Continuing interest
Also written Continuing interest (registration) · Sponsor commitment · Manager commitment · Skin in the game · Sponsor/manager commitment · Skin-in-the-game
The sponsor's or manager's own money locked into the fund — 2.5% of corpus or Rs 5 crore, whichever is lower, for Category I and II AIFs, and 5% or Rs 10 crore for Category III.
In plain language
A manager who is paid a fee whatever happens and a share of the upside if things go well has an uncomfortable amount to gain from taking risk with somebody else's money. Continuing interest is the regulation's answer: the sponsor or manager must put its own capital into the fund, and must leave it there.
That is why the workbook calls it skin in the game. It removes one of the main sources of mis-alignment of interests and moral hazard, and it is the first thing an investor checks — before any fund due diligence begins, the ownership structure and the level of commitment provide the preliminary comfort.
How it works
Under the SEBI (AIF) Regulations the Sponsor or Manager shall have a continuing interest of:
| Category | Requirement |
|---|---|
| Category I and Category II AIF | not less than 2.5% of the corpus or Rs 5 crore, whichever is lower |
| Category III AIF | not less than 5% of the corpus or Rs 10 crore, whichever is lower |
| Angel Fund | not less than 0.5% of the amount invested or Rs 50,000, whichever is higher |
Four conditions do the real work.
It must be fresh cash. The commitment shall be in the form of fresh investment in the scheme and shall not be through the waiver of management fees or transfer of stocks — the sponsor's capital is at risk on par with every other investor's.
It cannot be withdrawn. It remains locked in until distributions to investors are completed in full, which makes the sponsor the first investor in and the last paid out. A sponsor may commit more than the minimum, but the excess is subject to the same wait.
It has to keep up. If the fund size goes up, sponsors may need to invest more in subsequent tranches to maintain the minimum. Chapter 17 applies the test to each scheme where a fund has several.
It must be disclosed. The Manager or Sponsor shall disclose their investment in the AIF to investors, and the PPM carries sponsor and manager commitment in its Section I summary.
A worked example
Four schemes, four different answers — and the arithmetic is the examinable part.
| Scheme | Corpus | Percentage test | Rupee test | Continuing interest |
|---|---|---|---|---|
| Vindhya Growth Fund (Cat II) | Rs 400 crore | 2.5% = Rs 10 crore | Rs 5 crore | Rs 5 crore (lower) |
| Konkan Credit Fund (Cat II) | Rs 120 crore | 2.5% = Rs 3 crore | Rs 5 crore | Rs 3 crore (lower) |
| Deccan Long-Short Fund (Cat III) | Rs 300 crore | 5% = Rs 15 crore | Rs 10 crore | Rs 10 crore (lower) |
| Sahyadri Angel Fund | invests Rs 2 crore in a start-up | 0.5% = Rs 1 lakh | Rs 50,000 | Rs 1 lakh (higher) |
Note what happens to Konkan. A smaller fund carries a proportionately larger sponsor commitment — Rs 3 crore on Rs 120 crore is the full 2.5%, while Vindhya's Rs 5 crore on Rs 400 crore is only 1.25%. The rupee cap is a ceiling for large funds, not a floor for small ones.
Now suppose Vindhya exercises a green shoe and closes at Rs 700 crore. The percentage test becomes Rs 17.5 crore, the rupee test stays Rs 5 crore, and the lower of the two is still Rs 5 crore — so nothing more is due. Had the rupee figure not been there, the sponsor would have had to find another Rs 7.5 crore.
And the lock matters. Vindhya's sponsor put in Rs 5 crore in year 0 and cannot take it out in year 6 when the fund is distributing well; it comes out after every investor has been paid in full.
Why NISM asks about it
Chapter 7 section 7.1.5 sets out the three tiers, Chapter 12 section 12.4.1 makes ownership structure and continuing interest the first criterion in manager selection, and Chapter 17 section 17.2 restates the requirement scheme by scheme. A numerical 'what is the minimum sponsor commitment' question is close to guaranteed, and the lower/higher switch is what it tests.
Common exam traps
- Lower for Categories I, II and III; higher for angel funds. The angel test also runs on the amount invested, not on corpus, and the two numbers are Rs 50,000 and 0.5%.
- It cannot be met by waiving management fees or transferring stocks. Fresh cash, into the scheme.
- Locked in until investors are paid in full — first in, last out. That includes any voluntary excess over the minimum.
- Per scheme, not per fund, where a fund runs several schemes.
- Sponsor or manager. The regulation does not require both to contribute.
- Do not confuse it with the Rs 25 lakh minimum that applies to an employee or director of the fund or the manager who invests in an individual capacity.
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.
- ClawbackAn investor right to recover carried interest already paid to the manager on early successful exits, when later failed investments mean the manager was overpaid across the fund's whole life.
- First CloseThe date an AIF scheme declares it has raised enough commitments to proceed — the point from which tenure, management fees and set-up cost amortisation all start running.
- Management FeeThe fixed annual fee an AIF pays its investment manager for managing the fund — charged on committed capital in Category I and II funds and on gross NAV in Category III, regardless of performance.
- Adverse selectionThe risk of ending up with the wrong manager — picking a fund on a track record or a forward-looking statement that does not predict performance, and getting sub-optimal returns or moral hazard instead.
- Investor Due DiligenceThe investigation an investor runs on an AIF and its manager before committing capital — the process of investigation and evaluation into the details of a potential investment.
- Capital CommitmentThe total amount an investor promises to contribute to a Category III AIF over the life of the fund — at least Rs 1 crore, or Rs 25 lakh for employees and directors of the AIF or its Manager.
- Designated PartnerIn a Category III AIF set up as an LLP, the sponsor acting as the partner responsible for all statutory compliances of the LLP — and bound by the AIF code of conduct.
- Junior or subordinate class of unitsAIF units that accept lesser returns or share excess losses compared with pro-rata rights — open only to the manager or sponsor, DFIs, State Industrial Development Corporations and government-owned entities.
- Investor PresentationThe core marketing document an AIF distributor prepares from the PPM's disclosures, analysing the fund and scheme for investors and showing how it fits their needs.