Private placement memorandum

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.

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 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:

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.

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.

• 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.