PPM Audit
The mandatory yearly audit of a Category III AIF's compliance with the terms of its PPM, with findings reported to the trustee or board or designated partners, the manager's board and SEBI within 6 months of year end.
In plain language
A Private Placement Memorandum makes promises: this is the strategy, these are the classes of units, these are the fees for each class, this is how distributions work. The PPM audit checks, once a year, whether the fund kept them.
It is separate from the ordinary financial audit. It is mandatory for all Category III AIFs to perform a yearly audit at the end of each financial year to ensure compliance with the terms of the PPM, conducted through internal or external auditors or legal professionals.
The findings, together with any corrective steps, go to the people responsible for the fund — the Trustee or Board or Designated Partners of the AIF, the Board of the Investment Manager — and to SEBI, within 6 months from the end of the financial year.
How it works
What the audit covers (Chapter 4, 4.2.9)
- Minimum subscription for each class of units, and whether the classes in existence match the PPM
- Implementation of the investment strategy and investment policy; sample review of fund flows in purchase and sale of securities
- Disclosure of affiliates and transactions with them
- Capital commitments received and drawdowns made during the year
- Management fees charged for each class of units; distributions and additional return charged to investors
- Sources for the market opportunity and industry outlook section
- Governance policies on insider trading, anti-money laundering and conflicts of interest
- Responsibilities of Trustee, Sponsor and Manager; role and decision process of the investment committee
- Consequences of investor default — penalty, forfeiture, suspension of rights
- Transfer or withdrawal of units, on a sample basis
Optional sections. Auditing the PPM sections on Risk Factors; Legal, Regulatory and Tax Considerations; Track Record of First Time Managers; Illustration of Fees and Expenses; and Glossary and Terms is optional.
Who is exempt
| Exempt AIF | Condition |
|---|---|
| Large Value Funds | Each investor commits at least Rs 25 crore (USD 3 million or equivalent for non-INR commitments) |
| AIFs that have raised no funds | Must submit a Chartered Accountant's certificate to that effect within 6 months of year end |
Format and filing. SEBI prepared a standard reporting format for the PPM Audit Report in consultation with the pilot Standard Setting Forum for AIFs (SFA), which reviews it periodically. Reports are submitted on the SEBI Intermediary Portal.
A worked example
Illustrative figures. Godavari Market Neutral Fund, a Category III AIF trust, closes its financial year on 31 March 2026.
Deadline for communicating PPM audit findings = 31 March 2026 + 6 months = 30 September 2026
Its external auditor tests management fees by class. The PPM sets Class A2 at 2.10%. The auditor finds Class A2 was billed at 2.25% for the year on attributable assets of Rs 8 crore:
Excess rate = 2.25% − 2.10% = 0.15%
Excess charge = 0.15% × Rs 8 crore = Rs 1,20,000 (before GST)
The report records the finding and a corrective step — refund Rs 1.2 lakh plus the GST on it to Class A2 holders — and goes to the trustee, the manager's board and SEBI on the Intermediary Portal by 30 September 2026.
Its sister scheme is a Large Value Fund in which every investor committed Rs 25 crore or more. That scheme needs no PPM audit. A third scheme registered in 2025 has not yet raised a rupee; instead of an audit, it files a Chartered Accountant's certificate saying so, within the same 6 months.
Why NISM asks about it
Chapter 4 (Category III AIF: Fund Structures and Service Providers) covers the PPM audit in detail under Auditors (4.2.9), including scope, optional sections and exemptions. Chapter 5 (Regulatory Framework) repeats the yearly requirement and the 6-month deadline in its PPM section (5.6). Expect the deadline, the recipients, the exemptions and "internal or external auditors or legal professionals" as direct questions.
Common exam traps
- Yearly, at the end of each financial year — and mandatory for all Category III AIFs unless exempt.
- 6 months from financial year end, not 30 days (the Compliance Test Report has its own 30-day timeline).
- Conducted by internal or external auditors or legal professionals — not only chartered accountants.
- Reported to three places: Trustee or Board or Designated Partners of the AIF, the Investment Manager's Board, and SEBI.
- Some sections are optional — Risk Factors; Legal, Regulatory and Tax Considerations; Track Record of First Time Managers; Illustration of Fees and Expenses; Glossary.
- Exemptions: Large Value Funds (Rs 25 crore per investor, per the workbook's updated figure) and AIFs that have raised no money (with a CA certificate).
- A PPM audit is not the annual financial audit by a qualified auditor, which also applies.
Check yourself
1.Who prepared the standard reporting format for the PPM Audit Report of AIFs, and where is the report submitted?
- a)SEBI in consultation with the pilot Standard Setting Forum for AIFs (SFA); submitted to SEBI on the SEBI Intermediary Portal
- b)The Institute of Chartered Accountants of India; filed with the Registrar of Companies
- c)The scheme's merchant banker; filed with the stock exchange
- d)The trustee of each fund; filed with the custodian
Show the answer
Answer: (a) SEBI in consultation with the pilot Standard Setting Forum for AIFs (SFA); submitted to SEBI on the SEBI Intermediary Portal
The workbook states: "A standard reporting format for PPM Audit Report has been prepared by SEBI in consultation with pilot Standard Setting Forum for AIFs (SFA). The reporting format will be reviewed periodically by the pilot SFA in consultation with SEBI. AIFs are required to submit such PPM Audit Reports to SEBI on the SEBI Intermediary Portal." The audit itself may be done through internal or external auditors or legal professionals. The other options name bodies that have no role in the format. The merchant banker's documented work is the due diligence certificate on the PPM at launch, not the audit report.
Where this is taught
Free preparation for NISM Series XIX-BRelated terms
- 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.
- Large Value Fund for Accredited InvestorsAn AIF or scheme in which every investor other than the manager, sponsor and their employees or directors is an accredited investor committing at least Rs 25 crore — with lighter regulation.
- 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.
- Designated PartnerIn a Category III AIF set up as an LLP, the sponsor acting as the partner responsible for all statutory compliances of the LLP — and bound by the AIF code of conduct.
- Standard Setting Forum for AIFsA pilot industry body — the SFA — that formulates implementation standards for Category III AIFs in consultation with SEBI, including the standard PPM audit reporting format and the demat-holding rules for AIF units.
- TrusteeThe party that holds a Category III AIF's trust deed when the fund is set up as a trust, appoints the investment manager and custodian, and receives the annual audit findings on the fund's behalf.