Information Memorandum
Also written IM · Information Memorandum (IM) · Confidential Information Memorandum
In AIF due diligence, the investee company's own document of representations and forecasts; separately, the document an AIF scheme files with SEBI through a merchant banker to enter a dissolution period.
In plain language
The phrase Information Memorandum turns up twice in the XIX-E workbook, meaning two different documents written by two different parties. Keeping them apart is the whole point of this page.
1. The investee company's IM (Chapter 11). When an AIF looks at a company to invest in, the company presents itself — its business, its numbers, its forecasts — in an Information Memorandum. It is a sales document. Financial due diligence exists largely to test whether what it says is true.
2. The AIF scheme's IM (Chapter 13). When an AIF scheme reaches the end of its liquidation period with investments still unsold and wants to enter a dissolution period, it files an Information Memorandum with SEBI, through a merchant banker, with a due diligence certificate.
One is the company talking to a prospective investor. The other is a fund talking to the regulator.
How it works
Sense 1 — the target's IM in financial due diligence (section 11.1). A financial due diligence review verifies books of account, financial statements and business transactions to establish a true and fair view, and checks the accuracy of the oral or written representations made by the company in its IM and other literature. It looks for undisclosed material financial information that could affect the investment decision or the agreed valuation. It is usually carried out for at least the past three financial years, often includes vetting the financial forecasts represented in the IM and the consequent milestones, and covers direct and indirect tax. It is usually done on the manager's behalf by an accounting firm or investment bank.
Sense 2 — the scheme's IM for a dissolution period (section 13.7). A dissolution period follows the expiry of a scheme's liquidation period, to liquidate what is still unliquidated.
- The scheme needs approval of at least 75% of investors by value.
- Before seeking it, the manager discloses the proposed tenure, details of unliquidated investments and an indicative bid range with valuations by 2 independent valuers.
- The scheme files, through a merchant banker, an IM along with a due diligence certificate with SEBI, before the liquidation period (or its extension) expires.
- The dissolution period cannot exceed the scheme's original tenure and cannot be extended.
- No fresh commitments and no new investments during it.
A worked example
All figures are illustrative.
Sense 1. An AIF is negotiating a 20% stake in a logistics company. The company's IM projects next-year revenue of Rs 120 crore, and both sides have been talking about a valuation of 3 times revenue.
IM-based valuation = 3 × Rs 120 crore = Rs 360 crore
Cost of a 20% stake = Rs 72 crore
The financial DDR reviews three years of accounts and finds that Rs 20 crore of the projection rests on a contract that has not been signed.
Revised revenue = Rs 100 crore
Revised valuation = 3 × Rs 100 crore = Rs 300 crore
Cost of a 20% stake = Rs 60 crore
Testing the IM saved the fund Rs 12 crore on one line of the forecast.
Sense 2. A different AIF scheme with an original tenure of 7 years still holds two unlisted positions as its liquidation period nears its end. Investors holding 78% by value approve a dissolution period. Before the liquidation period expires, the scheme files an IM with a merchant banker's due diligence certificate with SEBI. Its dissolution period can run for at most 7 years and cannot be extended, and the scheme cannot take a single new commitment in that time.
Why NISM asks about it
Chapter 11, section 11.1 (Investor Due Diligence), uses the IM as the object of financial due diligence; Chapter 13, section 13.7 (Dissolution Period), requires an IM to be filed through a merchant banker. A question naming the IM will usually make the context obvious — due diligence on a target, or a scheme entering dissolution. Expect "what does financial DDR verify in the IM" and "what must a scheme file before entering a dissolution period".
Common exam traps
- Two different documents. The target company writes the due-diligence IM; the AIF scheme, through a merchant banker, files the dissolution IM with SEBI.
- The dissolution IM goes with a due diligence certificate by a merchant banker and is filed before the liquidation period expires.
- Dissolution needs at least 75% of investors by value.
- A dissolution period cannot exceed the original tenure and cannot be extended.
- No fresh commitments and no new investments in a dissolution period.
- Financial DDR normally covers at least three past financial years and can include vetting the IM's forecasts.
- The IM is not the PPM. The PPM is the AIF's disclosure document to its own investors.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- 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.
- Due diligence certificateThe formal certificate a lead manager signs and files with SEBI at prescribed stages of an issue, confirming that it has verified the issuer's disclosures and that the offer document is compliant.
- Dissolution PeriodThe period after an AIF scheme's liquidation period, entered with 75%-by-value investor approval, to sell unliquidated investments — ending in mandatory in-specie distribution of whatever remains.
- Financial DDRThe part of an AIF's due diligence review that verifies an investee company's books, financial statements, representations and tax position — usually for at least three past financial years.
- Liquidation PeriodThe 1-year period following expiry of an AIF scheme's tenure or extended tenure, for fully liquidating its assets and distributing the proceeds to investors.
- Offer documentThe document inviting subscription to an issue — a red herring prospectus, prospectus, shelf prospectus or information memorandum in a public issue, and a letter of offer in a rights issue.
- Final Investment MemorandumThe memorandum a PE fund's deal team prepares once the investment committee gives final approval, proposing a specific valuation — which the start-up can still negotiate before final agreements are signed.
- Deal SourcingThe investment manager's work of finding, screening and completing investments in suitable unlisted companies — through networks, intermediaries and its own research — to build a deal pipeline.
- TeaserA brief 1–3 page summary of a company and its investment opportunity, sent by the company's investment banker to selected funds so they can judge whether the deal fits before signing an NDA.
- Management PresentationA meeting arranged by the company's bankers at which its key management team presents the business to a fund's investment team, ahead of the team's investment proposal to its Investment Committee.
- Virtual Data RoomThe secure repository in which an investee company places detailed confidential records — constitutional documents, accounts, tax returns, contracts, IP and employee records — for the investor's due diligence.