NISM Series XIX-A · Chapter 3: Concepts in Alternative Investment Funds Industry

L1 · Foundation

Foundation — The private capital ecosystem

Who invests in AIFs internationally and why Indian institutional participation is limited by regulatory caps on provident and pension funds; the Rs 1 crore minimum investment, Rs 20 crore minimum corpus and 1,000 investor cap, and the private placement requirement; what a unit is and how the corpus is represented in a trust, company and partnership; the sponsor and the four fit and proper criteria; the trustee and the persons who may not hold that office; the investment manager and the five aspects of the role from deal sourcing to relationship management, and how managers are remunerated; distributors and placement agents and why AIF distribution demands training; and custodians with their registration requirement and related party bar.

21 min read · Worth 5% of the paper · Written from pages 41–61 of the official NISM workbook · Updated 18 September 2026

Who is who in an AIF

⚠️ "The AIF industry is nurtured by the private capital ecosystem that would consist of primarily THE INVESTORS looking out for alternative investment opportunities, THE ALTERNATIVE INVESTMENT MANAGERS who have the expertise TO IDENTIFY, INVEST, MANAGE AND HARVEST THE RETURNS FOR INVESTORS, THE SPONSORS WHO INITIATE AND FLOAT THE AIFs (MORE OFTEN THE FUND MANAGERS THEMSELVES) AND THE VARIOUS SERVICE PROVIDERS".

1. Investors and contributors

Start with who puts the money in. Abroad, it is mostly big pension funds. Next come insurers, trusts, endowments and family offices.

⚠️ "In the international markets, THE LEADING INVESTORS IN AIF MARKETS ARE PENSION FUNDS FROM BOTH PRIVATE AND PUBLIC SECTOR" — the workbook naming Canadian pension funds and the Norwegian pension fund. ⚠️ "The NEXT LARGEST INVESTORS ARE INSURANCE COMPANIES, TRUSTS AND FOUNDATIONS, ENDOWMENTS AND FAMILY OFFICES... INSURANCE COMPANIES ARE IDEALLY POSITIONED WITH LARGE LONG-TERM CORPUSES".

⚠️ "In the private equity and hedge fund segments, LARGE FAMILY OFFICES, SOVEREIGN WEALTH FUNDS, INVESTMENT BANKS, CORPORATE INVESTORS, FUND OF FUNDS AND PRIVATE WEALTH MANAGEMENT ACCOUNTS OF PORTFOLIO MANAGERS ARE THE MAIN INVESTORS".

⚠️ "CORPORATE INVESTORS ARE LARGE PUBLIC COMPANIES AND CORPORATIONS THAT INCUBATE SMALLER COMPANIES THAT ARE SYNERGISTIC TO THEIR CORE BUSINESS".

⚠️ On SWFs: "due to LARGE TRADE SURPLUSES GENERATED BY OIL TRADE AND GLOBAL COMMERCE, SWFs WERE STARTED BY SEVERAL COUNTRIES SUCH AS MEMBERS OF THE OPEC, CHINA, JAPAN, SINGAPORE AND MALAYSIA". ⚠️ "In the overseas markets, AIF INVESTORS ARE KNOWN AS LIMITED PARTNERS OR LPs AS THE AIFs ARE MOSTLY FLOATED AS PARTNERSHIPS".

1.1 Why India differs

In India, the biggest long-term pools are provident and pension funds. But rules cap how much they can put into unlisted alternatives. So they play a small role here.

⚠️ "Under the AIF Regulations, INDIAN, FOREIGN AND NON-RESIDENT INDIAN INVESTORS CAN BE CONTRIBUTORIES TO THE CORPUS OF AN AIF".

Requirement	⚠️ Rule
⚠️ Minimum investment per investor	⚠️ INR 1 CRORE (not applicable to Accredited Investors)
⚠️ Minimum corpus in each scheme	⚠️ INR 20 CRORE
⚠️ Maximum investors in a single scheme	⚠️ SHALL NOT EXCEED 1000
⚠️ Method of raising	⚠️ "They are allowed to RAISE THEIR CORPUS FROM INVESTORS ONLY THROUGH PRIVATE PLACEMENT"

⚠️ "CORPUS MEANS THE TOTAL AMOUNT OF FUNDS COMMITTED BY INVESTORS TO THE ALTERNATIVE INVESTMENT FUND BY WAY OF A WRITTEN CONTRACT OR ANY SUCH DOCUMENT AS ON A PARTICULAR DATE".

⚠️ "SEBI has introduced the concept of ACCREDITED INVESTORS IN ORDER TO PROVIDE FLEXIBILITY TO HIGH NET WORTH INVESTORS AND INSTITUTIONAL INVESTORS WHEN INVESTING IN LARGE VALUE FUNDS UNDER CATEGORY I AIFs AND CATEGORY II AIFs".

1.2 Units and the corpus

What the investor holds has a different name in each structure. The idea is the same: a share of the fund.

⚠️ "Investors under the AIF regulations are called 'UNIT HOLDERS OR CONTRIBUTORS' OR 'PARTNERS' OR 'SHAREHOLDERS' DEPENDING UPON THE STRUCTURE ADOPTED FOR THE AIF (TRUST, LLP OR A COMPANY)".

Structure	⚠️ Corpus represented by
⚠️ TRUST	⚠️ UNIT CAPITAL
⚠️ COMPANY	⚠️ SHARE CAPITAL
⚠️ PARTNERSHIP	⚠️ PARTNERSHIP INTEREST

⚠️ "The economic benefit of the unit WILL BE DENOTED BY THE GROWTH IN THE UNIT VALUE REPRESENTED BY ITS NET ASSET VALUE THAT IS DISCLOSED BY THE AIF PERIODICALLY".

⚠️ "AIFs shall ensure that INVESTORS WHO ARE PERSONS WITH DISABILITIES, UNDER THE RIGHTS OF PERSONS WITH DISABILITIES ACT, 2016, ARE PROVIDED FULL COOPERATION, ACCESSIBILITY, AND EQUAL OPPORTUNITY".

2. Sponsors

The sponsor is the one who sets up the fund. It applies to SEBI and puts in its own money.

⚠️ The sponsor's critical functions: "SPONSORING THE FUND, DEFINING THE THEME, CONSTITUTING THE FUND IN THE APPROPRIATE STRUCTURE, REGISTRATION WITH SEBI AND FORMATION OF THE INITIAL AND SUBSEQUENT CORPUSES FROM TIME TO TIME".

2.1 Fit and proper — Schedule II of the SEBI (Intermediaries) Regulations, 2008

⚠️ Criterion (a): "INTEGRITY, HONESTY, ETHICAL BEHAVIOUR, REPUTATION, FAIRNESS AND CHARACTER OF THE PERSON".

Put simply, criterion (a) is about good character. Criterion (b) is a list of things that rule a person out.

⚠️ Criterion (b) — the person NOT having any of these disqualifications:

⚠️ "CRIMINAL COMPLAINT OR CHARGE SHEET FILED AGAINST SUCH PERSON AND IS PENDING".
⚠️ "AN ORDER OF RESTRAINT, PROHIBITION OR DEBARMENT HAS BEEN PASSED AGAINST SUCH PERSON OR RECOVERY PROCEEDINGS HAVE BEEN INITIATED AGAINST SUCH PERSON AND ARE PENDING".
⚠️ "SUCH PERSON HAS BEEN DECLARED INSOLVENT OR HAS BEEN CATEGORIZED AS A WILFUL DEFAULTER".
⚠️ "SUCH PERSON HAS BEEN FOUND TO BE OF UNSOUND MIND BY A COURT OF COMPETENT JURISDICTION AND THE FINDING IS IN FORCE".

⚠️ "ANY CHANGE IN THE SPONSOR OR DESIGNATED PARTNER IS REQUIRED TO BE INFORMED TO SEBI AND WHERE THERE IS A CHANGE IN CONTROL OF THE AIF, PRIOR APPROVAL FROM SEBI IS REQUIRED".

3. Trustees

A trustee is needed only when the AIF is a trust. The trustee is the watchman. It checks that the manager follows the rules and treats investors fairly.

⚠️ "Trustees are required to be appointed IN CASES WHEREIN THE AIF IS CONSTITUTED AS A TRUST. Though the SEBI (AIF) Regulations DO NOT SPECIFICALLY PROVIDE FOR THE QUALIFICATION REQUIREMENTS OR CERTIFICATION OR LEGAL FORM FOR TRUSTEES, THEY DO HAVE LAID DOWN THE CODE OF CONDUCT FOR TRUSTEES".

⚠️ "SEBI REVIEWS THE APPOINTMENT OF THE TRUSTEE AT THE TIME OF REGISTRATION OF THE AIF AND SUBSEQUENT CHANGES NEED TO BE NOTIFIED AND APPROVED BY SEBI".

4. Investment Managers

The manager runs the money. It may be the sponsor itself. Abroad, it is called the general partner.

⚠️ "INVESTMENT MANAGER MEANS ANY PERSON OR ENTITY WHO IS APPOINTED BY THE AIF SPONSOR TO MANAGE ITS INVESTMENTS BY WHATEVER NAME CALLED AND MAY ALSO BE SAME AS THE SPONSOR OF THE FUND".

⚠️ "In a PARTNERSHIP STRUCTURE THAT IS WIDELY PREVALENT ABROAD, THE INVESTMENT MANAGERS ARE KNOWN AS GENERAL PARTNERS OR GPs". ⚠️ **The Manager must also be FIT AND PROPER under Schedule II, and "any change in the designated partner or Investment Manager HAS TO BE INFORMED TO SEBI AND WHERE THERE IS A CHANGE IN CONTROL OF THE INVESTMENT MANAGEMENT COMPANY, PRIOR APPROVAL FROM SEBI IS REQUIRED".

4.1 The five aspects of the role

Think of the job as a cycle. Find the deal. Do the deal. Help the firm grow. Exit at a profit. Keep investors informed all along.

#	⚠️ Aspect
1	⚠️ DEAL SOURCING — "must IDENTIFY FAVOURABLE OPPORTUNITIES, SOURCE AND COMPLETE SUCCESSFUL TRANSACTIONS TO GENERATE PROFIT AND SUPPORT THE RAISING OF FURTHER FUNDS", through relationships with "INVESTMENT BANKERS, CHARTERED ACCOUNTANTS, CORPORATE ADVISERS, CONSULTING FIRMS, SENIOR CORPORATE HEADS AND EXECUTIVES, POLICY MAKERS". "A LARGE PART OF THE INVESTMENT MANAGER'S TIME IS DEVOTED TO NETWORKING"
2	⚠️ STRUCTURING AND INVESTING — "need not only be INDUSTRY SPECIALISTS BUT SHOULD HAVE VERY PROFOUND DEAL MAKING SKILLS... KEEN NEGOTIATORS AND AT THE SAME TIME MOTIVATED TEAM LEADERS... They have to CREATE THE DESIRED BLEND OF INCENTIVES AND RETURNS WHILE MANAGING THE ASSOCIATED RISKS"
3	⚠️ ACTIVE MANAGEMENT — "WHILE THEY DO NOT SPECIFICALLY ASSUME DAY-TO-DAY MANAGEMENT CONTROL, THEY ARE ACTIVELY INVOLVED IN SETTING AND MONITORING THE IMPLEMENTATION OF STRATEGY. This is the basis of the argument that AIF INVESTMENT MANAGEMENT IS AN ALTERNATIVE MODEL OF CORPORATE GOVERNANCE TO MITIGATE AGENCY RISK"
4	⚠️ HARVEST RETURNS — "have to understand the INDUSTRY AND MARKET CYCLES, THEIR OWN INVESTMENT HORIZON, EXIT STRATEGY AND APPROPRIATELY HARVEST RETURNS... HARVESTING RETURNS BY MANAGING EXIT RISKS IS PROBABLY THE MOST IMPORTANT SKILL ATTRIBUTE OF AN INVESTMENT MANAGER"
5	⚠️ RELATIONSHIP MANAGEMENT WITH INVESTORS — "need to ENGAGE SKILFULLY WITH THEIR INVESTORS SUCH THAT THEY ARE ALWAYS KEPT INFORMED OF THE PROGRESS OF THEIR FUND, NEW DEVELOPMENTS... LAUNCH OF FOLLOW ON FUNDS", requiring "TIMELY, REGULAR AND APPROPRIATE ENGAGEMENT STRATEGY"

4.2 Remuneration

Two layers get paid. The people earn a salary and a bonus. The company earns a management fee, plus any extra return linked to how the fund performs.

Who	⚠️ Earns
⚠️ The FUND MANAGERS, as executives of the investment management company	⚠️ "A SALARY from the investment management company OR FROM THE FUND DIRECTLY IN CASE THE MANAGER IS AN INDIVIDUAL" · "A PROFIT SHARING OR BONUS IF ANY, FROM THE PROFITS OF THE INVESTMENT MANAGEMENT COMPANY"
⚠️ The INVESTMENT MANAGEMENT COMPANY	⚠️ "MANAGEMENT FEES" · "ADDITIONAL RETURNS IF ANY, FROM THE AIF, BASED ON PERFORMANCE OF THE FUND AND THE TERMS OF THE INVESTMENT AGREEMENT"

⚠️ "In a partnership structure, THE INVESTMENT MANAGERS ARE ALSO THE PARTNERS ALONG WITH THE INVESTORS IN THE FUND... In the Indian scenario, SUCH CONTRIBUTION IS MANDATORY UNDER THE REGULATIONS".

5. Distributors and Placement Agents

Distributors sell the fund and spread the word about it. They can be people, firms or banks.

⚠️ "Just as in the case of the MUTUAL FUND INDUSTRY WHICH GREW PHENOMENALLY IN INDIA SINCE 1994, THE AIF INDUSTRY'S WIDER REACH WOULD DEPEND UPON THE FORMATION OF THE DISTRIBUTION AND PLACEMENT NETWORK... They are important IN NOT ONLY THE SELLING FUNCTION BUT IN THE CREATION OF WIDER AWARENESS AND FAMILIARITY".

⚠️ "Distributors CAN BE INDIVIDUALS OR INSTITUTIONS SUCH AS DISTRIBUTION COMPANIES, BROKING COMPANIES AND BANKS".

⚠️ "Distributors have to UNDERSTAND THE NEEDS OF INVESTORS ON A CASE-TO-CASE BASIS, HAVE A COMPLETE UNDERSTANDING OF AIF PRODUCTS THEY DISTRIBUTE, HAVE REASONABLE FAMILIARITY WITH UNDERLYING RISK AND RETURN PROFILE... AND MAP THE REQUIREMENTS OF INVESTORS WITH THE PRODUCTS THEY DISTRIBUTE".

6. Custodians

The custodian keeps the fund's securities safe. It settles trades and makes sure the demat accounts are right.

⚠️ "The custodian needs to ACCEPT AND GIVE DELIVERY OF SECURITIES FOR THE REGULAR INVESTMENT TRANSACTIONS OF THE FUND. Since securities would be in dematerialised form, THE CUSTODIAN IS RESPONSIBLE FOR SETTLEMENT OF TRANSACTIONS AND ENSURING THAT THE DEMATERIALISED INVESTMENT ACCOUNTS OF THE FUND REFLECT THE CORRECT POSITION AT ANY TIME".

⚠️ Additional activities: "SETTLEMENT, TAX WITHHOLDING AND PROXY VOTING AND ALSO TRACKS CORPORATE ACTIONS SUCH AS DIVIDENDS, BONUS ISSUES AND RIGHTS ISSUES". ⚠️ "Custodians MAY ALSO COMPUTE NAV AS EXTENDED SERVICE TO A PARTICULAR FUND ON CASE-TO-CASE BASIS".

⚠️ The rules:

⚠️ "ALL CUSTODIANS NEED TO REGISTER WITH SEBI UNDER THE SEBI (CUSTODIAN) REGULATIONS 1996".
⚠️ "SPONSOR OR MANAGER OF AIFs SHALL COMPULSORILY APPOINT A CUSTODIAN FOR SAFEKEEPING OF SECURITIES OF THE FUND".
⚠️ "Custodian appointed by the Sponsors or Managers of CATEGORY III AIFs SHALL KEEP CUSTODY OF SECURITIES AND GOODS RECEIVED IN DELIVERY AGAINST PHYSICAL SETTLEMENT OF COMMODITY DERIVATIVES".
⚠️ "CUSTODIANS SHALL REPORT INFORMATION REGARDING INVESTMENTS OF AIFs AS SPECIFIED BY SEBI".
⚠️ "The custodian IS APPOINTED BY THE SPONSOR OR MANAGER... A CUSTODIAL AGREEMENT IS ENTERED INTO BETWEEN THEM. SEBI regulations provide that THE CUSTODIAN SHALL NOT BE A RELATED PARTY TO THE SPONSORS OR DESIGNATED PARTNERS UNLESS SPECIFIC CONDITIONS ARE FULFILLED".

Think of it like this

The builder who buys the first flat and moves out last

A builder who buys a flat in his own project tells buyers something a brochure cannot: his money is in the same building.

That is sponsor commitment — "the financial investment required from the sponsor or the investment manager... NECESSARY TO DEMONSTRATE THE ALIGNMENT OF INTERESTS BETWEEN THEM AND THE AIF SO THAT THE UNIT HOLDERS ARE ASSURED OF THEIR BEST INTERESTS BEING TAKEN CARE OF."

For Category I and II AIFs it is "NOT LESS THAN TWO AND HALF PERCENT OF THE CORPUS OF THE FUND OR INR 5 CRORE WHICHEVER IS LOWER", and it must be cash: "the commitment SHALL NOT BE THROUGH THE WAIVER OF MANAGEMENT FEES... putting CAPITAL AT RISK ON PAR WITH THAT OF THE UNIT HOLDERS."

And he leaves last: "the continuing interest CANNOT BE WITHDRAWN FROM THE FUND AND WILL REMAIN LOCKED UNTIL DISTRIBUTIONS TO INVESTORS ARE COMPLETED IN FULL. Therefore, THE SPONSORS ARE THE FIRST INVESTORS TO COMMIT TO THE FUND CORPUS AND WOULD ALSO BE THE LAST TO BE PAID OUT UPON WINDING UP."

The unspent portion of a sanctioned bank limit

A business sanctioned a Rs 10 crore working capital limit has not borrowed Rs 10 crore. It has drawn Rs 6.5 crore; the remaining Rs 3.5 crore sits available, costing nothing until used.

That is exactly the relationship between committed capital and invested capital. "AIF funds DO NOT GENERALLY DRAWDOWN FUNDS UNTIL THEY ARE NEEDED FOR FINANCING THE INVESTMENT DEALS." On a scheme closed at INR 1,000 crore, if INR 650 crore has been drawn, that is the invested capital, and "the undrawn amount of INR 350 crore is known as 'DRY POWDER'."

But the analogy breaks in one important way. A bank limit is the bank's obligation to lend; a capital commitment is the investor's obligation to pay. "Capital commitment means that they have A CERTAIN CASH COMMITMENT, BOTH IN TERMS OF TIMING OF THE CONTRIBUTION PAYMENTS AND THE TOTAL AMOUNT THAT WILL BE DRAWN DOWN", and "INVESTORS HAVE TO KEEP AVAILABLE CASH RESOURCES DURING THE AGREED DRAW DOWN PERIOD."

The chit fund member who misses an instalment

In a chit, a member who fails to pay does not simply pause. The others must cover the shortfall, and he forfeits his standing in the group.

"Investment managers PROTECT THEMSELVES FROM THE RISK OF AN INVESTOR BEING UNABLE TO FUND THEIR COMMITMENTS BY PUTTING IN PLACE A MECHANISM WHEREBY IF A PARTICULAR INVESTOR CANNOT FUND A DRAWDOWN, OTHER INVESTORS TAKE UP THE DRAWDOWN CALL. THE INVESTORS WHO FAIL TO FULFIL THEIR COMMITMENT THEN SUBSTANTIALLY LOSE THEIR RIGHTS AND RETURNS UNDER THE INVESTMENT AGREEMENT."

The event has a name — 'DEFAULT IN DRAWDOWN' — and three graded consequences: "to REDUCE THE CAPITAL COMMITMENT, OR CHARGE INTEREST FOR DELAYED PAYMENT OR IN EXTREME CASES, TERMINATE THE AGREEMENT AND RETURN THE CAPITAL INVESTED SO FAR."

Which is why the workbook stresses that the difficulty is timing, not solvency: "since drawdowns are SUBJECT TO THE INVESTMENT REQUIREMENTS OF THE FUND MANAGER, IT MAKES IT PARTICULARLY DIFFICULT TO FORECAST FROM A CASH PERSPECTIVE."

The queue at the temple hundi count

When a temple counts its collection, the order of payment is fixed and known before anyone opens the box: first the government dues, then a reserve for the coming festival, then the staff, then the trust's own works.

That is a distribution waterfall — "a PRIORITY SEQUENCE OF PAYMENT AS DETERMINED UNDER THE TERMS OF THE FUND." Six steps, in order: EXPENSES, TAXES AND STATUTORY PAYMENTS · RESERVES · MANAGEMENT FEES AND OTHER COSTS · NET PROCEEDS to investors, first capital then preferred return · ADDITIONAL RETURNS WITH CATCH UP · RESIDUAL DISTRIBUTION.

The two versions differ only in where the manager stands in the queue. In a European waterfall he waits until investors have had 100 per cent of capital and preferred return. In an American waterfall he is "paid an incentive fee on each deal, REGARDLESS OF WHETHER THE INVESTOR'S PREFERRED RETURN AND CAPITAL HAVE BEEN PAID BACK IN FULL."

And the European version has a real cost: "the manager's profit sharing MAY NOT GET REALISED FOR SIX TO EIGHT YEARS... AN UNDERPAID MANAGER MAY BE INCENTIVISED TO SEEK QUICKER EXITS AND LIQUIDATION RATHER THAN MAXIMISING THE RETURN POTENTIAL OF THE FUND."

The contractor who must return the advance if the building fails

A contractor paid a bonus after the first floor goes up smoothly may have to return it if the second floor collapses. The bonus was for the project, not for the floor.

That is clawback — the safeguard against the American waterfall's moral hazard. "Performance fees based on EARLY SUCCESSFUL EXITS CAN BE CLAWED BACK OR RECOVERED BY THE INVESTORS FROM THE MANAGER TO OFFSET THE LOSSES ON SUBSEQUENT FAILED INVESTMENTS."

It exists so that "fees based on THE FUND-AS-A-WHOLE APPROACH ARE ADJUSTED TO REFLECT A FULL NETTING OF PROFITS AND LOSSES OVER ITS LIFE."

But it has a practical limit worth telling any investor: "this clause is ONLY AS GOOD AS THE MANAGER'S ABILITY TO REFUND THE EXCESS RETURN, SO IT'S IMPORTANT THAT THE MANAGER HAS HIGH CREDIBILITY AND A BALANCE SHEET TO SUPPORT."

A promise to repay is worth what the promisor is worth.

The high-jump bar that never comes down

An athlete paid a bonus for each personal best cannot be paid twice for the same height. Once he clears 1.45 metres, the bar stays there.

That is the high watermark — "the HIGHEST VALUE RECORDED BY THE FUND CORPUS IN THE PAST. If this level is prescribed, THE FUND MANAGER GETS ADDITIONAL RETURNS ONLY AFTER THE CORPUS VALUE CROSSES THE MARK."

The workbook's own arithmetic: with a 20 per cent hurdle, "upto a fund value of INR 120 CRORE, ADDITIONAL RETURN WOULD BE NIL AS IT IS EQUAL TO THE HURDLE RATE." If the fund reaches INR 145 crore, "additional returns would be calculated on INR 25 CRORE." And then the bar moves: "For the following year — ADDITIONAL RETURNS ARE CALCULATED ONLY ON THE FUND VALUE IN EXCESS OF INR 145 CRORE."

"In funds that pay ANNUAL performance incentives, having a high watermark ENSURES THAT THEY DON'T GET PAID MULTIPLE TIMES FOR THE FUND VALUE ALREADY ACHIEVED IN THE PAST. THIS IS THE REASON WHY THIS ARRANGEMENT IS MORE COMMON IN HEDGE FUNDS."

Key terms in this chapter

American Waterfall: A distribution sequence allowing the manager an incentive fee on each deal regardless of whether investors have received their capital and preferred return in full, subject to a caveat that other assets are performing well. It suits pure debt funds holding assets to maturity.
Blind Pool Structure: An arrangement in which capital is committed by the investor to the overall fund and specific investments are chosen by the manager, as distinct from deal-to-deal arrangements such as co-investments.
Business Responsibility and Sustainability Reporting (BRSR): SEBI's improved ESG disclosure regime succeeding Business Responsibility Reporting, aimed at quantitative and standardised ESG disclosures enabling comparability, mandated for the top 1000 listed entities by market capitalisation from FY 2022-2023.
Capital Commitment: The total funds agreed by investors for subscription to the AIF — a legally binding commitment against future opportunities, with no cash deposited until called. The minimum is INR 1 crore, or INR 25 lakh from employees and directors.
Carried Interest: The international name for additional returns, or simply carry — the manager's incentive for outperforming the hurdle rate, customarily 20 per cent in a 2-20 structure, though this is not standard in India.
Catch-up Clause: A provision making the manager's additional return a percentage of the total returns of the fund rather than solely of the return in excess of the preferred return.
Clawback: The investor's right to reverse incentive fees taken by the manager during the life of the investment, so that fees reflect a full netting of profits and losses over the fund's life. It is only as good as the manager's ability to refund.
Co-investment: Investment by a manager, sponsor or investor of a Category I or II AIF in an investee company in which the AIF also invests, giving the investor direct exposure alongside the fund. It is not a standard feature and is offered to preferred investors.
Corpus: The total amount of funds committed by investors to the AIF by way of a written contract or similar document as on a particular date.
Deal Sourcing: The manager's function of identifying favourable opportunities and completing transactions, requiring extensive networking with investment bankers, chartered accountants, corporate advisers, consulting firms, corporate heads and policy makers.
Default in Drawdown: The event where an investor fails to fund a capital call, other investors take up the call, and the defaulting investor substantially loses his rights and returns. Remedies include reducing the commitment, charging interest, or terminating the agreement.
Drawdown: The process by which the manager calls committed capital as funds are needed for investment. Calls are made by a drawdown notice specifying the payment date, method and other details.
Dry Powder: The undrawn balance of committed capital — Rs 350 crore where Rs 650 crore has been drawn against a Rs 1,000 crore commitment.
European Waterfall: A distribution sequence paying investors 100 per cent of invested capital pro rata and then the preferred return in full, before the manager receives any carry — which may delay his profit share by six to eight years.
Fit and Proper Person: A test under Schedule II of the SEBI (Intermediaries) Regulations, 2008 requiring integrity, honesty, ethical behaviour, reputation, fairness and character, and the absence of a pending criminal charge sheet, pending restraint or recovery proceedings, insolvency or wilful defaulter status, or a subsisting finding of unsound mind.
Giveback: An alternative to reserve creation under which some amounts are adjusted against givebacks by investors from distributions. It may suit the manager better because preferred returns need not be provided on giveback amounts.
Hard Cap and Soft Cap: The maximum corpus specified at SEBI registration — a hard cap cannot be breached, while a soft cap guides investors about fund aspirations but may be extended as required.
Harvesting Returns: The manager's function of understanding industry and market cycles, investment horizon and exit strategy to realise returns. Managing exit risks is described as probably the most important skill attribute of an investment manager.
High Watermark: The highest value recorded by the fund corpus in the past, above which the manager earns additional returns. More common in hedge funds, it prevents payment more than once for value already achieved.
Invested Capital: The actual amount drawn down by the investment manager from investors towards their capital commitment.
Investment Manager: Any person or entity appointed by the AIF sponsor to manage its investments, who may also be the sponsor. In partnership structures abroad the manager is called the General Partner.
Organisational Expenses: One-time costs chargeable to the fund such as incorporation costs, statutory compliance costs, placement commissions or distribution fees, winding up expenses and fund administration costs.
Preferred Return: Also called the hurdle rate — the threshold return investors must receive before the manager receives additional returns. Around 8 per cent in developed markets and 10 to 12 per cent in India.
Private Capital Ecosystem: The investors seeking alternative opportunities, the investment managers with expertise to identify, invest, manage and harvest returns, the sponsors who initiate and float AIFs, and the service providers who facilitate the whole.
Self-managed Fund: An international concept in which the investment manager executives are employees of the fund itself, drawing salaries and expenses from the fund, so that the management fee is lower than in regular funds.
Sponsor: Any person or persons who set up the AIF, including the promoter in the case of a company and the designated partner in the case of an LLP. The sponsor applies to SEBI for registration and then invests in the capital of the fund.
Sponsor Commitment: The continuing interest the sponsor or manager must hold in a Category I or II AIF — not less than 2.5 per cent of the corpus or INR 5 crore whichever is lower — in cash, not by fee waiver, disclosed to investors and locked in until distributions are complete.
Summary of Principal Terms (SOPT): The document summarising the main terms and conditions on which the AIF expresses its willingness to invest in a company, subject to further discussion and negotiation.
Term Sheet: The first step towards an investment transaction between the AIF and an investee company. It is not a legal agreement and is not binding, but usually carries a validity period within which the transaction is to be completed.
Trustee: The office appointed where an AIF is constituted as a trust. The trustee must be a person of ability and integrity, cannot be the manager, director, officer or employee of an investment company, and must ensure that the manager's transactions comply with the regulations and the scheme's objectives.
Unit: The beneficial interest of an investor in the AIF or a scheme of the AIF, which may be fully or partly paid up. Partly paid up units represent the portion of committed capital actually invested.
Value Chain (BRSR): For BRSR Core reporting, the top upstream and downstream partners of a listed entity cumulatively comprising 75 per cent of its purchases or sales by value, in respect of which nine specified KPIs must be disclosed in the annual report.

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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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