under the scheme/fund
valuation policies and practices
investment strategies
particulars of investors and their contribution
rationale for investments made

All the above records are required to be maintained for a period of five years after the winding up of the fund.

Two things to fix. First, the fifth item — rationale for investments made — is the one candidates forget, and it is the one that matters most in a dispute. It is the documentary counterpart of the manager's Code of Conduct duty from Chapter 4 to record in writing, the investment, divestment and other key decisions, together with appropriate justification for such decisions.

Second, the retention period runs five years AFTER the winding up of the fund — not five years from creation. For an eight-year fund, that is thirteen years of records.

Notice what is not on the list: material contracts of investee companies, RBI monetary policy, or an effective rate of return. That is sample question 2.

10.2.3 Regulation 28 — reporting to SEBI

Regulation 28 states that SEBI may at any time call upon the AIF to file such reports, as it may desire, with respect to the activities carried on by the AIF.

The two standing reports:

AIFs will submit a comprehensive Annual Activity Report at the end of March of each financial year. The Annual Activity Report shall be submitted by all AIFs online through the SEBI Intermediary Portal (SI Portal) within 30 calendar days from the end of March of every financial year.

A limited Quarterly Activity Report shall be submitted by all AIFs online on the SI Portal in a revised format within 15 calendar days from the end of each such quarter.

No separate submission of Quarterly Activity Report will be required for quarter ending March of every year as the Annual Activity Report includes the data points of the Quarterly Activity Report.

Report	Frequency	Deadline	Portal
Annual Activity Report (comprehensive)	Annual, at end of March	30 calendar days from end of March	SI Portal
Quarterly Activity Report (limited)	Quarterly	15 calendar days from quarter end	SI Portal

And the sensible carve-out: no separate Quarterly Activity Report for the March quarter, because the annual report already contains those data points.

This answers sample question 3 — reporting to SEBI is on an annual and quarterly basis.

And the PPM changes intimation, which you met in Chapters 4 and 9:

In addition to the above report, all AIFs are required to intimate SEBI and investors about any changes in terms of PPM and other fund documents. These changes are to be reported on a consolidated manner within 1 month of the end of each financial year.

10.3 What monitoring is — and what it is not

Fund monitoring should be seen as part of a larger control system within the investment process. Investors need to keep their involvement active during fund cycle so as to steer the course of fund management by the manager in their best interests. The information asymmetry and moral hazard related problems can be lessened through effective monitoring.

But the investor's power is limited:

Because of the illiquidity of an AIF, the investor's ability to react to different situations is somewhat limited. In complex problems, a solution will require finding a consensus with the fund manager and the other co-investors, or building alliances with co-investors to exercise pressure and act jointly.

Now comes a conclusion that reaches back into Chapter 8 and is easy to miss:

This explains why fund due diligence by investors should focus not only on the fund manager but also on the co-investors.

Think about why that follows. If your only remedy when things go wrong is to build alliances with co-investors to exercise pressure and act jointly, then who your co-investors are matters enormously. A fund full of passive, disengaged investors leaves you alone. A fund with two large sophisticated institutions gives you allies.

The other benefits: In the context of a co-investment strategy, monitoring is important for screening interesting investment opportunities that may arise. Lessons learned from monitoring can also be applied in the future to improve the due diligence process and the selection of future investments.

And the two channels: So focus should be both on acting on standardised formal reporting information received from the fund as well as on informal interactions with the fund managers, co-investors and board of directors of the fund.

Formal reporting AND informal interaction. The formal reports come twice a year; the informal channel runs continuously.

The cost, and the two failure modes

Generally speaking, investing in and monitoring AIF investments involve more effort and higher costs relative to on-market investment funds. Therefore, fund monitoring and intervention needs to be channelled effectively to realise the benefits appropriately.

While monitoring is necessary, excessive monitoring can be counter-productive. AIF investors need to be patient and understanding especially during the early years of a fund's lifetime. By the same logic, investors' reaction should not be typically too little, too late, when things need to be addressed urgently to prevent further deterioration of the fund's outcome.

Two opposite errors, both named:

Excessive monitoring — pestering a manager in the early years, when Chapter 6's J curve guarantees the numbers will look bad no matter how well he is doing.
Too little, too late — waking up only when the damage is done.

The workbook asks for judgment between them: patient and understanding especially during the early years, but capable of acting when things need to be addressed urgently.

Monitoring is not management

Fund monitoring is an integral part of ensuring compliance with fund objectives, the terms of the contribution agreement and for gathering information. Fund monitoring should not be confused with fund management, an activity in which, in accordance with the contribution agreement, the investors have no involvement.

Fund monitoring is an oversight process on overall asset allocation, portfolio composition, fund governance and performance. Investors have to also keep track of internal and external risk factors that may have a bearing on the AIF's working and outcome.

Investors have no involvement in fund management. That is a contractual position, not merely a convention — it comes in accordance with the contribution agreement. An investor who tries to direct which company the fund should buy has stepped outside monitoring altogether.

Since investors cannot withdraw from an AIF easily and without adverse outcome, through effective monitoring activities, they may be able to identify and reduce downside risks in time either through a restructuring or by selling the position on the secondary market.

Two remedies where monitoring reveals a problem: restructuring or selling the position on the secondary market — the secondaries you will meet in section 10.7.

Style drift — and the honest caveat

This is especially applicable in the context of a style drift in the investment strategy of the fund. Because of the blind-pool nature of AIF investing, it is crucial for investors to set the risk profile of their investment at the time of commitment. Moreover, given AIF's lack of liquidity, the investor cannot easily adjust portfolio holdings or rebalance them if the manager undertakes actions that are inconsistent with fund documentation.

That said, there are risks associated with adhering too closely to a declared investment strategy, especially when market conditions change significantly, creating new opportunities. Investors need to keep this aspect in mind as well.

That final sentence is unusually candid for a regulatory workbook and it is worth remembering. Rigidity is also a risk. A manager who refuses a genuinely attractive adjacent opportunity because the PPM did not anticipate it may be protecting the letter of the document at the cost of the investors' money. The Regulations provide the proper route — any material alteration to the fund strategy shall be made with the consent of at least two-thirds of unit holders by value — rather than either drift or paralysis.

Think of it like this

The parent who checks the report card but does not sit in the classroom

A parent who has admitted a child to a good school does not stop paying attention. She reads the report card, meets the teacher twice a year, notices if the child stops talking about maths. What she does not do is walk into the classroom and take over the lesson.

That is exactly the line the workbook draws: Fund monitoring should not be confused with fund management, an activity in which, in accordance with the contribution agreement, the investors have no involvement. Fund monitoring is an oversight process on overall asset allocation, portfolio composition, fund governance and performance.

And the parent has two channels, just as the investor does — the formal report card, and the corridor conversation: focus should be both on acting on standardised formal reporting information received from the fund as well as on informal interactions with the fund managers, co-investors and board of directors of the fund.

Judging a mango tree in its second year

Stand in front of a three-year-old mango sapling and demand fruit and you will only irritate the gardener. The tree is doing exactly what a tree does at three. Come back at year seven and ask the same question, and it is a fair one.

That is why the workbook counsels both patience and vigilance in the same breath: While monitoring is necessary, excessive monitoring can be counter-productive. AIF investors need to be patient and understanding especially during the early years of a fund's lifetime. By the same logic, investors' reaction should not be typically too little, too late, when things need to be addressed urgently.

The J curve of Chapter 6 is the reason. In the Alpha Fund case the year-on-year IRRs ran −28.57%, −30.57%, −19.72%, −10.13% before turning positive. Panicking at year two would have been panicking at arithmetic.

The flat owner who cannot sell — so he needs neighbours who will complain with him

If you own a flat in a badly run society and can sell tomorrow, the neighbours hardly matter. If you cannot sell — no buyers, no market — then your only real power is to persuade five other owners to attend the general body meeting and vote with you.

That is precisely the AIF investor's position: Because of the illiquidity of an AIF, the investor's ability to react to different situations is somewhat limited. In complex problems, a solution will require finding a consensus with the fund manager and the other co-investors, or building alliances with co-investors to exercise pressure and act jointly.

And that leads to a conclusion most candidates miss, reaching back into Chapter 8: This explains why fund due diligence by investors should focus not only on the fund manager but also on the co-investors. You are not just choosing a manager. You are choosing the people you will have to organise with when something goes wrong.

Selling the shop when the lease has run out, not when the price is best

A shopkeeper whose lease expires next March must vacate in March. He may believe the locality will boom in two years, and he may be right — but the lease does not care what he believes.

A close-ended fund is in the same position: The AIFs need to sell out even if they see further appreciation in value if they are in the winding down phase of the scheme/fund.

There are only three ways to buy time, and each has a price. fund life may be extended for up to 2 years subject to approval by two-thirds of the investors by value. Or, with approval of at least 75 percent of the investors by value... AIF may launch a liquidation scheme... or choose in-specie distribution of the unliquidated investments... or enter into dissolution period. Note that the last group requires the higher 75 per cent threshold, not two-thirds — and that no AIFs shall launch any new Liquidation Schemes post April 25, 2024.

Selling the shop to the landlord versus selling it to the chain store

Sell your grocery shop to another shopkeeper and you get a fair price for a going concern. Sell it to a supermarket chain that wants this exact corner to complete its cluster of stores, and you may get considerably more — because the corner is worth more to them than it is to anybody else.

That is the difference between a secondary sale and a strategic sale. In a trade sale, it is customary to find a VC fund being taken over by a later stage PE fund or an earlier PE being taken over by a later PE investor — a financial buyer paying a financial price.

In a strategic sale, the buyer is a corporate buyer either in the same industry (as a competitor) as that of the portfolio company, or a larger company looking for an entry into that industry, and M&A exits could provide substantial strategic premium to the sellers.

Which is why This exit is usually the second most preferred exit option after the IPO exit option.

The promise from a friend who has no money

A friend borrows from you and promises that if all else fails, he will personally buy back your share. It is a comforting sentence. Whether it is worth anything depends entirely on whether he will have the cash on the day.

That is the honest position of a promoter buy-back. The AIF exercises a put option — a contractual right... the buyer of a security shall have the right (but not the obligation) to sell the security back to the seller. But: Buyback by promoters warrants huge personal/affiliate resources of the promoters to be used in the process. In many AIF backed companies, promoters are not resourceful enough for honouring a put option on them.

The picture gets harder still. AIFs usually stipulate a stiff put option exit price for a buyback to compensate for their loss of an IPO exit opportunity — so the promoter must find an even larger sum. And promoters push back: The promoters may stipulate that the 'put' shall be a residual option not exercisable unless the company does not go public within an agreed time frame.

Hence the verdict: It is usually used as a last resort in a going concern context.

Key terms in this chapter

75 Per Cent Approval Escape: The dissenting-investor exit process does not apply where the AIF has obtained the approval of not less than 75 per cent of unit holders by value of their investment in the AIF.
Annual Activity Report: The comprehensive report every AIF submits online on the SEBI Intermediary Portal within 30 calendar days from the end of March of each financial year. It subsumes the data points of the March quarter's Quarterly Activity Report.
Corporate or Promoter Buy-back: Exit by exercising a put option against the company or the promoters. Promoters often lack the resources to honour it, put prices are set stiffly by formula to compensate for a lost IPO, and it is usually used as a last resort in a going concern context.
Dissenting Investor Exit Process: On a material change to a close-ended AIF, dissenting unit holders get at least one month to express dissent, their units are bought out by the manager or a person arranged by him at a price not less than the average of two independent valuations, the cost is borne by the manager or sponsor and not the unit holders, and the process completes within three months of the dissent window closing.
Dissolution Period: The period following expiry of a scheme's liquidation period, entered only with investor consent, for liquidating what remains. Before seeking consent the AIF must disclose the proposed tenure, details of unliquidated investments and a valuation by two independent valuers. Nothing sold by its expiry is mandatorily distributed in specie, and no further extension follows.
Fund Monitoring: An oversight process on overall asset allocation, portfolio composition, fund governance and performance, ensuring compliance with fund objectives and the contribution agreement. It is not fund management, in which investors have no involvement.
GIPS, ILPA, IPEV and EVCA: The four international reporting and valuation reference points named in the workbook — Global Investment Performance Standards by the CFA Institute, the Institutional Limited Partners Association, the International Private Equity and Venture Capital Valuation Board, and the European Private Equity and Venture Capital Association.
In-specie Distribution: Distribution of the fund's assets themselves rather than cash. It is permitted at any time during the life cycle or at winding up subject to the fund documents, needs 75 per cent approval by value for unsold investments during liquidation, and becomes mandatory for anything still unsold when the dissolution period expires.
Liquidation Preference Variants: The invested amount plus accumulated dividends ahead of other shareholders; a multiple such as 1.5x or 2x before any surplus is distributed; or a right to participate in the surplus after taking out the investment. Some AIFs instead protect themselves by investing as venture debt, which ranks above equity.
Liquidation Scheme: A close-ended scheme launched only to liquidate unliquidated investments of an existing scheme whose tenure has expired, carrying those words in its name. Its tenure is fixed at PPM filing and cannot be extended, and it accepts no fresh commitment and makes no new investment. No new liquidation schemes may be launched after 25 April 2024.
Material Change (Fundamental Attributes): A change significantly influencing an investor's decision to continue in the AIF, construed as a change in the fund's fundamental attributes — including but not limited to a change in sponsor or manager other than internal group restructuring, a change in their control, or a fee or hurdle change resulting in higher fees to unit holders.
Offer for Sale through IPO: The most preferred and attractive exit for an equity-oriented AIF, historically yielding the best returns. The fund sells its holding at the IPO offer price, and where its cycle allows, may take a partial exit and complete it gradually in the secondary market after listing.
Put Option: A contractual right, available by the specific terms of an investment agreement, under which the holder has the right but not the obligation to sell the security back to the seller as agreed.
Quarterly Activity Report: The limited report submitted on the SI Portal within 15 calendar days from the end of each quarter. No separate submission is needed for the quarter ending March.
Realisation Risk: The risk arising from a change in the exit environment, reported at both fund and investee company levels in the annual report to investors.
Regulation 20(1) Review Duty: The general responsibility that an AIF shall review its policies and procedures, and their implementation, on a regular basis or as a result of business developments, to ensure their continued appropriateness.
Regulation 22 Transparency Obligations: Nine disclosure duties covering periodic financial, risk management, operational, portfolio and transactional information; fees to the manager or sponsor and fees charged by their associates; inquiries and legal actions; material liabilities; breaches of fund documents; change in control; the annual 180-day report; key investment team changes; and systemic risk information for SEBI.
Regulation 27 Records: Five records the manager or sponsor must keep — the assets under the scheme, valuation policies and practices, investment strategies, particulars of investors and their contribution, and the rationale for investments made — retained for five years after the winding up of the fund.
Secondaries: The sale of existing unit capital or partnership interests by an investor to co-investors or outside investors. Outstanding commitments usually transfer with the units, the contribution agreement and consents must be checked, and transactions occur at negotiated prices often at a substantial discount to NAV.
Secondary Sale (Trade Sale): Exit through a stake sale to a third party, customarily a later-stage fund taking over an earlier-stage fund's position. It is used when an IPO is not feasible due to adverse market conditions and the fund's investment horizon is complete.
Strategic Sale (M&A Exit): Sale to a corporate buyer in the same industry or one entering it. Because such buyers pay a strategic premium depending on the stake sold and the company's standing, this is usually the second most preferred exit after an IPO.
Strategy Risk: The risk of a change in, or divergence from, business strategy — reported at investee company level only.
Style Drift: A departure by the manager from the declared investment strategy. Because of the blind-pool nature of AIF investing and the lack of liquidity, investors cannot easily rebalance if the manager acts inconsistently with fund documentation — though the workbook cautions that adhering too closely to a declared strategy carries its own risk.
Systemic Risk: Business practices that may lead to a wider financial risk for an AIF much beyond a particular investment risk — for instance heavy concentration in one sector, so that sectoral trouble erodes a large part of the portfolio.
Vintage Funds and Mature Funds: Vintage funds are those that have completed their investments; mature funds are closer to harvesting the portfolio and completing the fund cycle. For both, exit prospects and execution become very important reporting disclosures.
Winding Up Grounds (Regulation 29): Four circumstances — the tenure of the AIF or all its schemes is over; the trustees are of the opinion that winding up is in the interests of investors; 75 per cent of investors by value pass a resolution; or SEBI so directs in the interests of investors. From the date of intimation, no further investments may be made.

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Original explanatory writing based on the official NISM workbook for Series XIX-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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