NISM Series XIX-A · Chapter 13: Good Practices

L1 · Foundation

Foundation — The distributor's role, the agreement and the pitch

Why AIF distribution is different, the four pillars, the distributor agreement and its seven principal terms, and what must go into the investor presentation and the distribution kit.

19 min read · Worth 5% of the paper · Written from pages 267–278 of the official NISM workbook · Updated 18 September 2026

13.1 Why this chapter exists

The need to dwell on good practices for distributors in the AIF industry cannot be over-emphasised. India is on the cusp of an exponential growth in AIF activity and distributors form the vital link between investment managers and the investor community so as to build a robust eco-system.

Considering the fact that AIF investment community consists of large institutional and HNI investors (both domestic and offshore), distributor skills and competence levels have to match up to the expectations of these informed investors.

Notice the argument. It is not that AIF investors need protecting because they are naive — they are informed investors with Rs 1 crore minimums. It is that a distributor advising such investors must be at least as capable as they are. A retail-grade sales pitch will simply be seen through.

The AIF Regulations have created the platform for the demand side to grow significantly seeking more and better structured AIF products. With more AIFs being floated over time, the supply side is also becoming robust as more investment opportunities are emerging in the Indian start-up and later stage businesses. Category I and II AIFs are therefore looking at a very promising growth phase and the role of AIF distributor is becoming increasingly important.

13.2 The role of the AIF distributor

AIF distributors play a wider role as compared to their counterparts in other segments of financial product distributorship since AIF Category I and II products are primarily off-market, long-term, illiquid and higher risk-taking products.

Four characteristics that make the job different: off-market, long-term, illiquid, higher risk-taking. Every one of them has been in this workbook already — private placement in Chapter 4, close-ended minimum three-year tenure in Chapter 4, illiquidity as the second investor risk factor in Chapter 6, and unsystematic risk in Chapter 6.

Distributors should not only understand these products better and match them to investor profiles but provide better relationship support as well.

The four pillars

Therefore, marketing, sales, support and relationship management form the four pillars of AIF distributorship.

Memorise those four: marketing, sales, support and relationship management.

These core functions should be actively supported with adequate research and product analysis, relationships with fund houses, investment managers, family offices and other investors.

Why the relationship is long

AIF products are close-ended and funds have a long gestation to close. So long term engagement with investment managers and investors is very important. It also helps in generating more investment opportunities from follow-on funds and even facilitating side-letters for discerning clients. Over time, expert skills in distribution of products based on specific requirements of client can be developed.

Read that carefully — it is the commercial logic of the whole profession. A mutual fund distributor's transaction is complete in a day. An AIF distributor's client will be drawing down capital for two years, holding for eight, and — if the manager performs — committing to a follow-on fund. The relationship is the asset. And notice the reference to facilitating side-letters for discerning clients, which connects to Chapter 9's caution that side letters make the job of an Advisor difficult.

13.3 The distributor agreement

The distributor agreement forms the contractual basis for distributorship of AIF products. The distributor acts as a service provider for the AIF for marketing its schemes to prospective investors.

Note the characterisation — the distributor is a service provider FOR the AIF. He is paid by the fund, not by the investor, which is precisely why the conflict-of-interest rules later in the chapter matter so much.

It is either executed as a bipartite agreement between the Fund and the Distributor or in some cases as a tripartite agreement between the Fund, Investment Management Company and the Distributor.

Bipartite: Fund + Distributor. Tripartite: Fund + Investment Management Company + Distributor.

The commercial arrangement between the fund and the distributor is based on marketing commissions.

The seven principal terms

The principal terms of the distributor agreement would comprise of the following:

Roles and Responsibilities of the parties to the agreement.
Rights and Obligations.
Indemnity clause.
Considerations/Commissions.
Distribution of Commissions.
Penal actions in case of non-fulfilment of performance clause.
Arbitration.

Note that Considerations/Commissions and Distribution of Commissions are listed separately — the first is what the distributor earns, the second is how it is shared or paid out over time. And note item 6: there is a performance clause, with penal actions for non-fulfilment.

Since AIF distributorship is captured not just by the general principles under the Indian Contract Act, 1872 but is also regulated by the distributorship agreement, the performance of distributor duties and responsibilities is to be structured carefully and executed well to prevent penalties, arbitration and legal implications.

Two sources of obligation: the Indian Contract Act, 1872 and the distributorship agreement itself.

13.4 The distribution pitch

A good AIF sales pitch must consist of marketing literature including a well-formulated and compelling Investor Presentation that analyses the fund/scheme being marketed in all areas that affect investor interests, highlights the features, commercial terms and risks of the scheme and provides guidance on how the particular scheme is a good fit for the investor.

And where it comes from: The investor presentation should be prepared after a complete analysis of the PPM issued by the Investment Manager, in particular the key disclosures in the PPM.

This is the practical application of Chapter 9. Everything the distributor says must be traceable to the PPM — the fifteen-section document filed through a SEBI registered Merchant Banker, at least 30 days prior to launch of scheme.

What the investor presentation must contain

The key components of an investor presentation should desirably include the following information:

Distributor introduction and credentials.
History and track record of the AIF/scheme.
Details of Sponsor, Sponsor Commitment and Continuing Interest.
Particulars of the Investment Management Team and their credentials.
Current and previous performance of the Fund/Scheme.
Fund Structure, Key appointees, governance mechanisms.
Particulars of the present investment opportunity – scheme objectives, target corpus, commitments made, investment strategy, tenure, investment requirements.
Management Fees and Expenses chargeable to the Fund.
Tax treatment of product returns, key regulatory provisions affecting the product.
Key risk factors – these should be extracted from the detailed disclosures provided in the PPM.
Investor eligibility requirements.
Investment Process Flow.
Capital Commitment, drawdown, investment period, first close/final close.
Additional returns, if any; catch up, if any.
Co-investment, MFN terms, if any.
Hurdle rate fund distributions as envisaged from the AIF.
Fund Reporting system envisaged.
Distributor Product Analysis and Recommendations.
Distributor services and Sales Pitch.

Notice the shape of that list. It opens with the distributor's own credentials — the investor is choosing an adviser as well as a fund — and closes with Distributor Product Analysis and Recommendations and the Sales Pitch. Everything between those two bookends is the fund, drawn from the PPM. The pitch comes after the analysis, not before it.

Notice too what is not on the list: any promise of return. Chapter 8's suitability material and item 6 of the good practices both forbid it.

The distribution kit — eleven items

The distribution kit should consist of the following information:

Copies of Fund Constitution and SEBI registration documents.
Private Placement Memorandum issued by the AIF/Investment Manager.
Distributor's Investor Presentation.
Key Disclosure Statement extracted from the PPM.
KYC documentation requirements and Forms for different constitutional requirements of investors.
Note on FATCA requirements, where applicable.
Expert opinions, if any.
Key timelines.
Essential approvals, if any, required for the investment.
FAQs on the scheme, AIF, Investment Manager, investment process, investor eligibility, tax and regulatory aspects, scheme evaluation, risk profiling and selection.
Co-ordinates of key officials and relationship managers from the distributor's office.

Item 5 is worth pausing on — Forms for different constitutional requirements of investors. A trust, an HUF, a partnership firm, a company and an individual each need different KYC documentation, and the distributor is expected to have all of them ready. Item 6 links to Chapter 12's FATCA obligations, where an AIF may... require prospective investors to provide any information, tax documentation and waivers including information concerning the direct or indirect owners of such investors.

And item 8, key timelines, is the answer to sample question 3.

Think of it like this

The vegetable seller and the house broker

A vegetable seller's job ends when you pay. He does not need to know what you will cook, and if the brinjal is poor you simply buy elsewhere tomorrow.

A broker who sells you a house is in a different trade entirely. He must understand your family, your loan capacity, the school your children attend and the lane's water supply — and he will hear from you for years, because you cannot simply buy another house tomorrow.

AIF distribution is the second trade. AIF distributors play a wider role as compared to their counterparts in other segments of financial product distributorship since AIF Category I and II products are primarily off-market, long-term, illiquid and higher risk-taking products. Which is why the job has four pillars — marketing, sales, support and relationship management — and why long term engagement with investment managers and investors is very important.

The doctor whose fee comes from the pharmaceutical company

Imagine a doctor who charges you nothing, and is paid instead by whichever company's medicine he prescribes. He may still be an excellent doctor. But you would want strict rules about which prescriptions he may write and what gifts he may accept.

That is the AIF distributor's position exactly. The distributor acts as a service provider for the AIF for marketing its schemes to prospective investors, and The commercial arrangement between the fund and the distributor is based on marketing commissions. The money comes from the fund; the duty runs to the investor.

Hence the rules that follow: Distributors shall keep investor's interest and suitability to their wealth management needs as paramount and never base their recommendations of a scheme to the investor on their own pecuniary interests, and a specific prohibition on Recommending inappropriate schemes solely because the AIF is offering higher distribution commissions there from.

The discount that makes you stop asking questions

A shopkeeper offers you Rs 500 off if you buy today. Suddenly you stop comparing brands. You are no longer buying the product — you are buying the discount.

That is precisely why pass-backs are forbidden. Pass-backs are an indirect incentive provided to potential investors, wherein the distributor gives back a part of the commission earned from the AIF, to the investor. This represents an inherent conflict, wherein potential investors are discouraged to take investment decisions based on the merit of the fund and investment strategy implemented by the investment manager.

The good practices repeat it, and add the sibling malpractice: Distributors shall not rebate their commissions back to investors and abstain from attracting investors through expensive gifts and other forms of gratification.

Note that the harm is not that the investor loses money — he gains, in cash. The harm is that he stops evaluating the fund on its merits.

The clinic that lets an outside agency handle patient files

A clinic outsources its records desk to a cheap agency. Within a month, patients begin receiving calls from an insurance company that somehow knows their diagnoses.

That is the risk the workbook attaches to outsourced on-boarding: Distributors should take reasonable steps to ensure that their internal staff are assisting in the documentation and KYC process, while on-boarding a new client or investor. This reduces the risk of potential fraudulent activities by third-party service providers, such as data theft, misuse of confidential data and sharing such data without seeking consent.

The good practice puts it as an outright prohibition: distributors should take reasonable steps to ensure that their own staff are assisting in the documentation and KYC process and not allow the paperwork to be outsourced or handled by a third party. And the same passage requires the firm's own people to be diligent in attesting/certifying investor documents and performing In-Person Verification (IPV) of investors.

The company that charges its office rent to the customer

A contractor building your house buys a set of tools he will use on ten future projects, and slips the bill into your material account. The tools are genuine; the cost is real; but it is not yours to bear.

That is a soft dollar arrangement: the Category I AIF/Category II AIF may use clients' money as a medium to pay for third-party research and proprietary research.

The line the workbook draws is precise. Research should be purchased with client assets, only if the primary use of such research report or service directly assists the manager in investment decision-making process and not in the management of the investment firm. Any proprietary research should be paid from the assets of the investment manager.

Research that helps pick this fund's investments may come from fund assets. Research that helps run the manager's business is the manager's own cost — Soft Dollar Arrangements can indirectly add to the cost of investment, which is indirectly borne by the investors and is a potential conflict of interest.

The shopkeeper who runs down the shop next door

A shopkeeper who spends his day telling customers that the shop across the road cheats them tells you nothing useful about his own goods. A shopkeeper who says "their model has a bigger motor, mine has a longer warranty, here are both specification sheets" has actually helped you decide.

The workbook asks for the second: Abstain from bad propaganda about competitor AIFs that the distributor is not representing. Ensure that comparisons, if any, are made with similar and comparable AIFs and schemes based on adequate information.

Two conditions on any comparison — the funds must be similar and comparable, and the comparison must rest on adequate information. That is the same discipline Chapter 8 demanded of benchmarking, where funds are grouped based on vintage years to bring in uniformity in the comparison, and Chapter 11 demanded of relative valuation, which requires comparing 'an apple to an apple'.

Key terms in this chapter

Assured Returns Prohibition: Distributors must abstain from indicating or assuring returns in AIF schemes, with the single exception of a pure debt scheme with assured returns explicitly provided for in the PPM.
Commission Driven Malpractices: Recommending inappropriate schemes solely because the AIF offers higher distribution commissions; pushing higher risk schemes and influencing inappropriate decision-making; and omitting material facts or obfuscating the decision-making process by misleading investors.
Comparison Rule for Competitor Funds: Distributors must abstain from bad propaganda about competitor AIFs they do not represent, and must ensure that any comparison is made with similar and comparable AIFs and schemes on the basis of adequate information.
Confidential Fund Data: The pitch book and data on investment strategy, investment process, target allocations, target sectors, time horizon, fund life, expected returns, fund terms and fee structure — all proprietary to the AIF and deemed owned by the fund.
Confidentiality Measures: Encryption and safeguarding of databases, non-disclosure agreements, firewalls for external access to the server, frequent backups stored at a disaster recovery site, locked paper storage, and senior management authorisation for access to confidential information.
Confidentiality Policy: The distributor's internal policy protecting fund and investor data, communicated to all teams and made binding on employees, board members, partners, directors and contracted third-party service providers, listing both compulsory and prohibited actions.
Distribution Kit: The eleven-item pack comprising fund constitution and SEBI registration documents, the PPM, the investor presentation, a key disclosure statement, KYC forms, a FATCA note, expert opinions, key timelines, essential approvals, FAQs and the distributor's contact coordinates.
Distributor Agreement: The contract making the distributor a service provider for the AIF, executed bipartite between the fund and the distributor or tripartite with the investment management company as well, remunerated through marketing commissions.
Distributor Conflict of Interest: A distributor may not market a fund where it is a relative, associate, affiliate or subsidiary of the fund, investment manager or sponsor, as tested under the SEBI (Intermediaries) Regulations, and the prohibition extends to conflicts with the trustee, the manager's employees and third-party service providers.
Four Pillars of AIF Distributorship: Marketing, sales, support and relationship management — the core functions of an AIF distributor, supported by research and product analysis and by relationships with fund houses, investment managers, family offices and other investors.
Fraudulent or Unfair Trade Practice: Direct or indirect misleading statements, concealing or omitting material facts of the fund or scheme, concealing key risk factors, or not taking reasonable care to ensure suitability of the scheme to the investor.
Grievance Handling by the Distributor: The distributor must have the organisational infrastructure and bandwidth to address investor grievances, liaise with the AIF, manager or custodian, and where necessary help investors register complaints with SEBI. Grievances about the distributor's own service must be addressed expeditiously to the investor's satisfaction.
In-Person Verification (IPV): Part of the KYC process which the distributor's own staff must perform, together with diligent attestation of investor documents. The paperwork must not be outsourced or handled by a third party.
Investor Presentation: The distributor's marketing document, prepared after a complete analysis of the PPM, which analyses the scheme in all areas affecting investor interests, highlights features, commercial terms and risks, and shows how the scheme fits the particular investor.
Legitimate Disclosure of Confidential Information: Disclosure permitted where a regulatory body requests it as part of an investigation or audit, or where it is required under contract to be shared with specific third parties — in both cases with the disclosure procedure documented and necessary authorisations collected.
Pass-back: An indirect incentive in which the distributor returns part of the commission earned from the AIF to the investor. It is prohibited because it discourages investors from deciding on the merit of the fund and the manager's investment strategy.
Post-commitment Services: Four activities — liaison on drawdown notices and fund transfers, acting as contact point for periodic reporting and manager meetings, forwarding investor requirements on co-investments, MFN requests, performance, exits and grievances, and marketing follow-on funds.
Pre-commitment Services: Ten activities from engaging fund houses on new launches through preparing pitches, explaining disclosures and risk factors, procuring additional information, facilitating fund due diligence, and seeking consent for capital commitment.
Principal Terms of the Distributor Agreement: Roles and responsibilities, rights and obligations, an indemnity clause, considerations or commissions, distribution of commissions, penal actions for non-fulfilment of the performance clause, and arbitration.
Related Party Capital Commitment: A commitment obtained from an entity that is a subsidiary, associate or affiliate of the distributor, or in which the distributor is a director or holds more than 10 per cent of paid-up capital. Such investments amount to related party transactions liable to scrutiny under direct tax laws.
Soft Dollar Arrangement: An arrangement in which the AIF uses clients' money to pay for third-party and proprietary research. Research may be bought with client assets only where its primary use directly assists investment decision-making rather than the running of the investment firm; proprietary research must be paid from the manager's own assets.
Structured Digital Database: The internal record an AIF must maintain of unpublished price sensitive information shared — the nature of the information, the names of those who shared it, the names of those with whom it was shared, and the recipient's PAN.

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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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