Conflict of Interest Policy

A fund manager is paid to act for investors. But the manager also has its own group companies, its own employees, other schemes, co-investors and service providers. Sooner or later, one of those interests will pull against the investors'.

The workbook does not pretend this can be avoided. Instead it requires that every AIF shall have a Conflict of Interest Policy — a document that helps identify and mitigate potential conflicts. Managers and Sponsors are responsible for monitoring compliance with it.

The reason is fiduciary. The Sponsor and Manager or Trustee of an AIF have a fiduciary duty towards investors and are bound to disclose all conflicts of interest as and when they arise or are likely to arise. The policy is how that duty is organised into a process rather than left to good intentions.

What the policy must briefly describe (Chapter 5):

1. The nature of potential conflicts that could arise at various levels of the fund.
2. The methodology the manager will adopt for effective mitigation.
3. The disclosure mechanism to inform investors of the risk from such conflicts and seek their acknowledgement.

The levels it has to cover. Chapter 5 gives examples at the fund-constituent level (employees of the sponsor, AMC, trustee and service providers; co-investments by the manager, to be disclosed before allocation; a trustee that is a group or associate entity or shares directors) and at employee level (no economic interest contrary to the fund; no bias from personal, family or friendship ties with a counterparty; no working for a competing entity). All conflicts, present or potential, are disclosed to the Compliance function.

The machinery around it (Chapter 11):

• a Conflict of Interest Register documenting each conflict, its nature and the action taken;
• investor consent, particularly for investments involving associates of the manager or sponsor;
• disclosure in the Placement Memorandum;
• measures such as Chinese walls, training, and care in choosing outsourcing firms;
• under the stewardship circular: blanket bans in certain cases, a Conflict of Interest Committee, segregation of voting from sales functions, recusal, minutes, and periodic review and public disclosure of the policy.

Chapter 11 adds that the code of conduct should ensure a separate Conflict of Interest Policy and Register for each scheme, and Chapter 9's disclosure table requires intimation of conflicts as and when they arise or seem likely to arise.

The fund, entities and amounts are illustrative; the steps are the workbook's.

Narmada Growth Fund, a Rs 500 crore Category II AIF, is offered a Rs 40 crore stake in a logistics company. A second AIF — managed by a group company of Narmada's sponsor — already holds 15% of that company and is the seller.

Working through the policy:

Suppose investors holding a majority by value approve at a price of Rs 1,600 a share, supported by an independent valuation. Narmada buys 2,50,000 shares — 2,50,000 × Rs 1,600 = Rs 40 crore. If the register had not been kept and the price had later been found to favour the seller, the manager would have no record showing the conflict was ever managed.

Chapter 5, section 5.1.1.4 (Investment Manager), makes the policy mandatory and lists its three contents. Chapter 11, sections 11.3.6 (Conflict of Interest Issues), 11.4 (Role of Human Capital in avoiding Conflict of Interests) and 11.6 (code of conduct), add the register, consent, Chinese walls and the per-scheme requirement. Chapter 9 puts conflict disclosures in the PPM and investor charter. Expect "what must the policy describe" and "who monitors compliance".

• Every AIF must have one. It is not optional or reserved for Category III.
• Three contents: nature of potential conflicts, mitigation methodology, disclosure mechanism with investor acknowledgement.
• Managers and Sponsors monitor compliance; all conflicts are disclosed to the Compliance function.
• Disclosure is "as and when they arise or are likely to arise" — not once a year.
• The policy is not the register. The policy sets out the approach; the Conflict of Interest Register records each actual conflict and the action taken. Chapter 11 expects both, per scheme.
• Chinese walls are one mitigation measure, not the policy itself.