NISM Series XIX-E · Chapter 13: Fund Monitoring, Reporting and Exit

L1 · Foundation

Watching the Fund - Monitoring, Duties and Reporting

Why investors must keep monitoring an illiquid fund after they commit, the difference between monitoring and managing, the manager's duties under Regulation 20, the six Stewardship Code principles, what Regulation 22 requires AIFs to disclose, the Category III quarterly report, records, reports to SEBI, and what a good fund report contains.

14 min read · Worth 10% of the paper · Written from pages 344–366 of the official NISM workbook · Updated 18 September 2026

Watching the Fund

13.1 Why monitoring does not stop at commitment

Alternative investments are long-term and illiquid. So investors may think there is little to do once due diligence is over and the commitment is made. The workbook says this is "far from the truth". Ongoing fund monitoring throughout its life cycle is a necessary control mechanism.

Managers try to maximise returns by making, monitoring, nurturing and exiting investments. Alongside that, they must report fund performance on an on-going basis to investors.

13.1.1 What monitoring is - and what it is not

Monitoring is part of a larger control system within the investment process. Because the fund is illiquid, the investor cannot simply sell and walk away when something goes wrong. His ability to react is limited. For complex problems he may need to reach a consensus with the manager and other co-investors, or build alliances with co-investors to put pressure on the manager together.

Other benefits of monitoring:

In a co-investment strategy, it helps screen interesting investment opportunities.
Lessons learned improve the due diligence process and the choice of future investments.

So the focus should be on both standardised formal reporting and informal interaction with investors and the investment committee or board.

Two cautions about investor behaviour:

Monitoring AIFs takes more effort and higher cost than listed, on-market funds. Investors must be patient, especially in the early years.
But when things go wrong, the investor's reaction should not be "too little, too late". Investors need to be goaded to take action in time.

The blind pool problem

AIF investing is largely a blind pool (co-investments aside) - investors commit before they know the exact investments. So the investor must set the risk profile of the investment at the time of commitment. And because the fund is illiquid, the investor cannot easily rebalance if the manager acts against the fund documents. The fix is effective communication and dialogue with the manager.

There is also a risk the other way. Sticking too closely to a declared strategy can be harmful when market conditions change significantly and create new opportunities. Investors should keep this in mind too.

13.2 The manager's duties under Regulation 20

Regulation 20 gives a general duty: the AIF must review its policies and procedures, and their implementation, regularly or when business changes. The specific duties (added by the Second Amendment Regulations 2021) are:

The Manager and the trustee / trustee company / Board / designated partners must ensure compliance with the Code of Conduct in the Fourth Schedule.
Every AIF must have detailed policies and procedures, approved jointly by the Manager and the trustee (or Board or designated partners). These ensure every decision complies with the Regulations, the placement memorandum, investor agreements and other fund documents. The Investment Manager is responsible for each decision complying.
The Manager may set up an Investment Committee to approve decisions. It is responsible for compliance under point 2. (This does not apply where SEBI gives waivers to Large Value Funds or in other specific cases.)
The Sponsor or Manager must appoint a SEBI-registered custodian to hold the fund's securities or goods.
Each scheme's assets and liabilities, and its bank and securities accounts, must be segregated and ring-fenced from other schemes.
AIFs must inform SEBI of any material change from the information given at registration.
A change of Sponsor or Manager, or change in control of the AIF, Sponsor or Manager, needs prior approval from SEBI.
The Manager must not give advisory services to anyone other than investors of a Co-investment scheme or clients of a Co-investment Portfolio Manager (under the SEBI (Portfolio Managers) Regulations, 2020), for investing in investee companies where its AIF invests.
The Manager must appoint a Compliance Officer, who must independently report any deviation to SEBI forthwith within 7 working days.

13.2.1 The Stewardship Code

A Stewardship Code applies to AIFs on a mandatory basis for their listed investments (SEBI Master Circular of 31 July 2023). It has six principles:

#	Principle	Key points
1	Stewardship policy	Comprehensive policy, publicly disclosed on the website, reviewed and updated periodically. Covers engaging with investee companies on performance, strategy, governance, ESG and capital structure
2	Conflicts of interest	Clear, disclosed policy that puts the client's interest before the entity's, including when clients' interests differ from each other
3	Monitoring investee companies	Continuous monitoring under a policy that sets the areas and extent - including when monitoring is not needed - while respecting insider trading rules
4	Intervention	When and how to intervene, and a policy on collaborating with other institutional investors. Steps may include meeting management, escalating to the board, working with other investors, or voting against decisions
5	Voting	A clear voting policy and disclosure of voting. Investors should decide after in-depth analysis, not blindly support management
6	Reporting	Report stewardship activities to clients periodically, in an easy-to-understand format; it may go on the website

13.2.2 What AIFs must disclose to investors - Regulation 22

AIFs must ensure transparency on:

(a) financial, risk management, operational, portfolio and transactional information about fund investments
(b) fees ascribed to the Manager or Sponsor, and fees charged to the AIF or any investee company by an associate of the Manager or Sponsor
(c) inquiries or legal actions by legal or regulatory bodies in any jurisdiction, as and when they occur
(d) any material liability during the AIF's tenure, as and when it arises
(e) any breach of the placement memorandum, investor agreement or fund documents, as and when it occurs
(f) change in control of the Sponsor, Manager or Investee Company
(g) any significant change in the key investment team
(h) information for systemic risk purposes, when SEBI requires

Systemic risk (workbook footnote) means business practices that could cause a wider financial risk well beyond one investment. Example: an AIF heavily invested in one sector could see a large part of its portfolio lose value if that sector hits trouble.

The Category III quarterly report

Category III AIFs must send investors a quarterly report within 60 days of the end of the quarter, covering:

A. Financial information of investee companies

B. Material risks and how they are managed:

Risk	Level
Concentration risk	Fund
Foreign exchange risk	Fund
Leverage risk	Fund and investee company
Realisation risk (change in exit environment)	Fund and investee company
Strategy risk (change in or divergence from business strategy)	Investee company
Reputation risk	Investee company
Extra financial risks (ESG)	Fund and investee company

13.2.3 Records - Regulation 27

The Manager or Sponsor must keep records of: (a) assets under the scheme; (b) valuation policies and practices; (c) investment strategies; (d) particulars of investors and their contributions; (e) rationale for investments made.

13.2.4 Reports to SEBI - Regulation 28

SEBI may at any time call for reports. The Activity Reports are filed on the SEBI Intermediary Portal (SI Portal) (SEBI circular of 4 March 2026):

Report	Deadline
Comprehensive Annual Activity Report	Within 30 calendar days from the end of March
Limited Quarterly Activity Report	Within 15 calendar days from the end of each quarter - but no separate report for the March quarter, since the annual report covers it
Leverage report (Category III only)	Quarterly, in a pre-defined format
Changes in PPM and fund documents	To SEBI and investors, consolidated, within 1 month of the end of each financial year

13.3 What a fund report covers

A typical fund report covers:

Economy (macro) - GDP growth, fiscal position, currency, interest rate outlook, macro stability
Sectors (micro) - performance and outlook of each industry the fund is invested in
Deals done - new and follow-on investments, debt financing, exits, liquidations
Current portfolio - break-up by company and sector, in percentages
Investee company progress - profile, developments, opportunities, growth in value
Outlook and deal pipeline - including signed term sheets, if the fund is still investing
Leverage (Category III) - overall leverage, leverage from cash borrowing, leverage from derivatives or complex products, and the main source of leverage. Borrowing at fund level for the investment strategy is unique to Category III AIFs
Exits - for vintage funds (fund close completed) and mature funds (close to harvesting), exit prospects and returns on completed exits
Changes to the PPM - consolidated, within 1 month of FY end, naming the changes and the relevant pages
Investor Charter and grievance redressal - services to investors, the grievance mechanism and investors' responsibilities, in one place

Fund valuation and performance are reported in the annual statutory report, which also covers stewardship. Many Indian AIFs are moving towards global standards - GIPS (CFA Institute), ILPA, the IPEV Valuation Board and EVCA practices.

13.3.1 Why managers hold back

Managers face a real dilemma:

They have a statutory duty to disclose, and good disclosure builds investor relationships.
But detailed information, enough for an independent risk assessment, could hurt follow-on fund raising if performance is weak.
Confidentiality protects portfolio companies' data privacy.
Too much disclosure could weaken the competitive edge of portfolio companies or deals in the pipeline.
In an extreme case, leaks of proprietary information could cause legal problems.

Think of it like this

Monitoring is the parents' meeting, not teaching the class

Parents who pay a boarding school's fees do not walk into the classroom and teach - that is the school's job. But they attend every parent-teacher meeting, read the report card, and speak up early if marks slide. That is fund monitoring. Under the contribution agreement investors have no role in fund management, yet they must oversee allocation, governance and performance. And, as the workbook warns, reacting "too little, too late" - after the child has failed the year - is as bad as not watching at all.

A blind pool is booking a chartered bus before the itinerary is fixed

A group of families pays for a two-week chartered tour. The organiser will decide the exact towns later. Once the bus leaves Chennai, no family can get off on the highway and take its money back. So the only sensible time to agree the kind of trip - pilgrim towns or hill stations, fast or relaxed - is before paying. That is why the workbook says investors in a blind pool must set the risk profile of their investment at the time of commitment, and rely on dialogue with the manager afterwards.

Ring-fencing is separate tiffin boxes

A dabbawala in Mumbai carries hundreds of tiffins, but each family's lunch stays in its own box with its own code. If one box spills, the next office's lunch is untouched. Regulation 20 asks the same of an AIF with several schemes: each scheme's assets and liabilities, bank accounts and securities accounts must be segregated and ring-fenced, so one scheme's losses or creditors cannot reach another scheme's investors.

The Stewardship Code is a housing society member who reads the agenda

In a cooperative housing society, some members sign every resolution the committee sends round. Others read the accounts, ask why the repair contract went to the secretary's cousin, speak to other members and vote against it if needed. The Stewardship Code asks AIFs to be the second kind of member in their listed investee companies: monitor continuously, intervene through a clear escalation path, collaborate with other investors, and vote after in-depth analysis rather than blindly supporting management.

Records kept after winding up are the old house papers

When a family sells its ancestral house, sensible elders keep the sale deed and old tax receipts for years afterwards - a dispute or a tax question can surface long after the keys are handed over. Regulation 27 works the same way. The manager or sponsor must keep records of assets, valuation policies, strategies, investor details and the rationale for investments for five years after the fund is wound up, not five years from when each record was made.

Key terms in this chapter

Accredited Investor (in the investor limits): An investor excluded from the 1,000-investor limit per scheme, to whom the ₹1 crore minimum investment does not apply.
Blind pool: A fund where investors commit money before the specific investments are known. That is why investors must set the risk profile of their investment at the time of commitment.
Buyback (exit): An exit where the AIF exercises a put option, and the investee company or its promoters buy back the shares.
Compliance Officer: An officer the Investment Manager must appoint to monitor compliance with SEBI's Act, rules, regulations and circulars, who reports any deviation to SEBI forthwith within 7 working days.
Compliance Test Report (CTR): An annual report the Investment Manager submits to the Sponsor (and Trustee, for a trust) within 30 days of the financial year end, testing compliance with the AIF Regulations. Comments come within 30 days, changes are made within 15 days, and violations go to SEBI at the earliest.
Comprehensive Annual Activity Report: An annual report every AIF files with SEBI on the SEBI Intermediary Portal within 30 calendar days from the end of March. It also covers the March quarter.
Continuing interest: The Manager's or Sponsor's own investment in the AIF: not less than 5% of corpus or ₹10 crore, whichever is lower, for Category III; 2.5% or ₹5 crore for Categories I and II.
Control (of a sponsor or manager company): The right to appoint a majority of directors or control management or policy decisions, by any person or persons acting alone or in concert. For other sponsor entities, any change in legal formation, ownership or controlling interest of not less than 50% of voting rights or interest.
Dissolution Period: A period after the Liquidation Period for selling remaining investments, entered only with investor consent, filed through a merchant banker, no longer than the original tenure, and never extended.
Fund monitoring: An oversight process on a fund's asset allocation, portfolio composition, governance and performance, and on internal and external risk factors. It is different from fund management, in which investors have no involvement.
Inoperative Fund: A status granted by SEBI to a scheme that retains money beyond fund life and wants to surrender registration, or keeps registration only for pending litigation. It may not launch schemes or charge management fees, and files an annual status report within 30 calendar days of the end of March.
In-specie distribution: Distributing unsold investments to investors instead of cash. It needs at least 75% approval by value and bids for at least 25% of the value; otherwise the distribution is at One Rupee.
Investor Charter: A document bringing together the services provided to investors, the grievance redressal mechanism and investors' responsibilities, in one place for ease of reference.
Limited Quarterly Activity Report: A quarterly report every AIF files with SEBI within 15 calendar days of each quarter end, except the quarter ending March.
Liquidation Period: A period of 1 year after the expiry of an AIF scheme's tenure or extended tenure, in which its assets must be fully liquidated.
Liquidation Scheme: A close-ended scheme launched only to liquidate the unliquidated investments of an expired scheme. No new Liquidation Schemes may be launched after 25 April 2024.
Mandatory exit option: An exit that close-ended AIFs must offer dissenting investors after a material change: at least one month to dissent, buyout at not less than the average of two independent valuations, costs not charged to unit holders, and completion within 3 months. It does not apply if at least 75% by value approve.
Material change: A change that significantly influences an investor's decision to stay invested - such as a change of sponsor or manager, change in control, or changes in the fundamental attributes of the fund or scheme.
Offer for Sale through IPO: An exit where the AIF sells its holding in the investee company's IPO - the most preferred exit, which has historically given the best returns.
Realisation risk: The risk of a change in the exit environment, reported by Category III AIFs at both fund and investee company level.
Regulation 20 (SEBI AIF Regulations): Requires AIFs to review policies and procedures regularly, and sets specific duties: Code of Conduct compliance, jointly approved policies, a SEBI-registered custodian, ring-fenced schemes, prior SEBI approval for change of control, and a Compliance Officer.
Regulation 22 transparency: The duty to disclose to investors financial, risk and portfolio information, fees, legal actions, material liabilities, breaches of fund documents, change in control of sponsor, manager or investee company, key team changes, and systemic risk information when SEBI requires.
Ring-fencing of schemes: Keeping the assets, liabilities, bank accounts and securities accounts of each scheme of an AIF separate from those of other schemes.
Stewardship Code: Six principles, mandatory for AIFs' listed investments, on stewardship policy, conflicts of interest, monitoring investee companies, intervention, voting, and periodic reporting of stewardship activities.
Strategic sale (M&A exit): An exit through sale to a corporate buyer in the same industry or entering it, which may pay a strategic premium. Usually the second most preferred exit after the IPO.
Strategy risk: The risk of a change in, or divergence from, business strategy, reported at investee company level.
Systemic risk: Business practices that could create a wider financial risk for an AIF well beyond one investment.
Trade sale (secondary sale): An exit through sale of the AIF's stake to a third party, which could be another AIF taking over the seller's position in the portfolio company.

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

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