Investment Committee

The manager is responsible for an AIF's investment decisions. But few managers want one person deciding where hundreds of crores go. Investors also feel safer when people outside the deal team have tested a deal.

So the AIF Regulations let the manager of a Category I or Category II AIF set up an Investment Committee. It can be "called by any name". Its job is to approve the fund's decisions.

It usually has three kinds of members. There is senior management of the investment management company. There are nominated outside members. And there are independent professionals. The outside members and professionals do not run the AMC day to day. The workbook says this is "to prevent conflict of interest".

The committee is not a rubber stamp. Its members are responsible for the decisions taken. They must make sure those decisions follow the AIF Regulations. They are also bound by the fund's Code of Conduct.

The regulatory conditions (inserted by the SEBI (AIF) (Second Amendment) Regulations, 2021):

1. The manager of a Category I or II AIF may constitute an Investment Committee to approve the decisions of the fund.
2. Members are responsible for decisions taken and for compliance with the AIF Regulations. Exception: members of an IC set up by a large value fund for accredited investors — each investor, other than the manager, sponsor and employees or directors of the AIF or manager, committing at least Rs 25 crore — are exempt and not held responsible, provided they have furnished a waiver to the fund.
3. Members abide by the Code of Conduct applicable to the fund.
4. External members not disclosed in the PPM or other fund documents at on-boarding may be appointed only with consent of at least 75% of investors by value of their investment. No consent is needed for a change in ex-officio external members, such as the sponsor, sponsor group, investment manager group or investors in their official capacity.

Residency of external members. To process an AIF registration or scheme launch, SEBI requires external members of the proposed IC to be resident Indian citizens; where they are non-resident Indian citizens, the application is processed only after clarifications from the Government and the RBI.

Its place in the deal process. The investment team first brings a brief 2–3 page investment proposal — to alert the committee or to seek a go-ahead to negotiate, sometimes with a cost-cover for out-of-pocket expenses. A Preliminary Investment Memorandum may be presented to obtain authorisation to sign the term sheet. The full proposal covers an executive summary, company, market and financial overviews, risks and due diligence, valuation, exit, deal structure and term sheet conditions, and the recommended size and structure. The committee examines whether the deal fits the scheme's investment theme, its risk and management, and fund-level concentration against return potential.

Disclosure. Section V of the SEBI PPM template requires the governance structure, including the investment committee and the terms of reference of the committee constituted for approving the fund's decisions.

Illustrative figures. Aravalli Capital manages a Rs 900 crore Category II AIF with 60 investors. Its PPM names a five-member IC: the CEO, the CIO, a partner, and two independent external members.

Year 2 — a new external member. The manager wants to add a retired steel-industry executive who was not named in the PPM. It needs consent from investors holding at least 75% by value, i.e. at least Rs 675 crore of the Rs 900 crore. Consents arrive from 48 investors holding Rs 640 crore. Forty-eight of sixty is 80% by headcount, but Rs 640 crore is only 71.1% by value, so the appointment cannot yet be made.

Year 2 — a sponsor nominee changes. The sponsor group replaces its ex-officio nominee on the IC. No investor consent is needed.

Year 3 — a deal goes to the IC. The team presents a Rs 70 crore investment in a specialty chemicals company. The IC checks it against the scheme's theme, its risk profile and the fund's concentration: Rs 70 crore is 7.8% of the Rs 900 crore corpus, well inside the 25% single-investee limit on investable funds for Category II AIFs. It approves, and the decision and its justification are recorded.

Had the fund been a large value fund for accredited investors, its IC members could have furnished a waiver and been exempt from responsibility for the decision — an exemption this fund does not have.

Chapter 7 (Investment Process and Governance of Funds) covers the Investment Committee at 7.6.2.1, including the four regulatory conditions, the contents of an investment proposal and the residency requirement for external members; 7.1.2 and 7.1.4 show where the IC sits in the deal process. Chapter 9 lists the committee's terms of reference among PPM Section V disclosures, and Chapter 8's due diligence questionnaire asks about IC composition and approval process. Expect questions on the 75%-by-value consent, the LVF waiver, and resident Indian citizen external members.

• "May" constitute — it is optional. The manager remains responsible for investment decisions; the IC is permitted, not mandated.
• IC members are responsible for their decisions — except in a large value fund for accredited investors, and then only if they have furnished a waiver.
• The LVF threshold here is Rs 25 crore per investor (per the 2025 amendment the workbook cites). Do not confuse it with the Rs 70 crore per-investor commitment plus waiver that exempts a scheme from the SEBI PPM template and annual PPM audit in Chapter 9.
• 75% by value, not by number, for appointing an undisclosed external member; no consent is needed for ex-officio changes.
• External members must be resident Indian citizens for SEBI to process the registration or scheme launch; non-resident Indian citizens trigger clarifications from the Government and RBI.
• The IC is distinct from an Investor Advisory Committee, which is made up of a majority of investor representatives, is not mandatory in India and only advises.