Pari-passu rights
Also written Pari-passu rights of investors
The rule that differential rights offered to select AIF investors must not harm others: no liability to other investors, no control, no change to others' rights, and full disclosure in the PPM.
In plain language
"Pari passu" means on an equal footing. In an AIF scheme it is the promise that no investor is quietly made worse off because another investor negotiated a better deal.
The workbook does not ban special deals. Large investors routinely ask for them — lower fees, information rights, seats on committees — through separate classes of units or side letters. Instead SEBI allows differential rights to select investors, without affecting the interest of other investors in the scheme, subject to guiding principles.
So pari-passu rights are not the same as identical rights. Two investors may pay different fees. What they must not have is a situation where one investor's benefit costs, controls or alters the rights of the others.
The rule sits beside pro-rata rights — each investor sharing in every investment and its proceeds in proportion to commitment — in section 15.11.1, introduced by amendments effective November 18, 2024.
How it works
The four guiding principles for differential rights:
- They shall not result in any investor accruing a liability to other investors in the scheme.
- Non-monetary or non-commercial rights shall not give an investor control in the scheme's decision-making — except when that investor is part of the Investment Committee.
- They should not alter the existing rights of other investors.
- All differential rights, and eligibility for them, shall be transparently disclosed in the PPM.
Manager and KMP duties:
- offer differential rights only in accordance with implementation standards formulated by SFA (the Standard Setting Forum for AIFs);
- disclose in the PPM the eligibility criteria for each right and how an eligible investor can opt for it;
- report differential rights that do not fall under the SFA standards to SEBI in a prescribed format and by email to aifreporting@sebi.gov.in;
- immediately terminate any reported right found to affect other investors' rights.
Exclusion. Pari-passu rights do not apply to Accredited Investors only Funds.
Evidence. The trustee or sponsor mentions these compliances in the Compliance Test Report submitted to SEBI.
Related tools elsewhere in the workbook. Chapter 9 explains that managers usually create a separate class of units with differential rights, rather than rely on side letters, to avoid breaching fiduciary duty to other investors; Chapter 12's Example 12.8 of Category III classes of units shows units split by commitment size and fee.
A worked example
The scheme, investors and fees are illustrative; the principles are the workbook's.
Kaveri Special Situations Fund has a corpus of Rs 300 crore. A pension fund commits Rs 60 crore and asks for three differential rights.
Right 1 — management fee of 1.5% instead of the standard 2%, through a separate class of units.
Saving to the pension fund = Rs 60 crore × (2.0% − 1.5%) = Rs 30 lakh a year
Acceptable if the manager absorbs it. But if the manager recovered that Rs 30 lakh by charging the other investors more:
Other investors' commitments = 300 − 60 = Rs 240 crore
Extra charge needed = 30 lakh ÷ 240 crore = 0.125% a year
— the other investors would be accruing a liability for one investor's benefit. That breaks principle 1.
Right 2 — a veto over any investment above Rs 20 crore, while not sitting on the Investment Committee. A non-commercial right giving control of decision-making: breaks principle 2.
Right 3 — quarterly portfolio calls with the fund manager. No liability, no control, no change to others' rights: acceptable, provided the right and its eligibility criteria (say, commitments of Rs 50 crore or more) are disclosed in the PPM.
If the manager had already granted Right 2 in a side letter outside SFA standards, it must be reported to SEBI — and once found to affect other investors, terminated immediately.
Why NISM asks about it
Chapter 15, section 15.11.1 (Pro-rata and Pari-passu Rights of Investors), sets out the principles, manager duties, reporting, termination and the AI-only Fund exclusion. Chapter 9, section 9.4.1 (Side Letters with Investors), and Chapter 12's classes of units show how differential rights are granted in practice. Chapter 15 carries 10% weight. Expect "which differential right is permissible", the Investment Committee exception, and "to which funds does pari-passu not apply".
Common exam traps
- Differential rights are allowed; they simply must not affect other investors. Pari passu does not mean identical terms.
- Control through non-commercial rights is barred — except for an investor who is part of the Investment Committee.
- Every differential right and its eligibility must be disclosed in the PPM, including how to opt for it.
- Pari-passu rights do not apply to AI-only Funds.
- Rights outside SFA standards are reported to SEBI; those found to affect others are terminated immediately.
- Pari-passu is not pro-rata. Pro-rata is about sharing investments and proceeds in proportion to commitment; its exceptions include excused or excluded investors, defaulting investors, and performance fees or carried interest shared with the manager.
- Junior classes are a separate permission — for the manager or sponsor, DFIs, State Industrial Development Corporations and government-owned entities including SWFs.
- Workbook date inconsistency: the SEBI circular SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/175 is dated December 16, 2024 in one footnote and December 13, 2024 in the next.
Where this is taught
- Series XIX-C · Chapter 17: Regulatory Frameworkintroduced here
- Series XIX-E · Chapter 15: Regulatory Frameworkintroduced here
Related terms
- Accredited InvestorAn investor certified by an accreditation agency as meeting SEBI's income or net-worth tests, and therefore allowed into products on relaxed terms — including below the Rs 1 crore AIF floor.
- 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.
- Compliance Test ReportThe annual self-certification an AIF manager prepares in SEBI's prescribed format, testing the fund against the AIF Regulations and routed through the sponsor and trustee for comment.
- Side LetterA supplementary agreement between one investor, the AIF and the manager granting that investor terms not generic to all — such as a different fee, waterfall or committee seat.
- Evergreening of liabilitiesUsing AIF money to let an investee repay debts owed to the fund's manager, sponsor or their associates, or to hide a lender's stressed loans — prohibited, and a trigger for specific due diligence.
- Pro-rata rightsThe rule that each AIF investor's share in every investment of a scheme, and in the proceeds, follows their share of commitments — save for excused, excluded or defaulting investors and the manager's carry.
- Sovereign Wealth FundA state-owned fund set up by countries with large trade surpluses — OPEC members, Norway, China, Japan, Singapore, Malaysia — that invests across markets, including through AIFs.
- Class of UnitsA group of units in a Category III AIF carrying its own rights — typically its own fee terms — assigned by size and timing of commitment; NAV is computed separately for each class or series.
- Most Favoured Nation (MFN) ClauseA protection right a large investor negotiates so that no other investor in the Category III AIF is placed in a better position — usually delivered through a separate class of units.
- Priority Distribution ModelA structure in which one class of investors bears more loss than its pro-rata share because another class has priority in distribution — no Category III AIF scheme may adopt it.
- In-specie DistributionDistributing an AIF's unsold investments themselves, rather than cash, to investors — allowed in the liquidation period with 75%-by-value approval and mandatory at the end of a dissolution period.
- Junior or subordinate class of unitsAIF units that accept lesser returns or share excess losses compared with pro-rata rights — open only to the manager or sponsor, DFIs, State Industrial Development Corporations and government-owned entities.
- Pari Passu ChargeOne common charge created over the same pool of security in favour of several lenders who all want the same level of charge, so none of them can be paid ahead of the others out of that security.