NISM Series XIX-C · Chapter 13: Legal Documents and Negotiations

L1 · Foundation

Foundation — The five documents that make an AIF work

The constitutional document for a trust, LLP or company, the Investment Management Agreement and why the trust structure ring-fences the manager, the Contribution Agreement and dematerialised units, side letters and MFN clauses, and the wrapper.

22 min read · Worth 7% of the paper · Written from pages 341–365 of the official NISM workbook · Updated 18 September 2026

13.1 What "legal documentation" means here

The term 'legal documentation' in the context of an AIF refers to the set of legal contracts and documents that define the AIF architecture and set out the binding roles and performance obligations of the connected parties in such a way that the outcome of the fund activity protects the interests of the investors and other stakeholders.

The principal documents to be mentioned in this regard are:

the constitutional document of the AIF
the contractual document governing the investment management
the contractual document governing the investors' relationship with the AIF
the Private Placement Memorandum (PPM)
the various service agreements that define the roles and responsibilities of other stakeholders such as trustees, investment advisors etc. and service providers such as distributors

Five categories. Learn the list, because a question that asks which of four items is a "principal document" is really asking whether you know this structure.

To attract high quality investors, it is essential that the fund documents (including marketing literature prepared by the Fund and the distributors such as the 'Pitch documents' and the PPM) include an articulation on the fund's governance standards. Fund documents are an important aspect of the fundraising exercise.

Fund documents also serve the very important purpose of making the whole fund structure bankable from a regulatory, commercial and contractual perspective so that investors are reassured of the protection of their interests.

Bankable from a regulatory, commercial and contractual perspective — three dimensions in one phrase.

13.2 The constitutional document

If the AIF is a trust

When the AIF is constituted as a trust, it is necessary to constitute it through a 'Trust Indenture' which is a document that is executed between the settlor and the trustee to bring the trust into existence. Further as provided under the AIF Regulations, the trust deed is required to be registered. It is also noteworthy that a trust does not have a separate legal personality.

The settlor of the trust who is the author of the trust, settles the trust and conveys the initial sum of money to the trustee towards setting up the trust and creating its assets. The trust document is also the instrument of trusteeship which is vested in the trustees of the AIF.

And the drafting requirement that links straight back to Chapter 8:

The trust document has to be drafted carefully to conform to the 'determinate' status of its corpus and is necessary to establish its status and tax treatment with the revenue officials under the Income Tax Act, 1961.

Three facts about a trust in one paragraph: it is executed between the settlor and the trustee, it is required to be registered, and it does not have a separate legal personality.

If the AIF is an LLP

In the case of a Limited Liability Partnership (LLP) structure, the constitutional document would be the LLP agreement signed between the managing partners initially and thereafter it would induct the investors into the partnership. It would define the relationship between the partners and all commercial understanding between them contractually. The LLP is registered with the Registrar of Companies (ROC) to provide it with a legal persona.

If the AIF is a company

If the AIF is constituted as a company, the manager would incorporate it with initial shareholders as subscribers to the Memorandum. The memorandum and articles of association are registered with the ROC and the company takes birth with a distinct legal entity.

Form	Constitutional document	Executed / registered	Legal personality
Trust	Trust Indenture	Between settlor and trustee; required to be registered	No separate legal personality
LLP	LLP agreement	Between managing partners, then inducting investors; registered with ROC	Legal persona on ROC registration
Company	Memorandum and Articles of Association	Subscribers to the Memorandum; registered with ROC	Distinct legal entity

Who sees it

The constitution document of the AIF is shared with all investors of the AIF alike, being the charter document, and also shared with SEBI for registering the AIF under the SEBI (AIF) Regulations.

Shared with ALL investors alike. Hold that phrase — it is exactly what distinguishes the constitutional document from the Contribution Agreement and the side letter, which are not.

13.3 The Investment Management Agreement

The Investment Management Agreement (IMA) is required to be entered into by and between the trustee (on behalf of the AIF) and the investment manager.

This agreement not only sets out the terms of fund management by the manager but in effect, the trustee delegates all its management powers in respect of investment management to the investment manager, except for certain retained powers that are identified in the Indenture of Trust.

And a detail that is easy to miss and easy to test:

The IMA is signed ONCE for the trust as a whole and NOT signed at the launch of each scheme.

Why the trust structure protects the manager

A trust structure permits ring fencing of the manager's liability (including from a fiduciary, breach of fund documents perspective) from that of the AIF's, because the manager is only a counterparty service provider to the AIF, unlike also being on the board of directors of an AIF which could be a company, or being a designated partner of an LLP. It is due to this reason why majority AIFs in India are constituted as trusts and not as LLPs.

This is a new reason for the dominance of the trust, on top of the reasons Chapter 8 gave — lower compliance cost, governance flexibility, investor confidentiality and the 200-investor cap on companies. Here the reason is liability ring-fencing: in a trust the manager is only a counterparty service provider, whereas in a company he would sit on the board and in an LLP he would be a designated partner, in both cases assuming the entity's own liabilities.

Termination and "for cause" removal

Nowadays, investors are becoming increasingly cautious about providing excessive bandwidth to managers in terms of their functioning or commercial interests in the wake of the financial crisis in 2008 and several frauds that surfaced in fund management.

There can also be a termination clause in the investment management agreement with the fund / subscription agreement that may provide for termination of services of the manager or withdrawal of the investor in the event if it has come to light that the interests of the investors and manager are grossly mis-aligned and there is a considerable moral hazard in continuance.

'For cause' removal typically refers to the premature termination of the manager's services to the fund by the investors, owing to events of default — mainly FRAUD, WILFUL MISCONDUCT, and GROSS NEGLIGENCE. Since these facts are subject to interpretation by the courts, such litigation could be long drawn and vexatious. Suitable dispute resolution provisions through arbitration could mitigate this risk to some extent.

Three grounds for "for cause" removal: fraud, wilful misconduct, gross negligence. And the practical warning: proving them in court is long drawn and vexatious, so arbitration provisions matter.

13.4 The Subscription (Investor Contribution) Agreement

The Contribution Agreement is to be entered into by and between EACH CONTRIBUTOR (i.e. investor), the TRUSTEE and the INVESTMENT MANAGER.

Three parties, not two. This agreement sets out the terms between the AIF and the investor and is amenable for amendments as may be required from time to time. The Contribution Agreement sets out the conditionalities for an investor to participate in the AIF.

Considering that most fund investments are about blind pool investing, the subscription agreements include all aspects relating to fund investing such as computation of beneficial interest, drawdowns, distribution waterfall, commercial aspects of fees and expenses, fund governance structure, powers of the investment committee and so on.

And the confidentiality rule that contrasts with the constitutional document:

The Contribution Agreement for each Contributor is generally NOT shared with other Contributors, as it contains representations and warranties which may be specific to each Contributor.

Units must be dematerialised

Units representing unit capital held in the fund by an investor have to be issued in dematerialised mode only. Accordingly, the investors will be able to receive their unit statements from the depository on periodical basis showing the balance held by them and transactions conducted during a particular period. Such requirement would be specified as part of the subscription agreement. This compliance requirement protects investor interests.

Why the trust wins again

LLPs and companies have specific processes to receive contributions towards capital from their partners, shareholders. LLP provisions are contained in the Limited Liability Partnership Act. In case of a company, share allotment / application money, etc. are regulated concepts, which require compliance with the Companies Act, 2013.

Since AIF investment arrangements require more flexibility between the terms governing the investors, AIF and the investment manager, a company structure will pose difficulties to set up an AIF. Hence, a trust structure has become the most popular to constitute an AIF and enter into subscription agreement for investor contributions.

13.4.1 Side Letters

In many instances, investors may seek specific investment arrangements with respect to their participation in the fund. Since these may not be generic to all investors but may be available only to a few institutional or large investors, they are recorded separately in supplementary documentation known as the side letter(s). These are executed by the SPECIFIC INVESTOR, the AIF and the INVESTMENT MANAGER.

Most of the time, side letters relate to differential terms for charge of management fee, working of the distribution waterfall, participation rights in investment committees, investor giveback, etc.

The MFN clause

Sometimes, investors may also insist on including a protection right that would protect them from the risk of any other investor being placed in a better position than them... An investor may also insist on including a 'Most Favoured Nation' (MFN) clause to prevent any other investor being placed in a better position than itself.

The footnote gives the working definition: MFN Clause allows an investor to receive side letter entitlements, which can be used to protect themselves from less favourable terms or conditions in the PPM, as compared to the terms or conditions offered to other current or future investors.

The honest warnings

Side letter enforceability has not been tested adequately in Indian courts and they do have certain amount of legal risk for such investors.

However, it is important to note that the investment manager has a fiduciary duty towards other investors in the fund. Hence, the investment manager should ensure that they are not in breach of such fiduciary duty, in an attempt to provide differential rights to some large investors. To avoid such a breach of fiduciary duty, most investment managers create a separate CLASS OF UNITS with differential rights, issued to large investors.

What belongs in a side letter and what does not

In global practice, AIFs may be set up in such a way that the key constitutional and fund terms are included in the charter documents, and only certain specific terms for some investors (which are carefully worded so as not be construed as prejudicial to other investors) are included in side letters. Such charter documents are executed by all investors to the fund, along with the fund and the manager while the side letters are not disclosed to the other investors since they are bilateral between AIF / investment manager and the specific investors.

Therefore, only those terms which would only require INDIVIDUAL RIGHT OF ACTION for an investor against the fund or the manager, and NOT IMPACT THE GENERAL OPERATIONS of the fund vis-à-vis other investors, are contained in the side letter(s).

That is the operative test. A term giving one investor a private remedy against the manager may go in a side letter. A term changing how the fund itself operates may not.

Having side letters would generally make the job of an Advisor difficult to assess the risk for his investors, since he is unaware about the preferential rights already granted to the existing investors.

13.6 The Wrapper

A wrapper is a supplement attached to the Private Placement Memorandum of the domestic fund distributed at offshore locations (in case of 'unified structure'). This helps to achieve compliance with the requirements for private placement of the securities of an offshore fund to investors in jurisdictions outside India.

Note the structural link — a wrapper appears in a unified structure, where offshore money is pooled into the domestic AIF, and it exists to satisfy the private placement rules of the investor's own jurisdiction, not India's.

Who signs what — the summary table

Document	Parties	Shared with
Trust Indenture	Settlor and trustee	All investors alike, and SEBI
Investment Management Agreement	Trustee (on behalf of the AIF) and the investment manager	Signed once for the trust, not per scheme
Contribution / Subscription Agreement	Each contributor, the trustee and the investment manager	Not shared with other contributors
Side Letter	The specific investor, the AIF and the investment manager	Not disclosed to other investors
PPM	Issued by sponsor/manager to prospective investors	All prospective investors; filed with SEBI through a merchant banker
Wrapper	Supplement to the PPM	Offshore investors in a unified structure

Think of it like this

The building, the manager and the flat-buyer

Think of an AIF as a residential building, and the five principal documents fall into place.

The constitutional document — the trust deed, LLP agreement or memorandum and articles — is the building's registration and its rules. Everyone who lives there is bound by it, and everyone gets a copy. The constitution document of the AIF is shared with all investors of the AIF alike, being the charter document.

The Investment Management Agreement is the contract with the facility management company who will run the building. Signed once, by the society with the firm — the IMA is signed once for the trust as a whole and not signed at the launch of each scheme.

The Contribution Agreement is each individual flat-buyer's agreement. It says what you paid, what you own and what you promised. And you do not get to read your neighbour's: the Contribution Agreement for each Contributor is generally not shared with other Contributors.

The PPM is the brochure and disclosure document shown before you buy — the fullest description of what is on offer.

The service agreements are the contracts with the security agency, the accountant, the lift maintenance firm.

And the side letter is the private arrangement one large buyer negotiates — a reserved parking space, say — bilateral between AIF / investment manager and the specific investors and not disclosed to the other investors.

Why the manager prefers to be a supplier, not a partner

Chapter 8 gave four reasons the Indian AIF industry chose the trust: lower compliance cost, governance flexibility, investor confidentiality, and the 200-investor cap that strangles a company. Chapter 13 adds a fifth, and it is about the manager's own skin.

Consider a contractor building your house. If he is simply a contractor under a contract, his exposure is what the contract says. If instead you make him a co-owner of the property, he inherits every liability attached to the property itself.

In a company AIF the manager sits on the board. In an LLP AIF he is a designated partner — and recall from Chapter 8 that every LLP must have at least two "designated partners", who are responsible for the conduct and compliances of the LLP. In a trust, he is a supplier with a contract.

It is due to this reason why majority AIFs in India are constituted as trusts and not as LLPs.

The side letter test: private remedy, not public rule

A large investor asks for two things. First, a lower management fee for itself. Second, the right to block any deal above INR 50 crore.

The first is fine in a side letter. The second is not — and the workbook gives the exact test:

Only those terms which would only require individual right of action for an investor against the fund or the manager, and not impact the general operations of the fund vis-à-vis other investors, are contained in the side letter(s).

A discounted fee is a private matter between that investor and the manager; if the manager breaches it, that investor sues. A veto over investments changes how the fund invests for everybody — including the investors who never saw the letter and never agreed.

Two further constraints follow. The investment manager has a fiduciary duty towards other investors in the fund. Hence, the investment manager should ensure that they are not in breach of such fiduciary duty, in an attempt to provide differential rights to some large investors. And the practical solution the industry uses: to avoid such a breach of fiduciary duty, most investment managers create a separate class of units with differential rights, issued to large investors — moving the differential from a secret letter into a disclosed unit class.

One last honest caution the workbook offers, which few sales decks mention: side letter enforceability has not been tested adequately in Indian courts and they do have certain amount of legal risk for such investors.

The MFN clause, and the adviser who is flying blind

A Most Favoured Nation clause is a promise that nobody else gets a better deal than you. Formally: MFN Clause allows an investor to receive side letter entitlements, which can be used to protect themselves from less favourable terms or conditions in the PPM, as compared to the terms or conditions offered to other current or future investors.

It sounds like a complete solution. It is not, and the workbook flags the reason in a single sentence that deserves attention:

Picture an adviser recommending a fund to a client. He can read the PPM. He can read the contribution agreement. He cannot read the four side letters already signed, because side letters are not disclosed to the other investors. So he genuinely does not know whether his client is entering a level playing field.

That is why Chapter 11 required that the use of Most Favoured Nation (MFN) provision in side-letters is regularised, such that certain investors should not be afforded special or additional rights arbitrarily, and why the existence of a side letter should have objective justification. Secrecy that is fair is tolerable. Secrecy that is arbitrary is not.

"For cause" is three words, and each is hard to prove

Investors sometimes assume that a bad manager can simply be removed. In practice, removal usually turns on a narrow clause.

"For cause" removal typically refers to the premature termination of the manager's services to the fund by the investors, owing to events of default — mainly fraud, wilful misconduct, and gross negligence.

Notice what is not on that list: poor performance. Losing money is not "cause". Missing the hurdle is not "cause". You cannot fire a manager for being wrong; you can fire him for being dishonest, deliberate or grossly careless.

And even then: since these facts are subject to interpretation by the courts, such litigation could be long drawn and vexatious.

Which is why the drafting advice matters: suitable dispute resolution provisions through arbitration could mitigate this risk to some extent, and why the workbook notes that there can also be a termination clause in the investment management agreement with the fund / subscription agreement that may provide for termination of services of the manager OR withdrawal of the investor where the interests of the investors and manager are grossly mis-aligned and there is a considerable moral hazard in continuance.

Sometimes the realistic remedy is not removing the manager but leaving — which is exactly what the material-change exit right in the PPM provides.

Demat units: the statement that comes from someone else

If your only record of owning INR 5 crore of a fund is a letter from the fund itself, you are relying on the fund to tell you what the fund owes you.

Units representing unit capital held in the fund by an investor have to be issued in dematerialised mode only. Accordingly, the investors will be able to receive their unit statements from the DEPOSITORY on periodical basis showing the balance held by them and transactions conducted during a particular period.

The statement now comes from an independent third party, and the workbook draws the conclusion plainly: this compliance requirement protects investor interests.

It is the same logic that sits behind the custodian requirement — Sponsor/Manager of AIFs shall appoint a custodian for safekeeping of the securities of the fund, appointed prior to the date of first investment of the scheme.

The pattern across the whole AIF framework is worth noticing: wherever the manager could otherwise be the sole source of truth about assets or holdings, the regulations insert an outside party — a depository, a custodian, a merchant banker, an independent valuer, a PPM auditor.

Key terms in this chapter

Contribution Agreement: Entered into between each contributor, the trustee and the investment manager, setting out beneficial interest computation, drawdowns, distribution waterfall, fees and expenses, governance structure and investment committee powers. Not shared with other contributors.
Custodial agreement: The binding contract between the AIF and its custodian, covering the scope of custodial services and back-office responsibility fixation. A custodian is mandatory for all AIFs, may differ per scheme, and must be appointed prior to the scheme's first investment.
Dematerialised units: AIF units must be issued in demat mode only, so investors receive periodic unit statements from the depository rather than from the fund — a compliance requirement that protects investor interests.
Direct Plan (AIF): The route through which investors approaching an AIF via a SEBI-registered intermediary that separately charges them an advisory or portfolio management fee must be on-boarded, involving no payment of commissions.
Distribution Agreement: Drawn between the investment manager and the distributor, defining the distributor's role and a Code of Conduct — including no alteration of marketing literature, no incurring liability for the manager without written authority, attendance at training, and no rebates as inducement.
Equal trail basis: The commission structure requiring distribution or placement fees to be spread over the fund's tenure. Category III AIFs may pay no upfront fee at all and only from the manager's management fee; Categories I and II may pay up to one-third upfront.
First Time Manager vs Experienced Manager: A binary the PPM must state categorically. A first time manager, having no fund track record, must instead disclose the previous funds with which individual members of the investment team were associated.
"For cause" removal: Premature termination of the manager's services by investors on events of default — mainly fraud, wilful misconduct and gross negligence. Because courts must interpret these, litigation is long drawn, so arbitration provisions are used.
Intimation to SEBI model: The route for Large Value Fund schemes, which are exempt from filing the PPM through a merchant banker and from incorporating SEBI comments, filing instead under an undertaking signed by the manager's CEO and Compliance Officer.
Investment Advisory Agreement (offshore): Signed where an offshore fund delegates advisory responsibilities to a separate entity. The offshore manager remains responsible to offshore investors while the local advisor advises on deal assessment, execution and post-investment management; an offshore advisor may be coupled with an onshore sub-advisor.
Investment Management Agreement (IMA): Entered into between the trustee, on behalf of the AIF, and the investment manager. The trustee delegates all investment management powers except powers retained in the Indenture of Trust. Signed once for the trust as a whole, not at each scheme launch.
Investor Charter: A single document setting out the AIF's vision and mission, business transacted, services provided, timelines, grievance redressal mechanism and investor responsibilities. Disclosed in the PPM for new schemes and by registered email for existing schemes.
Legal documentation (AIF): The set of contracts defining the AIF architecture and binding roles — the constitutional document, the investment management contract, the investor relationship contract, the PPM, and the service agreements. Together they make the structure bankable from a regulatory, commercial and contractual perspective.
Leverage breach reporting: Where a Category III AIF breaches its permitted leverage limits, the custodian must report to SEBI the fund name, extent of breach and reasons, before 10 a.m. on the next working day.
Material change in PPM: A change that can alter an investor's decision to remain invested, triggering a compulsory exit option — change in sponsor or manager excluding internal group restructuring, change in their control, or a change in fee structure or hurdle rate adversely affecting investors.
Merchant banker agreement: The appointment contract with the merchant banker who exercises independent due diligence on PPM disclosures and issues a due diligence certificate. He shall not be an associate of the AIF, sponsor, manager or trustee, and the agreement must ensure arm's length distance.
Most Favoured Nation (MFN) clause: A clause allowing an investor to receive side letter entitlements, protecting it from terms less favourable than those offered to other current or future investors.
Optional PPM audit sections: Risk Factors; Legal, Regulatory and Tax Considerations; Track Record of First Time Managers; Illustration of Fees and Expenses; and Glossary and Terms.
PPM audit: A mandatory annual audit of compliance with PPM terms, by an internal or external auditor or a legal professional, with findings and corrective steps reported to the Trustee/Board/Designated Partners, the Board of the Manager and SEBI within 6 months of financial year end.
PPM audit exemptions: Angel Funds (unless total investments at cost exceed INR 100 crore, from FY 2025-26); schemes where each investor commits at least INR 70 crore and provides a waiver; and Large Value Funds, which need no investor waiver.
PPM filing requirement: The PPM must be filed with SEBI through a SEBI-registered merchant banker at least 30 days prior to scheme launch, with the scheme fee — though the application fee is not applicable for an AIF's first scheme.
Private Placement Memorandum (PPM): The AIF's offer document, a regulated document under the AIF Regulations, containing all material disclosures. SEBI has prescribed templates with fifteen sections in Section A plus a Section B for additional disclosures.
Ring-fencing of manager liability: The protection a trust structure gives the manager, who is only a counterparty service provider to the AIF rather than a director of a company AIF or a designated partner of an LLP AIF. A key reason most Indian AIFs are trusts.
SEBI observations on a PPM: SEBI provides only observations and does not approve the PPM. It takes no responsibility for the accuracy of disclosures or the manager's capability; responsibility rests entirely with the manager.
Section A and Section B of the PPM: Section A carries the minimum disclosures prescribed by SEBI in fifteen sections; Section B accommodates all additional disclosures the AIF chooses to make over and above them.
Section VII, Principal Terms: The longest section of the PPM, detailing in full the items summarised in the Executive Summary plus additional items. It forms the basis for the entire investment paradigm.
Settlor: The author of the trust, who settles it and conveys the initial sum of money to the trustee towards setting up the trust and creating its assets.
Side letter: Supplementary documentation executed by a specific investor, the AIF and the investment manager, recording differential terms such as management fee, waterfall working, investment committee participation or investor giveback. Not disclosed to other investors.
Side letter test: Only terms creating an individual right of action for an investor against the fund or manager, which do not impact the general operations of the fund vis-à-vis other investors, may go in a side letter.
Trust Indenture: The document executed between the settlor and the trustee to bring an AIF trust into existence. It must be registered under the AIF Regulations, and must be drafted to conform to the determinate status of the corpus for tax purposes.
Warehousing of investments: Transactions parking securities for a period so they can be transferred or disposed of later, with the investor acting for an ultimate beneficiary or purely as a service provider. Not to be confused with warehousing of deals — building a pipeline before first close.
Wrapper: A supplement to the PPM of a domestic fund distributed at offshore locations in a unified structure, achieving compliance with private placement requirements in jurisdictions outside India.

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

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