SEBI – Pre-Placement Memorandums (PPMs) and Alternative Investment Fund[1]
Introduction
With an emphasis on transparency and investor protection, the “Securities and Exchange Board of India (SEBI)” has released the Alternative Investment Fund (AIF) Circular 2023 and the Pre-Placement Memorandum (PPM). Prior to investment, the PPM seeks to provide prospective investors with thorough information on financial performance, management, business operations, and related risks. SEBI recognises that, especially for seasoned investors, it is crucial to communicate clearly and avoid using legalese. Establishing regulatory standards for Alternative Investment Funds, the AIF Circular 2023 guarantees legal compliance and encourages best practices in disclosure. In order to promote fair dealings and improve the professional reputation of companies interacting with seasoned investors, SEBI emphasizes the necessity of uniform disclosure requirements across a variety of factors. These regulatory actions are consistent with SEBI’s commitment to maintaining the honesty, equity, and efficiency of India’s share market.
Simultaneously, the Alternative Investment Funds (AIF) Circular 2023 outlines regulatory requirements, streamlining compliance and establishing benchmarks for disclosure procedures. With this move, SEBI renews its commitment to upholding uniform disclosure regulations, encouraging fair business practises, and elevating the stature of companies dealing with seasoned investors. These regulatory actions are consistent with SEBI’s overarching goal of promoting efficiency, integrity, and transparency in the Indian securities market, which will ultimately increase investor confidence and protect the integrity of the market. With its numerous developmental and regulatory measures for investor protection and a robust growth and regulation of the capital market, the Securities and Exchange Board of India (SEBI), which has been in existence for more than eight years[2], has significantly impacted the capital market. There is a significant correlation between financial markets and economic development. It is recognized that regulation makes it possible for the securities market to operate in an orderly manner. The Securities and Exchange Board of India (SEBI) is the regulatory body tasked with maintaining the integrity of the Indian securities market, safeguarding investor interests, and promoting market growth.
Powers, functions, regulation in SEBI’s evolution
The Board performs its legislative authority through the adoption of regulations, its executive authority by enforcing the regulations it developed and taking steps against any organization that is violating them, and its judicial authority by adjudicating conflicts in the execution thereof,” the Apex Court noted. The Supreme Court’s opinion in Clariant International v. SEBI[3] provided this viewpoint. SEBI issued standards for issuers regarding investor protection and disclosure on June 11, 1992. Securities issuers are required to continuously implement appropriate redressal mechanisms and respond to investor complaints. The effectiveness of the free valuing regime is largely dependent on disclosure, which is one of the most important tools for safeguarding investors and equity. Consequently, SEBI’s ongoing efforts to improve this are conducted through regular meetings and ongoing communication with the top managers.
SEBI gave issuers greater freedom to raise capital, and they are no longer required to get permission from any authority in order to issue securities or set their price. The SEBI Act’s Section 11 was periodically modified in 1995 to allow for the entry of additional agents towards the capital market. SEBI developed guidelines for the Transparency of Information of Investor Safety in order to safeguard investors’[4] interests. Investors can use the dispute redressal system forum provided by SEBI if they have any complaints about the disclosure. According to Section 11B of the Act, the board is required to take steps against anyone connected to the securities market who discovers a scam, and such action must be done in the best interests of investors.[5]Investors who have been defrauded by companies may file contends to receive reimbursement under a suggested investor protection bill from SEBI. It ought to be able to track down the companies’[6] assets and disbar directors as well.
The bill was written during a disappearing company issue, according to SEBI. SEBI wasn’t given the authority to take steps regarding those companies or their directors, so even if it managed to identify them, the issue would remain unresolved. The absence of well-defined regulations hinders SEBI’s ability to take action against companies[7] that are fraudulent or disappearing. But the Investor protection Bill was rejected by the government on the ground that there is enough legal provision in the Companies Act as well as under SEBI where a separate law is not required. In January 2003, SEBI launched the Securities Market Awareness Campaign (SMAC) to bring back the confidence of the small investors who are the backbone of the securities market as there was series of the stock market scam which has frightened the small investors in the Indian business community.[8]
Case Study
1. Sahara v SEBI[9]– This ground-breaking ruling, which upholds SEBI’s broad jurisdiction to look into both listed and unlisted businesses, represents a dramatic shift in the corporate landscape of India. It redresses jurisdictional disputes between SEBI and the Ministry of Corporate Affairs and gives SEBI extensive authority to investigate any matter impacting investor interests, even in unlisted companies. By defining the concurrent jurisdiction of SEBI and MCA[10] in matters of public interest, the ruling seeks to avoid conflicts and the exploitation of legal loopholes. Sahara filed a review petition, but the decision is still pending, paving the way for a difficult legal battle.
2. Rakesh Agrawal vs. SEBI[11]– Rakesh Agrawal of ABS Industries Ltd. and Bayer AG agreed to a purchase agreement in 1996 for 51% of the company’s shares. Allegedly guilty of insider trading, Agrawal sold off a sizable chunk of his ownership in ABS Industries following the announcement of the acquisition. He was ordered to deposit Rs. 34 lakhs in Investor Protection Funds[12] by SEBI after the agency found him guilty. The Securities Appellate Tribunal (SAT), however, reversed the judgment. Given that Bayer AG needed a minimum of 51% of the shares to complete the acquisition, SAT determined that Agrawal’s actions served the best interests of the business. Rejecting SEBI’s “disclose or abstain” argument, SAT held that an insider cannot be penalised unless an unfair benefit is demonstrated. The tribunal stressed taking into account the insider’s motivation, noting that although the regulation does not specifically mention mens rea, and the motive cannot be ignored[13].
3. Hindustan Lever ltd. Vs. SEBI[14]– The Appellate Authority confirmed that Hindustan Lever Limited (HLL) had knowledge of a merger that went beyond self-generated data, upholding SEBI’s ruling in this case. Regarding the requirements for Unpublished Price Sensitive Information (UPSI), it agreed with HLL’s position. The Authority also concurred that information does not need to be confirmed by the company in order for it to be widely known. The Supreme Court is currently reviewing the case.
In response to this case, SEBI changed the meaning of “unpublished” in 2002 and added a clause designating information pertaining to mergers as price-sensitive. In 2015, the Regulations provided clarification on “generally available information.” The 2017 informal guidance from SEBI to Kirloskar Chillers stressed the need to evaluate information accessibility for UPSI on an individual basis.
4.The WhatsApp Leak Case[15]– In this instance, it was discovered that price-sensitive data regarding businesses like Wipro, Bajaj Auto Ambuja Cement, Mindtree, etc. was shared through a number of WhatsApp groups by Shruti Vora of Antique Stock Broking Ltd.’s Institutional Sales Department. After conducting an initial inquiry, 26 entities in the Market Chatter WhatsApp Group were the target of SEBI’s search and seizure operations, which led to the seizing of about 190 devices, records, and different items. Shruti Vora was fined by SEBI for sharing WhatsApp messages with Unpublished Price Sensitive Information (UPSI) about the financial performance of the companies in question. Parthiv Dalal and Neeraj Kumar Agarwal, experts at various brokerages, were also subject to fines.
The suspects presented claims based on the idea of “Heard on Street”, that is a widely used technique by traders, market analysts, institutional investors, and other investors. The suspect went on to claim that unsubstantiated information is frequently circulated and that news organizations like Reuters, CNBC, Twitter and Bloomberg handle shared HOS, in addition to major US journals. SAT rejected allegations of illicit trading made by SEBI against workers of specific stockbroking firms who had merely “forwarded as received” messages from WhatsApp that included confidential quarterly reports of large corporations. According to SAT, SEBI was only focusing on the people who forwarded the messages and was unable to determine where they originated. Unpublished Price Sensitive Information (UPSI)[16] won’t be applied to generally available information, according to SAT. Consequently, those who forwarded such information would not be considered “insiders.” In addition, SAT claimed that in order for data to be classified as UPSI, SEBI had to prove a “preponderance of probability” in the particular situation and the recipient had to be aware of the sensitive nature of the material.
Challenges
Globally, regulating the financial industry is a difficult undertaking[17]. It is significantly more when the regulatory body is newly established and the subject matter is extremely complicated, necessitating specialized expertise. This article aims to critically evaluate the issue at hand as well as the regulatory efficacy of the SEBI. The unsightly battle over regulation-related matters between the Securities and Exchange Board of India (SEBI) and the stockbroking community appears to have taken on rather unsettling aspects. Investing on all of the biggest stock exchanges has been floated for the past few days due to stockbrokers’ adamant protests against SEBI’s authoritarian approach[18]; an end to the boycott is still not in sight. A directive from SEBI had been sent to stock exchange participants, sub brokers, and other agents involved in the securities market.
Prior to the recent implementation of the screen-based system, the Indian stock exchange system lacked the fairness component of transparency. Due to the lack of transparency in the trades, investors were unable to confirm the true execution price of their deals. Brokers, according to many investors, paid the lowest sale price and charged the highest purchase price. Brokers taking advantage of their clients’ profitable transactions, failing to keep client funds and securities separate, and postponing payments so that brokers could use client funds without restriction were examples of unfair practices[19].There has always been criticism of SEBI’s appointment process. Reports of corruption involving SEBI employees are common. The transparency and accountability framework surrounding SEBI is not very good. Ensuring fairness and transparency in the recruitment process is crucial. Thus, lack of accountability and transparency remains one of the biggest challenges for the investors before investing in securities.
The size of SEBI in relation to the security market is insufficient to adequately regulate the capital market, which is expanding. It must create self-regulatory organizations, just like its counterparts (the UK and US regulators). While SEBI works on more significant matters, SRO can concentrate on routine decisions.[20] SEBI’s statutory authority is equivalent to that of a civil court. SEBI has created a number of regulations, but simply issuing directives and regulations won’t cut it if the organization can’t carry them out. SEBI must improve its enforcement and monitoring capabilities. It must make certain that all infractions, no matter how minor, are reported[21]. While the US Security and Exchange Commission by itself employed 1,000 people in 2012, SEBI only employed 643. Human resources are undoubtedly the most valuable asset for a company. The quality and quantity of SEBI’s human resources need to be increased. To increase efficiency, it must make major improvements to its technology, talent pool [22]and market intelligence.
There hasn’t been much of an increase in capital market participants. Even now, a sizable portion of the populace stays out of the security industry. Although SEBI has made significant efforts to promote capital market participation—such as removing mutual fund entry loads and streamlining KYC regulations[23]—it still needs to take more decisive action to increase capital market involvement. It should increase pension, pension savings, and gratuity funds’ involvement in equity, create a thriving retail debt market, and lower the cost of transactions.
The volume of the debt market has grown despite multiple attempts, but it hasn’t drawn in enough liquidity. The company debt and privatization markets need to be developed by the regulator, but they are still primarily over-the-counter markets.[24]
Pre-Placement Memorandum
A legal document offered to potential investors when selling stock or another security in a company is called a pre placement memorandum, or as PPM. It may also be known as an offering memorandum or offering document. When securities are traded via one of the registration exemptions rather than being registered under applicable federal or state law, a PPM is used in “private” transactions[25]. Among other things, the PPM explains the risks associated with the investment, the terms of the offering, and the company selling the securities. Depending on the target investors, the offering’s intricacy, and the registration exemption being used, different disclosures are included in the PPM.
The anti-fraud provisions of federal securities laws apply to all securities transactions and forbid making false or deceptive statements about the company, the offered securities, or the offering itself. Investors in consideration are given a thorough education about a number of topics in the Private Placement Memorandum (PPM), including company management, details, prospects for future, historical financial performance, and associated risks. While some entrepreneurs might worry that the document contains too much legalese, seasoned investors typically accept and welcome these informational disclosures and see them as an indication of the company’s professionalism. Although disclosure requirements may be flexible due to applicable laws, PPM standards suggest certain information disclosures even in cases where they are not legally required. PPMs typically have a standard format that includes a number of elements[26].
Alternative Investment Fund
SEBI (AIF) Regulations 2012-
The Securities and Exchange Board of India [2012] reports that SEBI formally notified the SEBI (Alternative Investment Funds)[27] Regulations on May 21, 2012, establishing a broad regulatory framework to oversee the alternative investments sector. The investor solidarity applauded the regulations greatly as they successfully addressed the issues raised in the draft paper.
Alternative investment funds have been effectively categorized using a mutually exclusive and collectively exhaustive approach, which allowed for the industry’s complex structure to be adequately accommodated. In addition, with many of the practical constraints outlined in the draft paper, SEBI also eliminated any provisions that might lead to an imbalance of interests between investors and the fund manager.
When examined alongside traditional investment approaches, the investment alternative gives retail investors a return of approximately 11–16%[28]. Because they give investors access to alternative assets that have little to no correlation to traditional investments and the potential for higher returns, alternative investment funds are therefore regarded as a valuable addition to a well-diversified investment portfolio. After learning what alternative investment funds are, let’s examine some things to think about before making an investment in them.
Condition & Restrictions
A scheme’s largest number of investors was limited to 1,000, and the minimum corpus of a fund was raised to INR 20 crore. It was a wise move to raise the minimum amount invested per investor to INR 1 crore in order to discourage regular retail investors from investing in this hazardous asset class.[29]
Guidelines
Up until the current scheme was concluded, funds that were already registered with SEBI as VCFs were permitted to continue operating under SEBI (VCF) Regulations.[30]
They are not permitted to introduce new schemes or expand the fund’s corpus until they register under the new AIF regulations. AIF regulations would require unregistered funds to register in order for them to raise new funds (apart from commitments already made) or launch new schemes.
The Sponsor/ Fund Manager
As per the SEBI (Intermediaries) Regulations, 2008, the manager/sponsor must be a fit and proper individual, meaning they must not have any convictions or restraint orders, be competent, including financially solvent, and possess integrity, reputation, and character. By declaring that the manager of an AIF will not co-invest on terms that are better than those provided to the aforementioned AIF, SEBI also addressed the agency issue. A manager’s declaration of any potential conflicts of interest became required.
Categories
The draft paper’s illogical classification was abandoned by SEBI, which swapped it with three mutually exclusive and collectively exhaustive categories.
Category-I- funds that make investments in facilities social projects, SMEs, early-stage businesses, and other industries the government deems desirable.
Depending on the focus of the investments, five subcategories were mentioned: venture capital funds, which must invest at least 66% of the corpus in unlisted securities of venture capital undertakings,1 excluding nonbanking financial companies and gold financing; social venture funds, which must invest at least 75% of the corpus in charitable trusts, Section 25 companies, and microfinance institutions; SME funds, which must invest at least 75% of the corpus in unlisted securities of SMEs; infrastructure funds, which must invest in infrastructure companies and special purpose vehicles; and others (dual grouping).[31]
Category II: Funds which cannot be classified into either Category I or III and do not borrow or use leverage for anything other than meeting their daily operating needs; these could be debt funds or private equity funds that receive no special incentives from the government[32].
Category III: Funds which employ a variety of intricate trading techniques and may use leverage, such as by investing in derivatives that are listed or not listed. This particular group was made just for hedge funds that participate in open market trading[33]
PPM & AIF Circular 2023
In accordance with SEBI’s circular, PPM audits are required in order to verify that the data provided in a Private Placement Memorandum is accurate and compliant. To confirm the information given to possible investors, these audits entail a careful review of financial statements, business operations, and regulatory compliance. By performing a PPM audit, the company and its investors can reduce their exposure to legal and financial risks while also boosting investor confidence[35].
Deadline-
1. Annually- Every year, AIFs are expected to perform a PPM audit. The AIF’s fiscal year ought to be included in the audit.[36]
2. Submit to SEBI- Within 180 days of the fiscal year’s conclusion, SEBI must receive the audited PPM and the audit report. For instance, the audited PPM and audit report must be delivered to SEBI by September 30 of the identical year if the fiscal year ends on March 31st.[37]
3. Investor communication- As soon as the audit is finished and submitted to SEBI, AIFs are also required to promptly inform their investors of the audit’s findings.[38]
SEBI issue circular to standardise format of trading preferences. The aim behind this is to ensure that the clients are permitted to access all the active stock exchanges and the brokers are mandated to register new clients to active stock exchanges. This will also benefit Bobay Stock Exchange where the participation is lower as compared to that with the National Stock Exchanges. For the existing clients 3 months access is to be given.
The circular will get effective from Aug 1, 2023. Your guide through the maze of Alternative Investment Funds (AIFs) is the Private Placement Memorandum (PPM). It is the document that outlines the strategies, potential risks, and regulatory compliance plans of the fund. As we’ve explained in our checklist, PPM audits now function as detective work. They carefully check everything, including the fund’s investment choices, legal documentation, and communication channels. These audits lower risks and foster investor confidence in addition to ensuring compliance. As a result, PPM audits are essential to the process of building contributor and manager trust.[39]
Conclusion
SEBI’s implementation of the Pre-Placement Memorandum (PPM) and the Alternative Investment Fund (AIF) Circular 2023 represents a positive stride towards fortifying India’s securities regulatory framework. The emphasis on transparency and investor protection through detailed disclosures in the PPM aligns with SEBI’s commitment to fostering fair practices and enhancing market integrity. The regulatory guidelines outlined in the AIF Circular 2023 provide a structured framework for Alternative Investment Funds, promoting compliance and standardizing disclosure practices.
Key findings reveal the importance of clear communication in the PPM, addressing concerns about legal language, and reinforcing the significance of comprehensive information dissemination. The uniformity in disclosure requirements across factors enhances fairness and professionalism in dealings with seasoned investors.
Key takeaways – Companies ought to view regulatory actions as an opportunity to uphold investor trust, adhere to industry best practices, and support a stable and open securities market. Businesses should embrace these regulations’ core principles, go beyond compliance, and see them as instruments to enhance openness, confidence, and long-term investor relationships. Additionally, by maintaining constant communication between SEBI and market participants, regulations can be improved and adjusted to reflect changing market dynamics while maintaining the highest standards of integrity.
Suggestions-Despite its challenges, SEBI is essential in protecting investors from fraud. Adaptability and competitiveness can be improved by keeping an eye on regulations, encouraging continuous communication, and benchmarking against international standards. In order to ensure investor protection in the face of changing market dynamics, cooperation between SEBI, businesses, and stakeholders is essential for an evolving and effective regulatory framework.
[1] Pritam Mehta, Vth Year, National Law University, Ranchi
[2] S. Mohana Murali. The Role of SEBI in Protecting the Interests of Investors and Regulation of Financial Intermediaries. Vol. 5. 0-1. 2017.
[3] AIR 2004 SC 4236
[4] Gopalsamy N., Capital Market: The Indian Financial Scene, Mac Millan India Ltd. Edition, 2005, Pg. 243, 268-276.
[5] Ibid, pg243
[6] ibid
[7] ibid
[8] Ibid, pg. 246
[9] Deepika V. Sawhney and Souvik Mukherjee. “India: Sahara vs. SEBI-An In- Depth Analysis Of The Landmark Supreme Court Ruling”. https://www.mondaq.com/india/shareholders/203796/sahara-vs-sebi-an-in-depth-analysis-of-the-landmark-supreme-court-ruling. 31 October 2012
[10] ibid
[11] 2003 SCC OnLine SAT 38
[12] ibid
[13] ibid
[14] (1998) 18 SCL 311 MOF
[15] Lakshya Garg and Vimlendu Agarwal. “Hinged Upon Conjectures: A Meticulous Study of WhatsApp Leak Case”. https://cbcl.nliu.ac.in/company-law/hinged-upon-conjectures-a-meticulous-study-of-whatsapp-leak-case/.
[16] Anushka Agarwal and Sushmit Mandal. “SAT’s WhatsApp Leaks Order – Undue Interpretation of the PIT Regulations?” https://www.jurist.org/commentary/2021/06/agarwal-mandal-whatsapp-leak-order/. Giri Aravind. National U. of Advanced Legal Studies, IN. June 6, 2021
[17] Gupta, L. C. “Challenges before Securities and Exchange Board of India.” Economic and Political Weekly, vol. 31, no. 12, 1996, pp. 751–57. JSTOR, http://www.jstor.org/stable/4403941. Accessed 4 Dec. 2023.
[18] D. P. Sharma. “SEBI’s Misadventure.” Economic and Political Weekly, vol. 27, no. 17, 1992, pp. 859–859. JSTOR, http://www.jstor.org/stable/4397777. Accessed 4 Dec. 2023.
[19] Supra note at 16
[20] Jyoti Bhoj, Akansha Khurana and Mamta Bhushan. Sebi: Achievements Problems and Emerging challenges. https://www.worldwidejournals.com/indian-journal-of-applied-research-(IJAR)/recent_issues_pdf/2016/April/April_2016_1459497365__38.pdf. Volume 6. Issue 4. April 2016.
[21] ibid
[22] ibid
[23] ibid
[24] ibid
[25] Armand Aponte. What Is a Private Placement Memorandum? https://www.nolo.com/legal-encyclopedia/what-is-private-placement memorandum.html#: ~:text=A%20private%20placement%20memorandum%20(PPM, offering%20memorandum%20or%20offering%20document.
[26] Ibid
[27] Chinchwadkar, Rohan, and Vidhu Shekhar. “Evolution of Private Equity Regulations in Emerging Markets: A Case of India.” The Journal of Private Equity, vol. 20, no. 1, 2016, pp. 38–44. JSTOR, http://www.jstor.org/stable/44396816. Accessed 4 Dec. 2023.
[28] ibid
[29] Supra note at 26
[30] Supra note at 26
[31] Supra note at 26
[32] Supra note at 26
[33] Supra note at 26
[34] Supra note at 26
[35]Maanya Shah and Varsha Dhake. How SEBI Minimizes Risks for AIF Investors Through PPM Audit How SEBI Minimizes Risk for AIF Investors Through PPM Audit (taxguru.in)). MASD & Co. 18 Sept 2023.
[36] ibid
[37] ibid
[38] ibid
[39] ibid
Author Bio
