Distributor Agreement
Also written Distributors Agreement
The contract forming the legal basis for an AIF distributor's relationship with the fund, executed either between the fund and the distributor or as a three-way agreement including the investment manager.
In plain language
A distributor markets AIF schemes to investors, but goodwill alone does not make that arrangement enforceable. It needs a contract.
That contract is the Distributor Agreement. It is either a bipartite agreement, between the fund and the distributor, or a tripartite agreement, adding the fund's investment management company as a third party. Either way, it turns the distributor's role from an informal understanding into a set of enforceable rights and duties.
The commercial heart of the agreement is simple: the distributor earns marketing commissions for bringing in investors. Around that commercial core sits a full set of legal terms governing how the relationship works, and what happens if it goes wrong.
How it works
The principal terms the workbook lists for a Distributor Agreement:
- Roles and responsibilities of the parties.
- Rights and obligations.
- An indemnity clause.
- Considerations / commissions.
- Distribution of commissions.
- Penal actions for non-fulfilment of a performance clause.
- Arbitration.
Its legal basis is layered. AIF distributorship is governed by the general law of contract — the Indian Contract Act, 1872 — and, on top of that, by the specific terms the parties write into the Distributor Agreement itself. Careful drafting and execution matters, because it is what prevents penalties, arbitration and other legal exposure if the distributor relationship breaks down.
Where it sits among other support-services contracts. The workbook groups the Distributor Agreement with other outsourced-function agreements of the AIF and its manager — with merchant bankers, custodians, legal advisers, auditors, fund accountants, tax consultants, valuation experts and technical experts.
A worked example
Kalika Capital Advisors signs on to distribute units of Meridian Alpha Fund II, a Category II AIF. Because Meridian's investment management company is a separate legal entity from the fund itself, the parties execute a tripartite Distributor Agreement among the fund, the investment manager and Kalika.
The agreement fixes Kalika's commission at 1.5% of every investor commitment it brings in, sets an indemnity clause protecting the fund against loss caused by Kalika's misrepresentation to investors, and provides for disputes to go to arbitration rather than court.
Kalika brings in Rs 20 crore of fresh commitments in its first quarter, earning a Rs 30 lakh commission. Six months later it misses an agreed onboarding deadline for a large investor. Under the agreement's penal action clause for non-performance, the fund withholds part of that quarter's commission — exactly the kind of consequence the principal terms are drafted to cover.
Why NISM asks about it
Chapter 13 (Good Practices), section 13.3 (Distributor Agreement), sets out the bipartite/tripartite structure and the principal terms; section 9.6 (Support Services Agreements) cross-refers to it as one of several outsourced-function agreements. Expect a question naming one of the seven principal terms, or asking whether the agreement is bipartite or tripartite.
Common exam traps
- The workbook gives no specific commission rate or figure for a Distributor Agreement — the terms are commercial and negotiated case by case, not fixed by regulation.
- A tripartite agreement is not the default. It is used specifically where the investment management company is a separate party that also needs to be bound.
- The Distributor Agreement is not the same as the PPM. The PPM is the fund's offer document to investors; the Distributor Agreement is the fund's contract with its own distribution channel.
- General contract law still applies underneath it. The Indian Contract Act, 1872 governs alongside — not instead of — the agreement's own terms.
Check yourself
1.One of the key provisions of a distributor agreement is:
- a)the role of the distributor in AIF investment strategy
- b)the quantum of risk to be assumed by the AIF
- c)the applicability of the SEBI (AIF) Regulations 2012 to the fund
- d)the commercial understanding with the distributor
Show the answer
Answer: (d) the commercial understanding with the distributor
This is the workbook's own sample question. The commercial arrangement between the fund and the distributor is based on marketing commissions, and the principal terms include Considerations/Commissions and Distribution of Commissions alongside Roles and Responsibilities, Rights and Obligations, an Indemnity clause, Penal actions in case of non-fulfilment of performance clause and Arbitration. A distributor has no role in the fund's investment strategy; the AIF's risk appetite is a matter for its PPM; and the AIF Regulations apply as law whether or not a contract says so.
Where this is taught
Free preparation for NISM Series XIX-ARelated terms
- 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.
- 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.
- Self-managed FundAn international fund model in which the investment team are employees of the fund itself and draw their salaries and costs from the fund, so the headline management fee is lower than a normally managed fund's.
- Target ReturnThe return a manager says it intends to achieve from a scheme — a statement of ambition that signals how much risk it plans to take, never a promise and never the contractual carry threshold.