Investor Advisory Committee

Investors in a close-ended AIF hand over their money and, by design, have no say in which companies it buys. The Investor Advisory Committee gives them a structured voice without giving them control.

The workbook describes it as "not a mandatory feature in Indian AIF structure". Where it exists, it consists of a majority of investor representatives and is constituted "as a check and balance in the fund system". Its role — the workbook uses "Advisory Board" for the same body — is "to provide informed guidance to the investment manager / IC of the fund based on its own assessment of the affairs of the fund from time to time".

The operative word is guidance. The Investment Committee approves investments and its members are responsible for those decisions. The Investor Advisory Committee recommends.

What it typically advises on (section 7.6.2.2):

• conflict resolution;
• risk management;
• governance matters;
• investor–manager relations and reporting;
• statutory or tax issues of the fund that may need investor consideration;
• any other matters it finds necessary for investor consideration;
• in some instances, administrative issues arising out of fund documents.

How it differs from the Investment Committee.

Where investors find it.

• PPM, Section V (Governance Structure) lists the sponsor, trustee, manager, key investment team, investment committee, advisory board if any, investor advisory committee if any, and investment adviser if any.
• Fund due diligence (Annexure 8.1) asks for "details of Investor Advisory committee formation and seat eligibility criteria, if any", and for the role the fund's LP Advisory Board plays in matters including valuation policy changes and deviations from valuation guidelines.

Illustrative figures. Godavari Growth Fund II, a Rs 1,400 crore Category II AIF, has a five-seat Investor Advisory Committee: four seats for investors with commitments of at least Rs 100 crore and one independent member — four of five being investor representatives.

Year 3 — a conflict. The manager proposes that the fund buy a stake in a logistics company in which Godavari Growth Fund I, managed by the same firm, is selling. That puts the manager on both sides of the price. The manager takes it to the Advisory Committee, which recommends that:

1. two independent valuations be obtained and the price be not less favourable to Fund II than their average; and
2. the transaction be disclosed to all Fund II investors before completion.

The manager accepts both. The Investment Committee still makes the investment decision — the Advisory Committee has no power to approve or reject the deal.

Year 4 — a tax issue. A change in tax treatment affects offshore investors differently from domestic ones. The Advisory Committee flags it as a statutory or tax issue needing investor consideration, and the manager circulates a note to all investors with the annual report.

In fund due diligence for Fund III, prospective investors ask for exactly this record — how the Advisory Committee is formed, who is eligible for a seat, and what it has done.

Chapter 7 (Investment Process and Governance of Funds) describes the Investor Advisory Committee at 7.6.2.2 within the fund governance structure, immediately after the Investment Committee at 7.6.2.1. Chapter 8 (Fund Due Diligence) includes it in the due diligence questionnaire, and Chapter 9 (Legal Documents and Negotiations) lists it in the PPM's governance section. Expect questions on whether it is mandatory (no), who sits on it (a majority of investor representatives) and what it does (advises, not approves).

• It is not mandatory in the Indian AIF structure.
• It advises; the Investment Committee approves. Giving the Advisory Committee the power to approve investments is the commonest error.
• A majority of its members are investor representatives.
• The 75%-of-investors-by-value consent applies to external members of the Investment Committee not named in the PPM — not to the Advisory Committee.
• "Advisory Board" and "LP Advisory Board" are used for the same kind of body in the workbook.
• Do not confuse it with AIPAC, the Alternative Investment Policy Advisory Committee of SEBI, which is a regulator's committee and has nothing to do with a single fund.