Redemption Gate
A 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.
In plain language
Redemptions hurt a Category III AIF. The workbook says so directly: they may result in frequent changes in the investment portfolio and a potential loss of return. A manager who has to sell positions to meet withdrawals may have to sell at the wrong time.
So the manager is allowed to restrict redemptions, and has three tools:
- a lock-in period, during which you cannot redeem at all;
- an exit load, a fee on redemptions after lock-in but before the fund's tenure ends;
- a redemption gate, which caps how much can be redeemed in each redemption period.
The gate is the only one of the three that limits the quantity of money leaving the fund at one time. The lock-in limits when; the exit load limits how cheaply.
How it works
Where it is written. The manager sets out the conditions for redemption in the Private Placement Memorandum (PPM): the investor's right to full or partial redemption, and the redemption gates. The PPM contents listed in Chapter 4 include "conditions and limits on redemption, exit load to be paid and redemption gates".
What it does. Redemption gates provide the maximum amount of redemption permissible by investors, in every redemption period, subject to payment of applicable expenses, taxes and exit load.
The surrounding rules in the workbook:
| Item | Workbook position |
|---|---|
| Structure | Category III AIFs can be open-ended or close-ended |
| Minimum tenure, close-ended | Generally 3 years (same as close-ended Category I and II) |
| Lock-in | Specified by the manager; a 2-year lock-in is prevalent but not mandated by the SEBI (AIF) Regulations |
| Exit load after lock-in | 0 to 5 percent of NAV, pre-defined in the PPM; may be variable, higher for earlier exits |
The workbook's Chapter 4 illustration: a close-ended scheme of 5 years lets investors exit after a 2-year lock-in by paying an exit load. For exits between the end of lock-in and the end of tenure, the exit load is paid as per the redemption gates specified by the manager in the PPM.
A worked example
Illustrative figures and PPM terms. Narmada Long-Short Fund is an open-ended Category III AIF with NAV of Rs 200 crore. Its PPM, as assumed for this example, sets a gate of 10% of NAV per quarterly redemption period, meets requests pro rata when the gate binds, and charges an exit load of 2%.
This quarter, investors past their lock-in ask for Rs 30 crore.
Gate = 10% × Rs 200 crore = Rs 20 crore
Requests = Rs 30 crore
Fraction honoured = 20 ÷ 30 = 66.67%
Ms Meera Iyer had asked for Rs 6 crore:
Honoured this quarter = 66.67% × Rs 6 crore = Rs 4.00 crore
Exit load at 2% = 2% × Rs 4 crore = Rs 8.00 lakh
Paid (before tax) = Rs 3.92 crore
Not met this quarter = Rs 2.00 crore
What happens to Ms Iyer's unmet Rs 2 crore — carried to the next period or resubmitted — is whatever this fund's PPM says; the workbook does not prescribe it. The point the workbook does make is that the gate protects the investors who stay from a forced sale of the portfolio.
Why NISM asks about it
Chapter 3 (Introduction to the Category III AIF Ecosystem), section 3.3.7.1 Lock-in Period and Exit Load defines the gate, and Chapter 3's sample questions use "Redemption Gate" as a distractor in a question whose answer is Exit Load. Chapter 4 repeats the idea in its close-ended scheme example and lists redemption gates among the required PPM contents. Expect definitional questions that test whether you can separate a gate from a lock-in and an exit load.
Common exam traps
- A gate caps the amount; a lock-in bars redemption for a period; an exit load is a fee. "The fee charged on redemptions after lock-in but before tenure ends" is the exit load, not the gate.
- The gate is subject to expenses, taxes and exit load — those are still charged on what is redeemed.
- Gates are set by the manager in the PPM, not by SEBI.
- The 2-year lock-in is common but not mandated by the SEBI (AIF) Regulations.
- Exit load ranges 0 to 5 percent of NAV after lock-in.
- Close-ended minimum tenure is 3 years for Category I, II and III alike.
Check yourself
1.What fee is charged to investors on redemptions made after completion of the lock-in period but before the expiration of the stated fund tenure?
- a)Exit load
- b)Incentive fee
- c)Redemption gate
- d)Hurdle rate
Show the answer
Answer: (a) Exit load
This is the workbook's own sample question. Exit load is the additional fee charged on redemptions made after the lock-in ends but before the tenure expires, pre-defined in the PPM and ranging from 0 to 5 per cent of NAV. Option (c) is the near-miss: a redemption gate limits how much may be redeemed in a period; it is not itself a fee. An incentive fee rewards outperformance, and a hurdle rate is a threshold return, not a charge.
Where this is taught
Free preparation for NISM Series XIX-BRelated 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.
- Close-ended fundA mutual fund scheme that sells units only in its NFO, runs for a fixed period and redeems all units at maturity — in between, investors can exit only by selling on the stock exchange, where listing is compulsory.
- Exit loadA charge levied when an investor redeems units, calculated as a percentage of NAV and deducted from it, usually only if the units are sold within a stated holding period.
- 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.
- Lock-in PeriodThe stretch of time after an investor commits money to a Category III AIF during which they cannot redeem — not fixed by SEBI, but 2 years is common practice.
- Open-ended AIFAn AIF scheme that offers units continuously with no fixed maturity and lets investors redeem at set intervals — permitted only for Category III AIFs, with a variable corpus.
- Suspension of redemptionsAn open-ended Category III AIF halting redemptions in exceptional circumstances, justified only in investors' best interest or by SEBI — with no new subscriptions accepted while it lasts.