Supervisory Committee
Also written Supervisory Committee of an AIF · Supervisory board of an AIF · Advisory committee of an AIF
A 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.
In plain language
An AIF has a manager who invests the money and a trustee who holds it. Neither of them is the investor.
A supervisory committee is a third body the manager can choose to set up. It is not compulsory. The workbook lists it under industry best practices, not under the regulations.
Its job is to look over the manager's shoulder on the decisions where the manager has most to gain. Two examples: a valuation of a holding that has grown unusually large, and a deal that could create a conflict of interest.
One limit matters more than all its powers. The committee's resolutions cannot replace the consent of the investors where consent is required. It supervises. It does not vote on the investors' behalf.
How it works
Where it comes from (Chapter 10, section 10.9). Section 10.9 sets out industry best practices for an AIF under two headings, Governance and Deal Structuring and Investment Strategy. The supervisory committee is the first governance item, and the language is permissive throughout: the manager can set one up. No SEBI regulation in this chapter requires it.
What section 10.9 asks of it.
| What the workbook says | |
|---|---|
| Frequency | Meets at least once a year |
| Constitution | The manager should list its composition and powers |
| Powers, generally | The valuation of assets that exceed the pre-defined maximum investment per company; governance issues; the terms and conditions of the Fund; and the resolution of potential conflicts of interest |
| Hard limit | Its resolutions cannot, in any way, replace the mandatory consent of the Investors for matters that require it |
| The manager's duty to it | Promptly inform it of any transaction during the investment period that may give rise to potential conflicts of interest |
Read the first power carefully. It is not every valuation. It is the valuation of assets that breach the maximum investment per company the fund has already defined for itself — its own concentration limit. The committee is a check on the exception, not a second valuer.
What sits beside it in the same list. The other governance best practices are to identify the key persons or key executives of the fund and take keyman insurance and indemnity insurance, with those key persons informing investors of any situation that could substantially affect their dedication to the fund; and to determine the investment strategy clearly — the relevant jurisdictions, the type of investee companies, the maximum amount of each investment, concentration restrictions, and a list of excluded sectors the fund will not invest in. That last item is what creates the threshold the committee then polices.
Do not confuse it with the Investment Committee (section 10.5.3), which is a regulatory creature.
| Supervisory Committee (10.9) | Investment Committee (10.5.3) | |
|---|---|---|
| Source | Industry best practice | The AIF Regulations, inserted by the Second Amendment Regulations, 2021 with effect from 5 May 2021 |
| Purpose | Supervise valuations above the fund's own cap, governance, fund terms, conflicts | Approve the investment decisions of the fund |
| Frequency in the workbook | At least once a year | Not stated — it meets as proposals arise |
| Members' liability | Not stated | Members are responsible for the decisions taken and must ensure compliance with the AIF Regulations |
| Investor consent | Cannot replace it | External members not named in the PPM, the investor agreement or another fund document at onboarding need the consent of at least 75% of investors by value |
| Carve-out | None stated | The members-are-responsible provision does not apply to a large value fund for accredited investors, or to an AIF in which each investor has committed at least INR 70 crore and furnished a waiver |
Where the AMC board and the trustee sit (section 10.5.2). In a trust-based structure the board of directors of the AMC is entrusted with the overall supervision and oversight of the investment management functions of the AIF trust, and the trustee with the overall administration of trust matters, with their duties spelt out in the trust deed and the investment management agreement. A supervisory committee is none of those three.
Codes of conduct (section 10.8). The investment manager and its key management personnel must follow the code of conduct in the AIF Regulations. SEBI has also prescribed a code for members of the Investment Committee, the trustee and trustee company and its directors, and the directors or designated partners of the AIF: integrity and the highest ethical and professional standards, due care and independent professional judgement, timely disclosure of any conflict of interest to the Manager with recusal from the decision-making process where necessary, confidentiality, and no unethical practice or professional misconduct. The workbook does not extend that prescribed code to a supervisory committee by name.
A worked example
Illustrative fund and figures. The committee's powers, the once-a-year frequency and the 75% Investment Committee threshold are the workbook's.
Nilgiri Opportunities Fund I is a Category II AIF with a corpus of Rs 500 crore. Its PPM fixes a maximum investment per investee company of 12% of corpus, that is Rs 60 crore. The manager has set up a five-member supervisory committee — two nominees of large investors, two independent members and the manager's Chief Risk Officer — which meets each April.
Trigger 1, a valuation above the fund's own cap. At 31 March the fund holds Rs 52 crore of cost in Coimbatore Aerotech. The valuer marks it to Rs 71 crore, which is 14.2% of corpus and above the Rs 60 crore per-company ceiling. The committee's stated power covers the valuation of assets exceeding the pre-defined maximum investment per company, so the mark-up comes to it. It asks the valuer for the comparable set and minutes its view. What it cannot do is substitute its own resolution for any investor consent the fund documents require in order to change that 12% limit.
Trigger 2, a conflict, out of cycle. In November, during the investment period, the manager is offered a Rs 35 crore secondary purchase of shares in Konkan Diagnostics from another fund the same manager runs. That is a potential conflict of interest, so the manager must promptly inform the supervisory committee. It does not wait for April. The committee reviews the price against an independent valuation and records its resolution.
Where the committee's power stops. The manager then proposes to change the fund's fee terms. Terms and conditions of the fund are within the committee's stated powers, and it resolves in favour. That resolution cannot stand in for investor consent wherever consent is mandatory — section 10.9 says so in terms, and it does not list which matters those are, so the manager still has to find them in the fund documents and the regulations.
The contrast, in one line. When the same manager wants to add an external member to its Investment Committee who was not named in the PPM, no committee can wave it through: the regulations require the consent of at least 75% of investors by value of investment in the AIF.
Why NISM asks about it
Chapter 10, section 10.9 (Industry Best Practices), under Governance. It is a short passage at the end of a long chapter, which is exactly where a single-fact question comes from.
Expect: how often does the supervisory committee meet (at least once a year); what falls within its powers (valuation of assets exceeding the pre-defined maximum investment per company, governance issues, the terms and conditions of the fund, resolution of potential conflicts of interest); can its resolutions replace investor consent (no, not in any way); and what must the manager tell it promptly (transactions during the investment period that may give rise to potential conflicts of interest). The discriminating question pairs it against the Investment Committee of section 10.5.3: one is best practice meeting once a year, the other a regulatory body that approves investments and whose members are personally responsible for the decisions taken.
Common exam traps
- Best practice, not law. Section 10.9 says the manager can set one up. Nothing in XIX-D's Chapter 10 compels it, and no SEBI regulation is cited for it.
- At least once a year is a floor, not a schedule — and it is far less frequent than an Investment Committee, which meets as proposals arise.
- Not every valuation comes to it. Only assets that exceed the pre-defined maximum investment per company the fund has set for itself.
- It cannot replace the mandatory consent of investors. This is the most examinable line in the passage, and the workbook's wording is that the resolutions cannot in any way replace it.
- The manager's duty to inform is prompt, is limited to the investment period, and is about potential conflicts of interest. Not about every transaction.
- It is not the Investment Committee, not the trustee and not the AMC board. The AMC board has the overall supervision and oversight of the investment management functions; the trustee has the overall administration of trust matters (section 10.5.2).
- 75% of investors by value belongs to the Investment Committee's external members, not to the supervisory committee, which has no stated consent threshold at all.
- The prescribed SEBI code of conduct in section 10.8 names the Investment Committee members, the trustee and the AIF's directors or designated partners. The workbook does not name a supervisory committee in that code.
Where this is taught
Free preparation for NISM Series XIX-DRelated terms
- Conflict of interestAny interest of the analyst's own — a shareholding, a fee, a relationship — that could bias the research, and which the regulations require to be disclosed rather than merely avoided.
- SponsorThe person or firm that sets up the mutual fund — applies to SEBI for registration, executes the trust deed in favour of the trustees, and puts up the capital of the AMC.
- 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.
- 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.
- 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.
- 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.
- 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.