PPM Compliance Audit
The mandatory annual audit, at each financial year end, of a Category I or II AIF's compliance with the terms of its private placement memorandum — findings to the trustee, manager's board and SEBI within 6 months.
In plain language
A private placement memorandum makes promises: an investment strategy, classes of units, a minimum subscription, fees, a distribution waterfall, governance arrangements. Investors commit years of capital on the strength of it. The PPM compliance audit checks, once a year, whether the fund actually did what the PPM said.
In the workbook: "In order to ensure compliance with the terms of PPM, it will be mandatory for AIFs to carry out an annual audit of such compliance at the end of each financial year. The audit shall be carried out by either internal or external auditor/ legal professional."
It is paired with a rule about the other fund documents: the terms of the contribution or subscription agreement "shall be aligned with the terms of the PPM and shall not go beyond the terms of the PPM". The PPM is the benchmark; the audit tests the fund against it.
How it works
Scope (section 9.5.2). The audit covers, among other things:
- compliance with the minimum subscription for each class of units;
- implementation of the investment strategy, and the investment policy and investments made under it;
- disclosure of affiliates and transactions with them;
- fund flows in purchase and sale of securities, on a sample basis, against the investment strategy;
- classes of units in existence against those stated in the PPM;
- capital commitments received and drawdowns made;
- management fees charged for each class of units;
- distributions and additional return charged to investors;
- disclosures on the scheme structure and key constituents;
- a governance policy covering insider trading, anti-money laundering and conflicts of interest;
- disclosure and compliance with responsibilities of the trustee, sponsor and manager;
- the role of the key investment team or investment committee and its decision-making;
- consequences of investor default — penalty, forfeiture, suspension of rights;
- transfer or withdrawal of units, on a sample basis.
Optional sections. Audit of 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.
Reporting. Findings, with corrective steps if any, go to the Trustee or Board or Designated Partners of the AIF, the Board of the Manager, and SEBI, within 6 months from the end of the financial year.
Where it does not apply.
- AIFs or schemes in which each investor commits at least Rs 70 crore (USD 10 million or equivalent) and gives a waiver from the SEBI PPM template and the annual audit, in the prescribed manner.
- A large value fund for accredited investors need not follow the standard PPM template, and PPM audits are not mandatory for it.
- AIFs that have not raised any money from investors — instead, a Chartered Accountant's certificate within 6 months from the end of the financial year.
Angel funds. Angel funds crossing Rs 100 crore in total investments (at cost) are now required to undergo an annual PPM compliance audit, effective from FY 2025-26.
A worked example
Illustrative figures. Vindhya Capital's Category II AIF has three classes of units and a PPM that promises a management fee of 1.75% for Class A (on Class A commitments of Rs 672 crore), 2.00% for Class B, a sector cap of 25% of investable funds in any one sector, and drawdowns on 15 days' notice. Its external auditor carries out the PPM compliance audit for the year ended 31 March 2026.
| Area tested | Finding |
|---|---|
| Management fee, Class A | Charged at 2.00% instead of 1.75% for two quarters |
| Sector cap | Financial services at 23.5% — within 25% |
| Drawdowns (sample of 12) | Two notices issued with 10 days' notice instead of 15 |
| Affiliate transactions | One advisory fee to a sponsor group company, disclosed |
| Risk Factors section | Not audited — optional |
Excess Class A fee = (2.00% − 1.75%) × Rs 672 crore × 6/12
= 0.25% × Rs 672 crore × 1/2
= Rs 1.68 crore × 1/2
= Rs 84 lakh
The findings, with the corrective steps — a refund of Rs 84 lakh to Class A investors and a revised drawdown procedure — go to the trustee, the manager's board and SEBI by 30 September 2026, within 6 months of year end.
Why NISM asks about it
Chapter 9 (Legal Documents and Negotiations — Investor Perspective) sets out the PPM audit at 9.5.2, after the PPM disclosure template at 9.5. Expect questions on who may conduct it (internal or external auditor or legal professional), the 6-month reporting deadline and its recipients, the optional sections, and the situations in which it does not apply.
Common exam traps
- Annual, at the end of each financial year; findings within 6 months to the trustee/board/designated partners of the AIF, the manager's board and SEBI.
- Internal or external auditor or legal professional — it need not be an external statutory auditor.
- Five optional sections: Risk Factors; Legal, Regulatory and Tax Considerations; Track Record of First Time Managers; Illustration of Fees and Expenses; Glossary and Terms.
- The contribution agreement cannot go beyond the PPM.
- An AIF that has raised no money gives a CA certificate instead, within 6 months.
- The workbook's exemption list contradicts its own heading. It says the PPM template and audit requirements "are not applicable in two situations", then lists three bullets — and the first, on angel funds crossing Rs 100 crore in total investments at cost, says they are now required to undergo the audit from FY 2025-26. Read it as: the Rs 70 crore waiver case and the large value fund are exempt; angel funds above Rs 100 crore are brought in.
- Rs 70 crore per investor with a waiver is a different test from the large value fund for accredited investors, whose minimum commitment the workbook elsewhere gives as Rs 25 crore under the 2025 amendment. Do not merge them.
Where this is taught
Free preparation for NISM Series XIX-ARelated terms
- Investor CharterSEBI's published statement of what an investor is entitled to from an intermediary — the services, the rights, the dos and don'ts, and a table of activities with the timeline each one must be completed in.
- Angel FundA sub-category of Category I AIF, registered with SEBI specifically as an angel fund, which raises money from angel investors and invests it in start-ups deal by deal rather than through schemes.
- Material changeA change to an AIF's PPM or fund terms significant enough to influence an investor's decision to stay invested — such as a new sponsor or manager, change in control, or adverse fee change.
- 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.
- Tenure of a SchemeThe life of an AIF scheme — from the date of first close to the last date of its term in the fund documents — fixed when SEBI is applied to, a minimum of 3 years, and extendable by 2 with two-thirds investor consent.