Introduction of PPM
Private Placement Memorandum (PPM) serves as a comprehensive document that provides prospective investors with essential information about the fund’s investment strategy, objectives, risks, and legal structure. It is a crucial tool for AIF managers to communicate key details to potential investors, helping them make informed decisions before participating in the fund. A well-crafted PPM ensures transparency and compliance within the AIF industry, fostering trust and confidence among investors.
PPM audits
As per the circular (SEBI/HO/IMD/DF6/CIR/P/2020/24), SEBI mandates PPM audits to ensure the accuracy and compliance of the information presented in a Private Placement Memorandum. These audits involve a thorough examination of financial statements, business operations, and regulatory compliance to verify the information provided to potential investors. Conducting a PPM audit helps enhance investor confidence and minimizes legal and financial risks for both the company and its investors.
Checklist to be followed while conducting a PPM audit
|
Sr No |
Particulars | Description |
| 1 | Registration Documents | Ensure that the AIF has obtained the necessary regulatory registrations, including SEBI approval, SEBI Registration Certificate, Trust Deed, Investment Management Agreement, PAN, TAN, GST, FATCA, and FEMA registrations. Verify that these documents are up-to-date and compliant with regulatory requirements. |
| 2 | Organizational Structure | Confirm that the organizational structure aligns with the terms outlined in the PPM. Any changes to the structure should be promptly reported to SEBI for approval. Review the organizational chart to ensure it complies with regulatory guidelines. |
| 3 | Investment Committee | Verify the formation of the Investment Committee as mandated by the PPM. Examine meeting records to ensure that the committee has been active, and its decisions align with the PPM’s investment strategy and objectives. |
| 4 | Contributor’s Board | Ensure that the Contributor’s Board has been established in accordance with the PPM’s requirements. Review the board’s composition and roles to confirm compliance. |
| 5 | Sponsor’s Commitment | Confirm that the sponsor(s) have committed the funds as per the terms specified in the PPM. Ensure that these commitments are accurately reflected in the fund’s financial records. |
| 6 | Investment | Validate the investments made by the fund, ensuring they adhere to the terms and restrictions outlined in the PPM. Verify all the necessary documents relating to investments like the valuation reports of investee companies etc. Confirm that the Investment Committee approved these investments as required. |
| 7 | Contributors | Review contributions received and signed agreements in place. Ensure that KYC documentation for each contributor or beneficial owner is on file. Investigate any defaults and actions taken by the fund. Confirm periodic communication of NAV to contributors as per PPM. Review timely document submissions to contributors, address conflicts with contributors, ensure drawdown compliance, check for unit redemptions, and verify any NAV suspension. |
| 8 | Management and Mobilization Fees | Verify that the Mobilization Fees and Management fees charged align with the terms specified in the contributor agreement and PPM. Ensure accuracy in fee calculations and billing. |
| 9 | Organizational Structure and Operating Expenses | Examine operating expenses incurred by the fund, ensuring they remain within the specified limits set by the PPM. Review any Fund Performance Fees charged and ensure compliance with PPM terms. Confirm that the expenses billed are consistent with the PPM and contributor agreements. |
| 10 | Regulatory Filings | Ensure compliance with regulatory filings, including FATCA Returns, TDS Returns, GST Compliance, statutory audits, Income Tax Act, Form-64 submissions to Income Tax and investors, Foreign Investment reporting to RBI (InVi), and required annual and quarterly compliance reporting to SEBI. |
| 11 | Miscellaneous | Assess the timely receipt of contributions, utilization of capital in line with the purpose and objectives of the PPM, any legal notices received from government departments or other entities, communication from SEBI regarding fund winding up or termination, and any financial transactions with associate entities, with particular attention to prior approvals from contributors. Assess timely contributions, capital utilization, legal notices, SEBI communication, financial transactions with associates. |
Deadlines for PPM audit
SEBI has set specific deadlines and requirements for PPM audits for AIFs:
1)Annual Requirement: AIFs are required to conduct a PPM audit annually. The audit should cover the financial year of the AIF.
2)Submission to SEBI: The audited PPM, along with the audit report, should be submitted to SEBI within 180 days from the end of the financial year. For example, if the financial year ends on March 31st, the audited PPM and audit report should be submitted to SEBI by September 30th of the same year.
3)Investor Communication: AIFs must also communicate the results of the audit to their investors promptly after completing the audit and submitting it to SEBI.
Conclusion
In the complex world of Alternative Investment Funds (AIFs), the Private Placement Memorandum (PPM) is your guide. It’s the document that lays out the fund’s strategies, possible risks, and how it plans to follow the rules. Now, when it comes to PPM audits, as we’ve detailed in our checklist, they act like detectives. They thoroughly verify from the fund’s legal paperwork to its investment decisions and how it keeps everyone informed. These audits do more than just ensure compliance; they build confidence among investors and reduce risks. Therefore, PPM audits are indispensable in the process of developing trust between the Manager and the contributors.
Authors:
Maanya Shah | Associate Consultant | Email: maanya.shah@masd.co.in| LinkedIn Profile
Varsha Dhake | Manager | Email: varsha.dhake@masd.co.in | LinkedIn Profile
Author Bio
good job bro