Key Management Personnel

An AIF is a trust, and a trust cannot form an intention. People do. The regulations therefore name the people whose judgement the investors are actually buying, and put obligations on them personally rather than only on the entity that employs them.

Those people are the key management personnel. They have to be named in the private placement memorandum, so that an investor committing to a blind pool at least knows whose track record they are backing. And any change in them has to be intimated to the investors and to SEBI — because the team leaving is, for a fund investor, one of the most material things that can happen.

Who is KMP. The definition has three limbs:

1. members of the key investment team of the Manager, as disclosed in the PPM of the fund;
2. employees involved in decision making on behalf of the AIF, including but not limited to members of the senior management team at the level of Managing Director, Chief Executive Officer, Chief Investment Officer, Whole Time Directors, or an equivalent role or position;
3. any other person whom the AIF — through the trustee, board of directors or designated partners, as the case may be — or the Manager may declare as key management personnel.

Notice that limb 3 makes the class partly elective. A firm can add people to it. That matters, because membership brings obligations rather than privileges.

What follows from being KMP.

• The Code of Conduct in the Fourth Schedule of the AIF Regulations binds the Category I or II AIF, the KMP of the fund, the trustee and trustee company, the directors of the trustee company, the designated partners or directors of the fund, the investment manager, and the KMP of the investment manager. Its duties include acting in a fiduciary capacity towards investors, abiding by conflict-of-interest policies, recording key investment and divestment decisions in writing with justification, and providing the valuer with appropriate, well-considered and non-misleading inputs.
• Due diligence. AIFs, their managers and their KMP must carry out specified due diligence on their investors and investments to prevent facilitation of circumvention of laws specified by SEBI.
• Disclosure. All KMP of the AIF and of the investment manager are named in the PPM; changes go to investors and SEBI.
• In an angel fund, KMP of the fund or its manager are among the two categories of person who can be an angel investor at all — the other being an accredited investor.

Konkan Growth Capital II, a Rs 1,100 crore Category II AIF, lists five KMP in its PPM: the CEO of the manager, the CIO, two partners on the key investment team, and the head of portfolio operations, added under the third limb by a board resolution of the manager.

In year three the CIO — the person two-thirds of the investors say they backed — resigns to start his own fund. Three obligations fire at once:

1. the change in KMP must be intimated to investors and to SEBI;
2. the PPM disclosure is no longer accurate and has to be corrected through the material-change route;
3. whether the departure triggers the fund's key man clause — typically a suspension of the investment period until a replacement acceptable to the investors is appointed — is a matter of the fund documents, not of the KMP definition.

Meanwhile the head of portfolio operations, who would not have been KMP on the first two limbs, is bound by the Code of Conduct exactly as the CIO was, because the manager declared her one. Her written record of the justification for a Rs 90 crore follow-on into a portfolio company is as much a regulatory requirement as the CIO's.

Chapter 4 defines KMP at 4.1.15, immediately before reproducing the Code of Conduct from the Fourth Schedule, and refers to them again in the general obligations at 4.1.14 on investor and investment due diligence. Expect a "which of the following is not key management personnel" question built on the three limbs, and questions on the PPM disclosure and the intimation of changes to investors and SEBI.

• The third limb is elective. A person becomes KMP because the AIF or the manager declares them so, not only because of their title. "Only the MD, CEO and CIO are KMP" is wrong.
• KMP of the manager and KMP of the fund are both covered by the Code of Conduct — the Fourth Schedule lists them separately.
• Do not confuse KMP with the compliance officer. The compliance officer of an AIF manager is a separate appointment, with its own certification requirement.
• A change in KMP is intimated, not approved in advance — unlike a change in control of the manager, which needs SEBI's prior approval.
• KMP status is not the key man clause. The definition is regulatory; the key man clause is a negotiated term in the fund documents that suspends or ends the investment period when a named person leaves.
• In the angel fund context, KMP are eligible to be angel investors without being accredited investors — a narrow exception worth remembering.