Change of control
Also written Change in control · Change of sponsor or manager
A change in who controls an AIF's sponsor or manager — majority board appointment or control of management for a company, or a 50% controlling interest otherwise — needing SEBI approval and an investor exit.
In plain language
An investor commits to an AIF largely because of who runs it. If the manager is sold to a different group, the investor may be locked into a fund run by people they never chose.
The SEBI (AIF) Regulations treat that as a material change. They define what counts as a change of control, require SEBI's prior approval, and — for closed-ended funds — give investors who disagree a way out at a fair value, paid for by the manager rather than by the investors.
How it works
The definition (Chapter 15, section 15.4.2).
| Sponsor or manager is | "Control" means |
|---|---|
| A listed or unlisted company | The right to appoint a majority of the directors or to control management or policy decisions, exercisable by persons acting individually or in concert, directly or indirectly — including through shareholding, management rights, shareholders' agreements or voting agreements |
| Any other entity | Any change in its legal formation or ownership, or a change in controlling interest — an interest of not less than 50% of voting rights or interest |
Approval. Under Regulation 20(13), on a change of sponsor or manager, or a change in control of the AIF, sponsor or manager, the AIF must take prior approval from SEBI.
Other material changes. The workbook groups change of control with a change in sponsor or manager (not including internal restructuring within the group) and a change in fee structure or hurdle rate that may adversely affect investors.
The mandatory exit option — closed-ended funds.
- Unit holders who do not wish to continue get not less than one month to express dissent.
- The exit is by buying out the dissenting investors' units — by the manager or a person the manager arranges.
- Before the buy-out, units are valued by 2 independent valuers, and the exit is at not less than the average of the two valuations.
- Responsibility for the exit rests with the manager. Expenses are borne by the manager, sponsor or proposed new manager or sponsor — never charged to unit holders.
- The whole process is completed within 3 months from the last date of the offer for dissent.
- The trustee (for a trust) or the sponsor (for any other AIF) oversees the process and updates SEBI.
The waiver. The exit process does not apply where the AIF has obtained approval of not less than 75% of unit holders by value of their investment.
Investors should avoid simply defaulting on commitments in response — that is a contractual breach of the subscription agreement; the exit option exists so they do not have to.
A worked example
Narmada Credit Fund, a closed-ended Category II AIF with net assets of Rs 400 crore, learns that its manager is being acquired by another financial group, which will get the right to appoint a majority of the manager's board. (Figures illustrative.)
Is it a change of control? Yes — the manager is a company and the acquirer gains the right to appoint a majority of directors. The AIF must obtain SEBI's prior approval.
Route 1 — seek the waiver. The manager asks investors to approve the change. It needs holders of 75% by value: Rs 300 crore of the Rs 400 crore. It receives approval from holders of Rs 280 crore — not enough. The exit process must run.
Route 2 — the exit.
| Step | Date |
|---|---|
| Dissent offer opens | 1 July |
| Last date for dissent (at least one month) | 31 July |
| Exit to be completed by (3 months from last date) | 31 October |
Priya dissents. She holds 5,000 units.
| Valuer | Value per unit |
|---|---|
| Independent valuer 1 | Rs 1,180 |
| Independent valuer 2 | Rs 1,240 |
| Average | Rs 1,210 |
She must be bought out at not less than Rs 1,210 × 5,000 = Rs 60,50,000. The valuers' fees and every other cost of the exit are borne by the manager or the acquiring group — not deducted from what Priya receives.
Why NISM asks about it
Chapter 15 (Fund Monitoring, Reporting and Exit), sections 15.4.1 and 15.4.2 define material changes and change of control and set out the exit process; Chapter 13 (Legal Documents and Negotiations) lists change of control among the material changes to the PPM that trigger a compulsory exit option. Expect questions on the 50% controlling-interest test, the one-month dissent period, the two valuers and their average, the 3-month completion deadline, who bears the cost, and the 75% waiver.
Common exam traps
- Two tests, depending on the entity. Board-majority or management control for a company; 50% controlling interest (or change in legal formation or ownership) for any other entity.
- Internal restructuring within the group is not a material change of sponsor or manager.
- SEBI's approval is prior approval.
- Dissent period: not less than one month. Completion: within 3 months from the last date of the dissent offer.
- Two independent valuers; exit at not less than their average — not the lower of the two.
- Costs fall on the manager, sponsor or incoming manager or sponsor, never on unit holders.
- 75% by value waives the exit. The tenure extension threshold is two-thirds — do not mix them.
- The mandatory exit option applies to closed-ended funds.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- SponsorThe person or firm that sets up the mutual fund — applies to SEBI for registration, executes the trust deed in favour of the trustees, and puts up the capital of the AMC.
- Material changeA change to an AIF's PPM or fund terms significant enough to influence an investor's decision to stay invested — such as a new sponsor or manager, change in control, or adverse fee change.
- Private placement memorandumThe offer document of a Category III AIF, filed with SEBI through a merchant banker at least 30 days before a scheme launches — and the document SEBI comments on but never approves.
- Investment ManagerThe person or entity appointed by an AIF's sponsor to manage its investments — deal sourcing, structuring, oversight and exit — known abroad as the "General Partner" in an LLP fund.
- Independent ValuerThe valuer of a Category III AIF's unlisted holdings — not an associate of manager, sponsor or trustee, with 3 years' experience, and IBBI-registered with a professional membership or a CRA group entity.
- Closed-ended AIFAn AIF scheme offered for a limited period, funded by commitments drawn down through capital calls, with no redemption before the fund winds up — compulsory for Categories I and II.
- Mandatory exit optionThe exit a close-ended AIF must offer dissenting investors after a material change: at least one month to dissent, buyout at no less than the average of two independent valuations, done within 3 months.
- Trusteeship FeesThe fee an AIF set up as a trust pays its trustee under the offer letter — typically a fixed Rs 1 lakh to Rs 5 lakh a year, with 18% GST on top that the fund may not be able to recover.
- Taking privateA buyout of a listed company by acquiring the shares held by the public — in India through SEBI's delisting process for promoters, or a Takeover Code open offer for an external acquirer.
- Management Buy-inA buyout in which an outside management team is assembled to run the target, used where the company's existing managers cannot supply what a buyout needs.
- Dissent periodThe window of not less than one month an AIF must give unit holders to record dissent to a material change, after which the manager must buy out the dissenters within three months.