Ex-officio external member

An AIF's Investment Committee can include people from outside the manager. Investors care who those people are, because they approve the deals.

So the rule is protective. If an external member's name was not disclosed in the PPM or the investor agreement at the time investors came on board, that member can be appointed only with the consent of at least 75% of investors by value of their investment.

But there is a carve-out, and that is what this term names. Consent may not be required for a change in ex-officio external members — members who sit because of the post they hold rather than because of who they are.

The workbook names them: the Sponsor, the Sponsor Group, the Investment Manager Group, or investors acting in their official capacity.

The logic is simple. Investors already agreed that the sponsor gets a seat. They did not agree to a particular individual filling it, so swapping the individual is not a change they need to vote on.

Where it sits. Chapter 11, section 11.3.3 (Investment Committee Approvals), inserted by the SEBI (AIF) (Second Amendment) Regulations, 2021 with effect from 5 May 2021, with the ex-officio carve-out from a SEBI circular dated 25 June 2021.

The four conditions on an Investment Committee:

1. The Investment Manager of an AIF may constitute an Investment Committee to approve the decisions of the Fund.
2. Its members are responsible for the decisions taken and must ensure they comply with the SEBI (AIF) Regulations. This condition does not apply to a large value fund for accredited investors, or to AIFs in which each investor — other than the Manager, Sponsor and employees or directors of the AIF or Investment Manager — has committed at least INR 70 crore or equivalent and furnished a waiver.
3. Members must abide by the Code of Conduct applicable to the Fund.
4. External members whose names are not disclosed in the PPM, the investor agreement or any other fund document at the time of on-boarding investors are appointed only with the consent of at least 75% of investors by value of their investment in the AIF. However, consent may not be required for a change in ex-officio external members set up by the Investment Manager — such as the Sponsor, Sponsor Group, Investment Manager Group, or investors in their official capacity.

Read the carve-out precisely. It covers a change in ex-officio external members. The seat itself was part of the structure investors accepted. What is exempted is the substitution of the person occupying it.

A separate residence condition. For SEBI to process an application for AIF registration and for scheme launch, external members of the proposed Investment Committee must be resident Indian citizens. Applications where those external members are non-resident Indian citizens are processed only after clarifications are received from the Government and the RBI.

Why external members exist at all. The workbook says the Investment Committee consists of both internal members and external independent members and experts who are not entrusted with the day-to-day management of the AMC, precisely to prevent conflict of interest. The committee examines each proposal for fit with the scheme's primary investment theme, for portfolio performance and risk, and for fund-level risk concentration against return potential.

The fund, the names and the amounts are illustrative; the 75% test, the carve-out and the residence condition are the workbook's.

Meridian Growth Fund — Scheme II has capital commitments of Rs 800 crore. Its Investment Committee has five members:

Case 1 — the sponsor changes its nominee. Meridian Holdings replaces its nominee with a different executive. This is a change in an ex-officio external member, so no investor consent is required. The seat belongs to the Sponsor, not to the individual.

Case 2 — the manager wants to add an unnamed expert. Meridian proposes appointing Mr Farhan Qureshi, a semiconductor specialist whose name appears in no fund document. He is an external member who was not disclosed at on-boarding, so his appointment needs the consent of at least 75% of investors by value:

75% x Rs 800 crore = Rs 600 crore of commitments must vote in favour

Investors holding Rs 590 crore vote yes. That is 73.75% — short by Rs 10 crore. He cannot be appointed, even though 31 of the 40 investors by number supported him. By value, not by head.

Case 3 — the specialist lives abroad. Suppose Mr Qureshi is a non-resident Indian citizen and the fund is still applying for registration. The application would be processed only after clarifications from the Government and the RBI, because external members of a proposed Investment Committee must be resident Indian citizens.

Case 4 — change one fact about the investors. If each of the scheme's investors had committed at least INR 70 crore and furnished the prescribed waiver, the condition making IC members responsible for the decisions would not apply at all — as it does not for a large value fund for accredited investors.

Chapter 11, section 11.3.3 (Investment Committee Approvals). It is a four-item list with one percentage and one exemption threshold in it, which is why it is examined closely.

Expect: the 75% by value consent requirement, which members it applies to (external members not named at on-boarding), the ex-officio exception and the four offices it names, the INR 70 crore plus waiver exemption from member responsibility, and the requirement that external members of a proposed Investment Committee be resident Indian citizens. A discriminating question gives you a change of sponsor nominee and asks whether a vote is needed. It is not.

• Ex officio means by virtue of the office. The exemption attaches to the seat, not to the person's expertise or seniority.
• The carve-out is for a change in an ex-officio external member. Do not read it as licence to add external seats freely.
• 75% by value of investment, not 75% by number of investors. This is the single most common error on the section.
• It applies only to external members not disclosed at on-boarding. A name already in the PPM or the investor agreement needs no fresh consent.
• The four named offices are Sponsor, Sponsor Group, Investment Manager Group and investors in their official capacity. An independent expert engaged by the manager is not ex officio.
• Two different exemptions sit in the same list. The 75% consent rule is in condition 4; the INR 70 crore plus waiver and LVF exemption is in condition 2 and applies to member responsibility, not to consent.
• The residence condition bites at registration and scheme launch, not at every later appointment, and the consequence of a non-resident Indian citizen external member is delay pending Government and RBI clarifications — not an outright bar.
• The Investment Committee is not the Investor Advisory Committee. The latter is not mandatory in the Indian AIF structure, consists of a majority of investor representatives, and advises rather than approves.