Private placement memorandum
Also written PPM · Private Placement Memorandum (PPM) · Placement Memorandum
The 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.
In plain language
A Category III AIF raises money by private placement, not by public issue. There is no prospectus and no retail investor to protect with one. What sophisticated investors get instead is the Private Placement Memorandum.
The PPM is the fund's offer document. It carries everything an institution or high-net-worth investor needs to judge whether the fund fits their risk-return objective — information that is not publicly available and cannot be got anywhere else. For a fund raising capital commitments, it is the single most important document it will produce.
And it is the document that binds. The fee rates, the hurdle, the high-water mark method, the leverage strategy, the lock-in — all of it is fixed in the PPM before launch.
How it works
Filing. The Investment Manager or Sponsor must file the PPM with SEBI through a SEBI-registered merchant banker, at least 30 days prior to the launch of the scheme, with the scheme fee. The merchant banker must carry out independent due diligence on every disclosure, satisfy itself as to veracity and adequacy, and issue a due diligence certificate in SEBI's prescribed format. The merchant banker's details go into the PPM itself.
Comments, not approval. SEBI may communicate comments to the merchant banker before launch, and the merchant banker must ensure they are incorporated. But SEBI attaches standard wording to every PPM it receives, to the effect that submission "should not in any way be deemed or construed that the same has been cleared or approved by SEBI", that SEBI takes no responsibility for the accuracy of disclosures or the manager's capability, and that it is the Manager's responsibility to ensure the information is true and accurate in all material respects.
Changes. Changes to PPM terms are intimated to SEBI on a consolidated basis within 1 month of the end of each financial year, through a merchant banker with a due diligence certificate. Intimation of a specific change may be filed directly with SEBI without a merchant banker.
Large Value Funds for accredited investors are exempt from the merchant banker route and from incorporating SEBI comments — they launch under an "intimation to SEBI" model, with an undertaking signed by the CEO and Compliance Officer of the Manager.
Template and audit. SEBI has issued a standard PPM template, with a separate Annexure for Category III AIFs, and AIFs must carry out a yearly PPM audit against a reporting format developed with the Standard Setting Forum for AIFs.
A worked example
A manager plans to launch Scheme II of its Category III AIF on 1 October. The timetable the regulations impose:
By 1 September PPM filed with SEBI through a SEBI-registered
merchant banker, with the scheme fee and the
merchant banker's due diligence certificate
(30 days before launch)
September SEBI comments, if any, go to the merchant banker;
merchant banker ensures they are incorporated
1 October Scheme launches
By 30 April Any changes to PPM terms during FY intimated to
SEBI on a consolidated basis (1 month from FY end)
The economics the PPM has to nail down before that first date, for this fund:
| Term fixed in the PPM | Value |
|---|---|
| Target corpus | Rs 250 crore |
| Minimum capital commitment | Rs 1 crore |
| Minimum sponsor commitment | 5% of corpus or Rs 10 crore, whichever is lower → Rs 10 crore |
| Management fee | 2.00% of GNAV plus GST |
| Hurdle rate, Class A units | 10% |
| Performance fee | 20% above hurdle |
| Leverage strategy | Up to 2× NAV |
Note the sponsor commitment. At a Rs 250 crore corpus, 5% is Rs 12.5 crore and the cap bites:
5% × Rs 250 crore = Rs 12.50 crore
Rs 10 crore
Lower of the two → Rs 10 crore
Had the target corpus been Rs 150 crore, 5% would be Rs 7.5 crore and that would be the number. The PPM has to state the right one before a rupee is raised.
Registration itself cost this fund a non-refundable application fee of Rs 1 lakh and registration fees of Rs 15 lakh.
Why NISM asks about it
Chapter 5 (Regulatory Framework), section 5.6 is devoted to the PPM and Table 5.2 sets out its sections one by one. The highest-frequency questions are: the filing window (30 days before scheme launch), the route (through a SEBI-registered merchant banker, with a due diligence certificate), the intimation deadline for changes (within 1 month of financial year end, consolidated), and — most reliably — whether SEBI approves the PPM. It does not; it provides observations. A further question type hands you a term and asks which PPM section it appears in: fee structure, hurdle rate and high-water mark calculation all sit in the Executive Summary.
Common exam traps
- SEBI does not approve or clear a PPM. It gives observations. The standard disclaimer wording exists precisely so that no one can claim otherwise, and this is the most-asked point in the section.
- 30 days before launch, not after. And the scheme fee accompanies the filing.
- The merchant banker must be SEBI-registered and must issue a due diligence certificate. A PPM filed directly is non-compliant — except for Large Value Funds.
- Large Value Fund schemes are exempt from the merchant banker route, from incorporating SEBI comments, and from routing PPM changes through a merchant banker. They file with a CEO and Compliance Officer undertaking instead.
- Consolidated changes go in annually; a specific change may go in directly. Two different routes, and questions test which is which.
- The PPM is an offer document, not a prospectus. Category III AIF units are issued by private placement — there is no public issue and no public offer document.
Check yourself
1.Which section of the Private Placement Memorandum will most likely provide details on the prior experience of the Investment Manager of a Category III AIF?
- a)Investment Objective and Strategy
- b)Term of the Fund/Scheme
- c)Redemption
- d)Manager
Show the answer
Answer: (d) Manager
(This is a sample question from the NISM workbook.)
The "MANAGER / INVESTMENT MANAGER" section "STATES THE PRIOR EXPERIENCE OF THE FUND MANAGER(S) RESPONSIBLE TO TAKE INVESTMENT DECISIONS FOR THE FUND."
The other three sections each answer a different question, and all four are worth knowing as a set:
Section What it covers Investment Objective and Strategy "The TARGETED SECURITIES, INVESTMENT STYLE, SECTORS, GEOGRAPHIC FOCUS, and such other factors" Term of the Fund/Scheme "FUND STRUCTURE, TERM, WHETHER OPEN OR CLOSED FUND, FINAL CLOSING DATE AND APPLICABLE EXTENSION PERIODS" ⚠️ Manager ⚠️ "PRIOR EXPERIENCE OF THE FUND MANAGER(S)" Redemption "The PERIOD DURING WHICH INVESTORS CAN REDEEM... the LOCK-IN PERIOD AND THE REDEMPTION FEES OR EXIT LOAD" The workbook is emphatic that these should be read before subscribing: "Investors, before investing, SHOULD PARTICULARLY LOOK AT SOME OF THE CRUCIAL CLAUSES IN THE PRIVATE PLACEMENT MEMORANDUM, TO GET DETAILED INSIGHTS ABOUT THE FUND."
And the Redemption section is often the decisive one. The chapter's own HNI example turns on it: a fund may have "ABOVE-AVERAGE RETURNS" and "AN EXPERIENCED MANAGER" and still be unsuitable "GIVEN THE LIQUIDITY CONSTRAINTS."
2.The findings of the yearly audit of compliance with the terms of the PPM must be communicated to the trustee or board or designated partners, the board of the investment manager and SEBI within:
- a)60 days from the end of the quarter
- b)3 months from the end of the financial year
- c)6 months from the end of the financial year
- d)12 months from the end of the financial year
Show the answer
Answer: (c) 6 months from the end of the financial year
The findings, along with corrective steps to be taken if any, must be communicated to the Trustee or Board or Designated Partners of the Category III AIF, Board of the Investment Managers and SEBI, within 6 MONTHS FROM THE END OF THE FINANCIAL YEAR, and the report is filed on the SEBI Intermediary Portal. Option (a) is the deadline for the quarterly report of material risks to investors, which is a different obligation from a different chapter.
3.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
- Series XIX-B · Chapter 2: Growth of Alternative Investment Funds in India and Suitability of Category III AIFsintroduced here
- Series III-C · Chapter 15: SEBI (AIF) Regulations, 2012introduced here
- Series XIX-D · Chapter 8: Legal Documents and Negotiationsintroduced here
- Series XIX-A · Chapter 4: Regulatory Framework - Indian Contextintroduced here
- Series XIX-C · Chapter 7: Alternative Investment Funds Ecosystemintroduced here
- Series XIX-E · Chapter 9: Legal Documentations and Negotiationsintroduced here
- Series XIX-B · Chapter 4: Category III AIF: Fund Structures and Service Providers
- Series XIX-C · Chapter 13: Legal Documents and Negotiations
Related terms
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- 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.
- Investment Management AgreementThe agreement between the trustee, acting for the AIF, and the investment manager, by which the trustee delegates its entire investment management power — and by which the manager can later be removed.
- Hurdle rateThe minimum return that must accrue to investors before the manager earns any incentive fee — the threshold that turns a fund's profit into the manager's profit.
- 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.
- CorpusThe total of all capital commitments raised by a Category III AIF scheme from its investors — not the cash actually collected, which SEBI requires to be at least Rs 20 crore.
- Gross Net Asset ValueThe value of a Category III AIF's assets before incentive fees are deducted — and the base on which management fees are charged, which is why it is not the same as the NAV investors see.
- High-Water MarkThe highest year-end NAV the fund has ever reached, net of operating, transaction and management costs — the manager earns no incentive fee until the NAV climbs back above it.
- 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.
- Final CloseThe date that ends fund-raising for a Category III AIF scheme — after it, a close-ended scheme accepts no new investors, and only then may its units be listed.
- In-principle ApprovalA SEBI approval granted to an eligible AIF applicant before its trust or partnership deed is registered — the deed must then be registered within 6 months, and no investor money may be called until registration.
- PPM AuditThe 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.
- 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.
- Redemption GateA limit, set by the manager in the PPM, on the maximum amount investors can redeem from a Category III AIF in each redemption period — over and above expenses, taxes and exit load.
- Key-Person RiskThe risk that the death, incapacity or unavailability of the investment manager seriously disrupts a Category III AIF — its investment decisions, redemptions, compliance and trade execution.
- 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.
- Operating ExpensesThe recurring costs of running an AIF charged to all investors — audit, legal, custody, reporting and similar — typically capped each year, for instance at 10 to 50 basis points of NAV or commitments.
- 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.
- Mandatory exit optionThe exit a close-ended AIF must offer dissenting investors after a material change: at least one month to dissent, buyout at no less than the average of two independent valuations, done within 3 months.
- Information MemorandumIn AIF due diligence, the investee company's own document of representations and forecasts; separately, the document an AIF scheme files with SEBI through a merchant banker to enter a dissolution period.
- Conflict of Interest PolicyThe written policy every AIF must have describing the conflicts that could arise at each level of the fund, how the manager will mitigate them, and how investors are told and asked to acknowledge them.
- Intimation to SEBI modelThe PPM filing route for AI-only Funds and LVFs: filed directly with SEBI without a merchant banker or SEBI comments, so schemes can launch immediately on filing (a first scheme only once registered).
- Pari-passu rightsThe 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.
- Working daysFor AIF filings and reporting, all days excluding Saturdays, Sundays and public holidays on which the concerned SEBI office is closed for business, as published on SEBI's website.
- GARUDASEBI's Green Channel: AIF Rollout Upon Document Acknowledgement — the fast-track route that lets an AIF launch a scheme and circulate its PPM 10 working days after filing.
- Regular schemeAn AIF scheme that is not an LVF, an Accredited Investor Only Fund or an Angel Fund — so its PPM must be filed through a merchant banker at least 10 working days before launch.
- Equal trail basisSEBI's rule that a Category III AIF may charge distribution or placement fee only as an equal trail — no upfront fee at all, and paid only out of the manager's own management fee.
- Conflict of Interest RegisterThe record an AIF keeps of each actual or potential conflict of interest — naming the related party, the nature of the relationship, the date it arose, the proposed investment and its market price.
- Ex-officio external memberAn external Investment Committee member who sits by virtue of an office — sponsor, sponsor group, investment manager group or investor in official capacity — so replacing them needs no investor consent.
- Ring-fencing of schemesThe duty on an AIF's manager and trustee to keep each scheme's assets, liabilities, bank accounts and securities accounts segregated from every other scheme of the same fund.
- Deal-by-deal distribution waterfallThe order in which a close-ended Category I or II AIF pays out the proceeds of each individual exit — expenses first, investors next, the manager last and only what is left.
- Warehousing of dealsBuilding a pipeline of investment deals before a fund achieves its first close — a normal part of fund-raising, and not to be confused with warehousing of investments, which parks securities for later transfer.
- First Time ManagerAn AIF manager without a track record of its own previous funds. The PPM must say so, and must disclose the previous funds with which each member of its investment team was associated.
- Accredited Investors only (AI-only) FundAn AIF or scheme in which every investor apart from the manager, sponsor and their employees or directors is an accredited investor — a class SEBI lets launch on intimation, with lighter investor-protection rules.
- Supervisory CommitteeA voluntary best-practice committee an AIF manager may set up, meeting at least once a year, with powers over outsize valuations, governance, fund terms and conflicts — but none to replace investor consent.
- 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.
- First CloseThe date an AIF scheme declares it has raised enough commitments to proceed — the point from which tenure, management fees and set-up cost amortisation all start running.
- Contribution AgreementThe agreement between one investor, the trustee and the investment manager that sets the terms on which that investor participates in the AIF — the contract that turns a commitment into units.
- Investment Advisory AgreementThe agreement under which an offshore fund takes non-binding investment advice from an on-site Indian advisor — advice, not management, which is exactly what keeps the two roles apart.
- WrapperA supplement attached to a domestic fund's Private Placement Memorandum when it is distributed offshore, so the offering complies with private placement rules in the jurisdictions where it is marketed.
- Warehousing of investmentsParking securities for a period so they can be transferred or disposed of later — a conflict of interest the PPM must disclose, and not the same thing as warehousing of deals.
- Set-up CostThe one-time cost of forming the fund and issuing its units, charged to investors as a percentage of capital commitments — up to 1.5% or 2.5% — and usually amortised over the first 36 months.
- Investor Due DiligenceThe investigation an investor runs on an AIF and its manager before committing capital — the process of investigation and evaluation into the details of a potential investment.
- Adverse selectionThe risk of ending up with the wrong manager — picking a fund on a track record or a forward-looking statement that does not predict performance, and getting sub-optimal returns or moral hazard instead.
- Concentration riskThe risk that a few positions are large enough, against the fund's capital, that one loss damages the whole portfolio — capped by SEBI at 25% of investable funds for Category I and II AIFs and 10% for Category III.
- Change of controlA change in who controls an AIF's sponsor or manager — majority board appointment or control of management for a company, or a 50% controlling interest otherwise — needing SEBI approval and an investor exit.
- Beta ManagementThe manager's job of keeping a fund's systematic risk in line with the strategy stated in its private placement memorandum, rather than letting the portfolio beta drift with the market.
- Merchant banker agreementThe contract by which an AIF appoints a SEBI-registered merchant banker to file its placement memorandum with SEBI and certify the adequacy of its disclosures.
- Distribution AgreementThe contract between an AIF's investment manager and a distributor, defining the distributor's role, binding it to a code of conduct and fixing how commission may be paid.
- Key Management PersonnelThe key investment team of an AIF's manager, the employees who decide on behalf of the fund, and anyone else the AIF or manager declares as such — named in the PPM and bound by the Code of Conduct.
- Dissent periodThe window of not less than one month an AIF must give unit holders to record dissent to a material change, after which the manager must buy out the dissenters within three months.
- Co-investmentInvestment by a manager, sponsor or investor of a Category I or II AIF directly into an investee company that the AIF is itself investing in, alongside the fund rather than through it.
- Multiple on Invested CapitalA private equity performance multiple: realised plus unrealised value divided by total invested capital. Once every capital call has been met, it equals the fund's TVPI.
- Investment CommitteeA committee the manager of a Category I or II AIF may constitute to approve the fund's investment decisions; its members are responsible for those decisions and bound by the Code of Conduct.
- 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.
- Key Man ClauseA fund agreement clause that stops an AIF or its manager from making new investments if one or more named key persons cannot devote the necessary time to the fund.
- Default in DrawdownThe event of an AIF investor failing to pay a capital call. Other investors take up the call, and the defaulter substantially loses rights and returns under the investment agreement.
- Investor Advisory CommitteeAn optional committee of mainly investor representatives that gives an AIF's manager or Investment Committee informed guidance on conflicts, risk, governance, reporting and tax — a check, not a decision-maker.
- PPM Compliance AuditThe 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.
- Shelf Placement MemorandumA placement memorandum filed with SEBI to launch a co-investment scheme under a Category I or II AIF, filed through a merchant banker along with a fee of Rs 1,00,000, ahead of each individual co-investment.
- Common PPM TemplateSEBI's standardised disclosure format for a Category I or II AIF's Private Placement Memorandum, prescribed by a February 2020 circular so every AIF discloses the same categories of information.
- Distributor AgreementThe contract forming the legal basis for an AIF distributor's relationship with the fund, executed either between the fund and the distributor or as a three-way agreement including the investment manager.
- Investor PresentationThe core marketing document an AIF distributor prepares from the PPM's disclosures, analysing the fund and scheme for investors and showing how it fits their needs.
- 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.