NISM Series XIX-A · Chapter 7: Investment Process and Governance of Funds

L1 · Foundation

Foundation — From a teaser on a banker's desk to a signed term sheet

How managers find unlisted companies, why the target hires a banker, the teaser-NDA-IM sequence, business due diligence, the management presentation, the investment committee, and the non-binding term sheet.

20 min read · Worth 10% of the paper · Written from pages 140–165 of the official NISM workbook · Updated 18 September 2026

7.1 Why deal sourcing is hard

AIF fund managers are mandated to make investments in unlisted companies that show promise for growth and value creation. This in itself is an arduous task as these companies are not easy to find. As they are not listed on the stock markets, their presence is somewhat invisible. Secondly, their business and financial details are not available in the public domain as much as in the case of listed companies.

Pause on that word invisible. If you want to buy shares in a listed company, you open an app. If you want to buy 20 per cent of a promising auto-components maker in Aurangabad, there is no screen where it appears, no price, no quarterly result, and quite possibly no website worth reading. Finding it at all is the first competitive advantage a fund manager has.

AIF managers develop the expertise of not only identifying such companies but to zero in on the exact target investment which fits into their investment scheme and return requirements. Managers make use of their extensive network of business and professional contacts, services of investment bankers, consulting firms, practitioners such as auditors and legal firms, other AIF fund managers etc. to develop market intelligence and a database of potential companies that they could work on to generate deal flow.

Sourcing potential deals can be difficult and gruelling, but it is an essential skill required to be a fund manager in the AIF industry. Depending on the AIF's preference, a deal may be sourced through a variety of initiatives - internal analysis using a research support team, networking as stated above, making visits to various companies, company screens through databases for specific criteria, industry conferences and conversations with industry consultants and experts.

Six sourcing channels in that sentence — internal analysis, networking, company visits, database screens, industry conferences, conversations with consultants and experts — and then the label that covers them all:

Opportunities sourced through any of these means are referred to as 'proprietary sourcing' i.e., internally sourced.

Proprietary sourcing = internally sourced. Remember that equation; it is the kind of one-line definition the exam likes.

And a point that connects this chapter back to Chapter 3's fundraising discussion:

One of the key attributes of a successful AIF manager is to be able to showcase an impressive pipeline of deals to back up their pitch for raising the capital commitments from investors.

A manager cannot raise a fund by promising to look for deals. Investors want to see the pipeline before they commit. So deal sourcing is not merely what happens after fundraising — it is part of what makes fundraising possible.

7.1.1 Initial assessment — the two things being judged

In addition to developing the deal flow, a lot also depends on how managers evaluate the potential of the companies they identify and the capabilities of the managements of such companies to deliver desired performance.

Therefore, the initial assessment is largely about the potential business opportunity presented by the company and the credentials of the key management team (importantly the founders) and whether their vision, competence and drive match the requirements to convert the business opportunity into value creation.

Two things, always: the business opportunity and the people. And note the test applied to the people — not merely whether they are honest or capable in the abstract, but whether their vision, competence and drive match the requirements to convert the business opportunity into value creation. A brilliant founder who is wrong for this particular opportunity is still a bad investment.

Why the target hires a banker

Usually, companies seeking to raise capital from venture capital or private equity funds hire investment banks or consulting firms to provide professional assistance.

The workbook then gives four reasons why approaching a fund directly is a bad idea, and every one of them is examinable:

A direct representation by the company is often counter-productive since most VC and private equity investors value the reference that the prospective client brings. — the banker's involvement is itself a signal.

Moreover, the company will have no idea of how to identify the type of investor it is looking for or would be ideal for the given situation. — a company that pitches an early-stage story to a late-stage buyout fund wastes everyone's time.

In addition, there would be no external validation of the company's testimonials.

The company may also not have in-house expertise in deal structuring, valuation and negotiation with investors.

It is therefore both a convention and a preferred route to appoint an investment bank or professional firm to conduct the deal on their behalf.

The teaser, the NDA and the IM

Usually, the investment banker sends out a 'teaser' or a 'flier' (a brief 1-3 page summary of the company and the opportunity) to prospective funds after identifying a list of funds or portfolio managers based on the business sector and investment criteria of the transaction.

Note the length: 1–3 pages. A teaser is deliberately thin — often it does not even name the company.

The fund manager who receives the teaser would need to decide whether a particular proposal has a preliminary fit into their investment scheme so that it can be pursued. Typically, about 25% of all the leads and enquiries coming into their fold are taken up for further processing.

About 25 per cent — one in four. That number is worth remembering, and worth thinking about. Three-quarters of everything that reaches a fund manager's desk is rejected before any work is done on it.

If the investment team (investment managers supported by principals, associates and research team in the investment management company) finds the teaser interesting, they will negotiate and sign a Non-disclosure agreement (NDA) to receive the company's Confidential Information Memorandum (CIM or simply IM) prepared by the investment bankers.

In a proprietary-sourced opportunity, investment teams will often sign an NDA directly with the target company in order to receive some confidential information regarding the company from management. The NDA is especially important to share important technical information and is used extensively as a matter of convention.

The sequence so far: teaser → NDA → Information Memorandum. The NDA sits between the two, and the IM comes only after it is signed. Note also who the NDA is with: the investment bankers in a banker-led process, but directly with the target company in a proprietary-sourced one.

7.1.2 Business due diligence and the management presentation

At this stage, the investment team will perform some initial business and management due diligence to better understand the potential investee company. This process includes research on the industry, talking to advisors about the current state of the industry and players in it, and building and enhancing a preliminary financial model using the management's projections to understand the potential returns of making the investment. Meetings are also held with the investment bank to hear their thoughts on the financing requirements, type of financing and probable deal structure.

Four activities: industry research, advisor conversations, a preliminary financial model built on management's projections, and meetings with the bank on financing requirements, type of financing and probable deal structure.

At an appropriate stage the bankers arrange meetings between the investment team and the key management team of the investee company to be able to understand their perspective (known as the 'Management Presentation'). The management team will present an overview of the company while the deal team on both sides will be engaged in technical discussions and better picture of the business case, numbers presented, current performance of the company and all associated aspects.

The first trip to the Investment Committee

After reviewing the management's presentation and having initial discussions, the investment team will prepare a brief (2-3 page) investment proposal and present it to their Investment Committee. The meeting can either be to alert the Committee on the potential deal or to commence the first stage of a formal approval process whereby an investment team would seek a 'go-ahead' to negotiate the deal. Sometimes, if the deal processing requires an approval on out-of-pocket expenses to be incurred, a 'cost-cover' may also be approved by the Committee.

Three details to hold: the proposal is 2–3 pages; the meeting may be merely to alert the Committee or to seek a formal go-ahead to negotiate; and a cost-cover may be approved for out-of-pocket expenses.

Once this process is completed, the potential deal is processed further and at the appropriate stage, the investment team has to decide to engage in deal negotiations with the company and its investment bankers.

7.1.3 Negotiations by the investment manager

At this stage, further meetings are held to arrive at the refinement of the business plan presented by the investee company's management, fine-tune the investment and roll-out plan as applicable so that there is meeting of minds with the management on the future roadmap of implementation after the financing needs are met.

This process is extremely important as it culminates into an agreement on the final business plan that would become the basis of the investment and the key deliverables from the company.

That sentence explains something candidates often miss. The business plan is not a document the company writes and the fund reads. It is negotiated jointly, and the agreed version becomes the basis of the investment and the key deliverables. Later, when the fund complains that milestones were missed, it is complaining about a plan it helped write.

In parallel, the contours of the deal are also discussed with the investment bankers as well as the finance and regulatory teams of the company. The broad structure of the financing (debt/equity/mezzanine) are discussed and the appropriate regulatory framework at a broad level is also examined. The investment managers should also get a feel of the company's valuation expectations and to what extent it is negotiable.

7.1.4 The PIM and the term sheet

Before proceeding to execute the term sheet, depending upon the protocols in the organisation structure of the investment manager, a Preliminary Investment Memorandum (PIM) may be presented to the Investment Committee detailing the proposed investment and deal structure in order to get an authorisation to sign the term sheet.

So the Investment Committee is approached twice before any money moves — once for the go-ahead to negotiate, and again, via the PIM, for authorisation to sign the term sheet.

The investment team presents the potential investee company with a non-binding Letter of Intent (LOI) also called the 'term sheet'. This document is also sometimes referred to as Summary of Principal Terms (SOPT).

Three names for one document — term sheet, Letter of Intent (LOI), Summary of Principal Terms (SOPT) — and the exam may use any of them.

What it contains: The offer will detail a proposed transaction, investment amount (often a valuation range is given, rather than a specified amount), a proposed capital structure post-acquisition, board seat, key investor rights and management terms, exclusivity period, conditions precedent to investment and other residual matters.

Note the parenthesis: often a valuation range is given, rather than a specified amount. At term sheet stage nobody yet knows what due diligence will find, so the number is deliberately elastic.

Its legal status — the single most examinable point in this section:

It may be noted that a term sheet is a non-binding document on both the parties and does not provide for any contractual rights whatsoever. It has a validity period within which the parties are expected to complete the transaction. The validity period is usually extendable by mutual consent if required.

Non-binding. No contractual rights whatsoever. If a question asks whether either party can be sued for walking away from a term sheet, the answer follows from that sentence.

Then why bother? The role of the term sheet is to define the modalities avoiding vagueness and injecting precision into the transaction. It would also establish commitment from both sides (due to the exclusivity in the transaction) so that the transaction may be concluded expeditiously in the mutual interest.

Two purposes: precision and commitment through exclusivity. The exclusivity period means the company stops talking to other funds while diligence runs — which is why a fund is willing to spend real money on diligence at all.

Who advises on what:

Nevertheless, term sheets can be contentious and the company will do well to consult with its investment bankers and legal advisers... Usually, investment bankers assist in the commercial negotiation on issues such as valuation and deal structure while legal counsel advise on negotiation of contractual rights in the term sheet and going forward, on the definitive agreements.

Bankers → valuation and deal structure. Lawyers → contractual rights and the definitive agreements. A clean division, and a likely question.

The management team of the company has to focus on the compatibility of the investment management team of the AIF, its experience and value creation strategy and compatibility.

Note that the company is also assessing the fund. This is a two-way selection. A founder who takes money from a fund with no experience in his sector has made a mistake that no term sheet clause can fix.

The sequence so far — commit this order to memory

Step	What happens
1	Deal sourcing — networking, screens, conferences; proprietary sourcing = internally sourced
2	Teaser / flier — 1–3 pages from the banker; about 25% taken further
3	NDA signed
4	Confidential Information Memorandum (CIM / IM) received
5	Business due diligence — industry research, preliminary financial model
6	Management Presentation arranged by the bankers
7	2–3 page investment proposal to the Investment Committee — go-ahead to negotiate, possibly a cost-cover
8	Negotiations — final business plan, financing structure, valuation expectations
9	Preliminary Investment Memorandum (PIM) to the IC for authorisation to sign the term sheet
10	Term sheet / LOI / SOPT — non-binding, with an exclusivity period and a validity period
11	Due Diligence Review — does not commence unless the term sheet is executed by both parties
12	Final term sheet, then the definitive agreements

Step 11 carries a rule you must not reverse: The due diligence process does not commence unless the term sheet is executed by both parties. Diligence is expensive and intrusive; no company opens its books until the commercial terms are agreed in principle and exclusivity is in place.

Think of it like this

Looking for a house that is not on any property portal

If you want a flat in a listed society, you open a property app and see fifty options with photographs and prices. But suppose you want a specific kind of old independent house in a particular Kolkata lane — the kind that never gets advertised because the family sells to whoever the neighbourhood broker brings. You will find it only through a network: a broker who has worked that lane for twenty years, a cousin who lives there, the local lawyer who does the conveyances.

That is unlisted investing. As they are not listed on the stock markets, their presence is somewhat invisible. Secondly, their business and financial details are not available in the public domain.

And the manager's answer is exactly the broker network: extensive network of business and professional contacts, services of investment bankers, consulting firms, practitioners such as auditors and legal firms, other AIF fund managers. When he finds one himself rather than through a banker's mailer, that is proprietary sourcing.

Why the bride's family sends a mediator and not the bride

In a traditional Indian marriage arrangement, the two families do not negotiate face to face at the first meeting. A mediator carries the proposal, describes the family, vouches for their standing, and manages the awkward parts — money, expectations, dates.

The workbook says the same thing about a company approaching a fund. A direct representation by the company is often counter-productive since most VC and private equity investors value the reference that the prospective client brings. Beyond the reference, the company will have no idea of how to identify the type of investor it is looking for, there is no external validation of the company's testimonials, and it may also not have in-house expertise in deal structuring, valuation and negotiation with investors.

Four good reasons why it is therefore both a convention and a preferred route to appoint an investment bank or professional firm.

The one-page matrimonial advertisement, and the full biodata that follows

A matrimonial advertisement is four lines: age, education, profession, city. It tells you almost nothing, and it is meant to. Only when there is interest does the detailed biodata come across — and only to people the family is willing to share it with.

The teaser or flier is that advertisement: a brief 1-3 page summary of the company and the opportunity, sent to funds selected based on the business sector and investment criteria of the transaction. It is filtered hard — Typically, about 25% of all the leads and enquiries coming into their fold are taken up for further processing.

The biodata is the Confidential Information Memorandum, and there is a gate before it: the fund must negotiate and sign a Non-disclosure agreement (NDA) to receive the company's Confidential Information Memorandum. Teaser, then NDA, then IM — never IM before NDA.

The engagement that is not yet a marriage

An engagement announces intention, fixes the terms and stops both families from looking elsewhere. But it is not a marriage. Either side may withdraw, and no court will order the wedding to proceed.

That is exactly the legal position of a term sheet: a term sheet is a non-binding document on both the parties and does not provide for any contractual rights whatsoever.

So why hold an engagement at all? For the same two reasons the workbook gives: The role of the term sheet is to define the modalities avoiding vagueness and injecting precision into the transaction. It would also establish commitment from both sides (due to the exclusivity in the transaction) so that the transaction may be concluded expeditiously.

Precision and exclusivity. And note what the exclusivity buys: only after it is in place will a fund spend real money on due diligence — which is why the due diligence process does not commence unless the term sheet is executed by both parties.

Checking the property papers before you pay the token amount — but after you agree the price

Nobody in India engages a lawyer to search thirty years of title, verify municipal dues and check the encumbrance certificate before the seller has even named a price. You agree the price and terms first, pay a token, take exclusivity — and then pay for the searches.

The same order governs a fund investment. The term sheet fixes investment amount (often a valuation range is given, rather than a specified amount), a proposed capital structure post-acquisition, board seat, key investor rights and management terms, exclusivity period, conditions precedent to investment. Only then does the Due Diligence Review begin.

And when the searches turn up an old dispute, you renegotiate — which is precisely what the workbook describes: this could lead to re-negotiations to modify and arrive at the final term sheet that could involve revision in valuation or disclosure statements, strengthening of the representation and warranties.

The contractor and the architect give different advice, and you need both

When you build a house, the contractor tells you what the construction should cost and how to phase the payments. The architect and the lawyer tell you what the sanction plan permits and what the sale deed must say. Ask the contractor about the deed and you will get a confident, useless answer.

The workbook draws the same line. Usually, investment bankers assist in the commercial negotiation on issues such as valuation and deal structure while legal counsel advise on negotiation of contractual rights in the term sheet and going forward, on the definitive agreements.

Bankers = money. Lawyers = rights. And there is a third job that belongs to neither: The management team of the company has to focus on the compatibility of the investment management team of the AIF, its experience and value creation strategy. No adviser can do that for the founder.

Key terms in this chapter

Affirmative Rights: Positive control — corporate actions that cannot be carried through without the investor's express consent, irrespective of its shareholding, even where an ordinary resolution would otherwise suffice. Fifteen standard matters range from capital structure changes to appointment or removal of auditors.
Compliance Test Report (CTR): The annual report filed by the investment manager on compliance with the AIF Regulations and circulars. It goes to the sponsor and trustee within 30 days of the financial year end; observations come back within 30 days; the manager replies within 15 days; and any violation is intimated to SEBI as soon as possible.
Confidential Information Memorandum (CIM or IM): The detailed document prepared by the investment bankers describing the company and the opportunity, released to a fund only after a non-disclosure agreement is signed.
Cost-cover: An approval from the Investment Committee for the out-of-pocket expenses of processing a deal, sought at the same time as the go-ahead to negotiate.
Definitive Agreements: The set of binding agreements signed between the investee company and the investment manager representing the AIF to complete the transaction — principally the Share Subscription Agreement and the Shareholders' Agreement.
Disclosure Letter: Issued by the company as a formal qualifier to the absolute representations and warranties in the SSA. Once a fact is disclosed, the AIF has notice and cannot claim breach of warranty or indemnification for it, so the burden of disclosed liabilities shifts from the promoters to the AIF.
Downround: A financing round at a valuation lower than the previous round, arising from adverse performance by the company or external factors that reduce investor confidence.
Drag Along (Bring Along) Right: An obligation on other shareholders to sell to the same buyer on the same terms if the holder of the right sells. Usually insisted upon when the AIF is a minority investor, so the stake offered is large enough to attract a control or strategic premium instead of a minority discount.
Due Diligence Review (DDR): Also called investor due diligence or IDD — a comprehensive examination of the facts, representations and affairs of the target company by the AIF's investment manager. It does not commence until the term sheet is executed by both parties.
Exclusivity Period: The period during which the company undertakes to deal only with this fund. It is what establishes commitment from both sides and makes it worthwhile for the fund to spend money on due diligence.
Financial DDR: Verification of the books, financial statements and transactions to establish a true and fair view, test the accuracy of representations in the IM and find undisclosed material information. It is carried out for at least the past three financial years and covers direct and indirect tax, usually by an accounting firm or investment bank.
Fund Governance: The control structure within which funds are managed, directed and controlled. Its central themes are manager oversight, outsourced independent valuation, segregation of functions, absence of conflicts of interest, and increased transparency and reporting.
Investment Committee: A 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, and external members not named in the PPM need consent of 75 per cent of investors by value.
Investor Advisory Committee: A non-mandatory committee with a majority of investor representatives, which provides informed guidance and recommendations to the manager or Investment Committee on conflict resolution, risk management, governance, investor relations and statutory or tax issues.
Legal DDR: Conducted by a corporate law firm, covering the legal aspects of the business, IPR protection, contractual relationships, material contracts, outstanding litigation and possible outcomes, statutory compliance and defaults.
Liquidation Preference: The right of preferred shareholders to receive a certain amount of liquidation proceeds ahead of all other shareholders — the investment amount or a multiple of it. Each round or series may carry different returns and preference rates reflecting its risk.
Management Presentation: The meeting the bankers arrange between the fund's investment team and the company's key management, where management presents an overview and both deal teams engage in technical discussion of the business case, numbers and current performance.
Milestone Valuation: Pegging valuation to technical or commercial targets set out in the business plan rather than to a forecast. Missing a milestone does not automatically stop the investment but may cause a downward revision in valuation, a downround, or delay in future investments.
Online Dispute Resolution (ODR): An alternative route investors may take at any point. If a complainant opts for ODR or other civil remedies while a complaint is pending on SCORES, the SCORES complaint is treated as disposed. Disputes go to mediation and/or conciliation and/or arbitration.
Pre-emptive Right: The right, also enshrined in section 62 of the Companies Act, to participate pro rata in future issues so as to maintain one's percentage shareholding. It is only a right and not an obligation to invest in a future round.
Preliminary Investment Memorandum (PIM): A memorandum placed before the Investment Committee detailing the proposed investment and deal structure, in order to obtain authorisation to sign the term sheet.
Proprietary Sourcing: Deal opportunities the fund finds internally — through its own research team, networking, company visits, database screens, industry conferences or conversations with consultants — rather than through a banker's process.
Ratchet (Clawback) Clause: An anti-dilution mechanism that compensates an investor if a later round is at a lower valuation, by issuing additional shares for no or minimal cost under a formula. It may be delivered through a bonus issue, preferential allotment, CCPS or equity warrants.
Right of First Refusal (ROFR) / Right of First Offer (ROFO): Contractual terms inter se between shareholders, not affecting the company, obliging a seller to offer shares first to those shareholders who hold the benefit of the right before offering them to a third party.
SCORES: The SEBI Complaint Redress System, a web-based centralised platform where investors lodge complaints against AIFs. Complaints are automatically forwarded to the AIF, which must redress them within 21 calendar days and report through an Action Taken Report routed back to the investor.
Shareholders' Agreement (SHA): An inter-se agreement among all existing shareholders and the AIF. It is needed because SSA conditions bind only the company and not its shareholders, who are not parties to it. The Articles of Association are amended to incorporate its provisions so that they become enforceable.
Share Subscription Agreement (SSA): The main transaction document, between the AIF and the company, governing a new issue of shares. It sets the terms of the investment, provides rights superior to those of an ordinary investor under the Companies Act, and covers board reconstitution and key appointments.
Stewardship Responsibilities: SEBI's mandate that AIFs and other institutional investors monitor and actively engage with their listed investee companies on performance, strategy, corporate governance, ESG risks and capital structure, under six principles covering policy, conflicts, monitoring, intervention, voting and reporting.
Tag Along (Co-sale) Right: The right to insist that a potential purchaser of another shareholder's shares also buys an equivalent percentage of one's own shares at the same price and terms. Its stated purpose is to make the promoter's shares more difficult to sell, so that the founders stay while the AIF is invested.
Teaser (Flier): A brief one to three page summary of the company and the opportunity, sent by the investment banker to funds selected by sector and investment criteria. Roughly 25 per cent of all leads reaching a fund are taken up for further processing.
Term Sheet: Also called a Letter of Intent or Summary of Principal Terms. A non-binding document creating no contractual rights whatsoever, which fixes the proposed transaction, investment amount or valuation range, capital structure, board seat, investor rights, exclusivity period and conditions precedent.
Veto Rights: Negative control — the right to oppose a corporate action even if it has the requisite majority, exercised as a defence to protect the investor's own interests.
Virtual Data Room: The controlled repository through which the investee company provides detailed confidential records — constitutional documents, board minutes, books of account, tax returns, invoices, purchase orders, payroll, statutory filings, property and IP documentation, employee agreements, segment financials and audited accounts.

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Original explanatory writing based on the official NISM workbook for Series XIX-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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