Contribution Agreement
Also written Subscription Agreement · Investor Contribution Agreement · Subscription (Investor Contribution) Agreement · Contribution (Subscription) 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.
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.
- 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.
- DrawdownThe process by which the manager of a Category III AIF calls committed capital from investors as the fund needs it — also known as a capital call.
- Side LetterA supplementary agreement between one investor, the AIF and the manager granting that investor terms not generic to all — such as a different fee, waterfall or committee seat.
- Distribution WaterfallThe order in which a Category III AIF pays out capital and gains to investors and the manager — capital first, then the hurdle return, then the manager's catch-up, then the residual split.
- 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.
- Most Favoured Nation (MFN) ClauseA protection right a large investor negotiates so that no other investor in the Category III AIF is placed in a better position — usually delivered through a separate class of units.
- In-specie DistributionDistributing an AIF's unsold investments themselves, rather than cash, to investors — allowed in the liquidation period with 75%-by-value approval and mandatory at the end of a dissolution period.
- Revocable transferA transfer to a trust whose document lets the transferor get back the income or asset, or reassume power over it; income from it is taxed in the transferor's hands under sections 97 and 98 of the ITA.
- 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.
- Pro-rata rightsThe rule that each AIF investor's share in every investment of a scheme, and in the proceeds, follows their share of commitments — save for excused, excluded or defaulting investors and the manager's carry.
- Merchant banker agreementThe contract by which an AIF appoints a SEBI-registered merchant banker to file its placement memorandum with SEBI and certify the adequacy of its disclosures.
- Distribution AgreementThe contract between an AIF's investment manager and a distributor, defining the distributor's role, binding it to a code of conduct and fixing how commission may be paid.
- Dematerialised unitsAIF unit capital held in electronic form with a depository: every scheme must now issue units in demat only, each carrying its own ISIN against which the NAV is uploaded.
- 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.
- Key Man ClauseA fund agreement clause that stops an AIF or its manager from making new investments if one or more named key persons cannot devote the necessary time to the fund.
- Default in DrawdownThe event of an AIF investor failing to pay a capital call. Other investors take up the call, and the defaulter substantially loses rights and returns under the investment agreement.