Contribution Agreement
Also written Subscription Agreement · Investor Contribution Agreement · Subscription (Investor Contribution) Agreement
The agreement between one investor, the trustee and the investment manager that sets the terms on which that investor participates in the AIF — the contract that turns a commitment into units.
In plain language
The PPM tells an investor what the fund intends to do. The Contribution Agreement is what the investor actually signs.
It is executed by and between each contributor, the trustee and the investment manager — three parties, not two — and it sets out the conditionalities for that investor to participate in the fund. It is amenable to amendment from time to time.
And it is not shared with the other contributors, because it carries representations and warranties specific to each one. Two investors in the same scheme sign two different documents.
How it works
The scope of the agreement follows from what an AIF investment is. Because most fund investments are blind pool investing — the investor commits to the pool, and the manager picks the deals afterwards — everything has to be settled before any deal exists. So the subscription agreement covers computation of beneficial interest, drawdowns, the distribution waterfall, the commercial aspects of fees and expenses, the fund governance structure and the powers of the investment committee.
Two mechanical points sit here as well. Units representing unit capital have to be issued in dematerialised mode only, and that requirement is specified as part of the subscription agreement, so the investor receives unit statements from the depository. And a fund cannot offer differential drawdown terms to investors in the same class — where the economics genuinely differ, the answer is a separate class of units, or a side letter.
The agreement is also why the trust is the dominant structure. An LLP receives contributions under the Limited Liability Partnership Act and a company under the Companies Act, 2013, where share application money and allotment are regulated concepts. AIF arrangements need more flexibility between investor, fund and manager than a company structure allows.
A worked example
Saraswati Credit Opportunities Fund, a Category II AIF, closes with a corpus of Rs 600 crore across 92 investors.
Ms Iyer commits Rs 5 crore. Her Contribution Agreement, signed by her, the trustee and the manager, fixes:
| Term | What her agreement says |
|---|---|
| Capital commitment | Rs 5 crore |
| Class of units | Class A1 |
| Initial drawdown | 20% — Rs 1 crore, within 10 business days of notice |
| Management fee | 1.75% on committed capital during the commitment period |
| Waterfall | European, 10% preferred return, 20% additional return |
| Default in drawdown | Interest at 15% p.a., then forfeiture of rights |
A sovereign wealth fund in the same scheme commits Rs 150 crore and signs its own agreement, for Class A2 units at a 1.25% fee. Ms Iyer never sees it, and it never sees hers.
What she can work out from her own document: over an eight-year life, 1.75% on Rs 5 crore for a three-year commitment period and then on roughly Rs 3.9 crore of invested capital costs her about Rs 6 lakh, or 12% of her commitment, before a single rupee of carry.
What she cannot work out from it: whether the Rs 150 crore investor has a seat on the investment committee. That is the point of the document being bilateral, and the reason side letters carry the legal risk they do.
Why NISM asks about it
Chapter 13 (Legal Documentation and Negotiations), section 13.4, is the whole of it, and the Investor Charter in Annexure 13.1 puts 'entering into contribution agreement with investor' inside the on-boarding process and makes abiding by it an investor responsibility. Expect a parties question (who signs it), a 'which of these is a definitive agreement' question, and a distinguish-the-document question against the PPM and the IMA.
Common exam traps
- Three parties sign it — the contributor, the trustee and the investment manager. The manager is not a bystander to it.
- One per investor, and confidential. It is not a scheme-wide charter; the representations and warranties are investor-specific.
- The PPM is disclosure, the Contribution Agreement is contract. A term in the PPM that is not carried into the agreement binds nobody.
- Units are issued in demat mode only — that requirement lives in this agreement, not only in the regulations.
- No differential drawdown terms inside a class. Differences go into a separate class of units, or a side letter, not into a quiet variation of the same class.
- Do not confuse it with the Investment Management Agreement, which is signed once for the trust as a whole between the trustee and the manager, and not at the launch of each scheme.
Check yourself
1.Who are the parties to a Contribution Agreement, and is it shared with other investors?
- a)The investor and the AIF only; it is circulated to all investors
- b)Each contributor, the trustee and the investment manager; it is generally not shared with other contributors because it contains representations and warranties specific to each contributor
- c)The sponsor and the investor; it is filed publicly with SEBI
- d)The manager and the custodian; it is shared only with the trustee
Show the answer
Answer: (b) Each contributor, the trustee and the investment manager; it is generally not shared with other contributors because it contains representations and warranties specific to each contributor
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. 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. Contrast this with the constitutional document, which is shared with all investors of the AIF alike, being the charter document. On contents: 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 note the hierarchy rule from the audit section: the terms of contribution or subscription agreement shall be aligned with the terms of the PPM and shall not go beyond the terms of the PPM.
2.When should an institutional investor complete its due diligence, and why does the timing matter?
- a)After signing the contribution agreement, so the fund shares more information
- b)Before signing legal documents and investment agreements — timely completion allows the investor to negotiate the terms and conditions of subscription based on the due diligence reports and analysis
- c)At the first close, whichever is later
- d)Within one year of the first drawdown
Show the answer
Answer: (b) Before signing legal documents and investment agreements — timely completion allows the investor to negotiate the terms and conditions of subscription based on the due diligence reports and analysis
Due Diligence process should be ideally completed before signing legal documents and investment agreements, which binds the institutional investor to commit capital to the fund. Timely completion of due diligence can allow the investor to negotiate the terms and conditions for subscription to the fund, based on the due diligence reports and analysis. The findings are the investor's bargaining chips. Once the contribution agreement is signed the commitment is legally binding and there is nothing left to trade. The chapter repeats this instruction twice, which is a signal of its importance. Note also that side letters are negotiated on the same basis: an institutional investor can negotiate Investor Side Letters, based on the Due Diligence reports and analysis.
3.Which document is signed when investing in an offshore fund, and which for an onshore fund?
- a)A Contribution Agreement for offshore funds and a Subscription Agreement for onshore funds
- b)A Subscription Agreement for offshore funds and a Contribution Agreement for onshore funds
- c)An Indenture of Trust in both cases
- d)A wrapper in both cases
Show the answer
Answer: (b) A Subscription Agreement for offshore funds and a Contribution Agreement for onshore funds
The Subscription Agreement is signed, at the time of investing in Offshore Funds, while a Contribution Agreement is signed, at the time of investing in Onshore Funds. Whichever applies, its contents are the same in substance: it records the fund terms and conditions, distribution mechanism, list of expenses to be borne by the fund and powers of the investment committee of the AIF. The agreement sets out the capital commitment for investors and records the representations and warranties to be made by the investors, on their legal qualification to make investments in the fund. And the essential cross-check: a potential investor shall verify all the terms and conditions stated in the Subscription Agreement with the PPM and check for any differences or discrepancies which may impact their rights or liabilities. A wrapper, by contrast, is a supplement attached to the PPM, to help achieve compliance with the requirements for private placement of the units issued by an offshore fund, to investors in jurisdictions outside India.
Where this is taught
Free preparation for NISM Series XIX-BRelated terms
- Investment Management AgreementThe agreement between the trustee, acting for the AIF, and the investment manager, by which the trustee delegates its entire investment management power — and by which the manager can later be removed.
- 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.
- Blind poolA fund in which investors commit capital to the pool rather than to named deals — the manager chooses the investments afterwards, which is why the subscription agreement must settle everything in advance.
- Investment Advisory AgreementThe agreement under which an offshore fund takes non-binding investment advice from an on-site Indian advisor — advice, not management, which is exactly what keeps the two roles apart.
- WrapperA supplement attached to a domestic fund's Private Placement Memorandum when it is distributed offshore, so the offering complies with private placement rules in the jurisdictions where it is marketed.