SEBI asks AIFs to provide 'direct plan' option to investors; introduces trail model for distribution com

To bring transparency in expenses and curb mis-selling, markets regulator Sebi has asked alternative investment funds (AIFs) to provide an option of "direct plan" for investors and introduced a trail model for distribution commission.

In addition, the regulator came out with guidelines with respect to excluding an investor from an investment of AIF.

This came after the regulator observed inconsistency and lack of adequate disclosure in Private Placement Memorandum (PPM) with respect to certain industry practices.

The new rules are aimed at providing flexibility to investors for investing in AIFs, bringing transparency in expenses and curbing mis-selling, the Securities and Exchange Board of India (Sebi) said in two separate circulars.

The framework pertaining to direct plan will come into force from May 1, while those related to excluding an investor from an AIF investment will become effective immediately.

Directing AIFs, Sebi said,"schemes of AIFs shall have an option of ‘Direct Plan’ for investors" and through such direct plans, investors will have the opportunity to participate in an AIF without having to pay any distribution fee or placement fee.

AIFs will have to ensure that investors who approach the AIF through a registered intermediary, which is separately charging the investor any fee such as advisory fee or portfolio management fee, are on-boarded through direct plan only.

Introducing a trail model for distribution commission, Sebi said that category III AIFs would charge distribution fee from investors only on an equal trail basis. It means no upfront distribution fee would be charged by such AIFs directly or indirectly from their investors.

Further, any distribution charge paid would be only from the management fee received by the managers of such category III AIFs.

In February 2020, the regulator introduced a template for PPM for AIFs, in order to ascertain that a certain minimum level of information in a simple and comparable format is disclosed to investors.

The PPM template provides for disclosure with respect to direct plan for investors, and constituents of fees that may be charged by the AIF, including distribution fee.

For other two categories, AIFs may pay up to one-third of the total distribution fee to the distributors on upfront basis, and the remaining distribution fee would be paid to the distributors on equal trail basis over the tenure of the fund.

Also, Sebi asked AIFs to disclose distribution fees to the investors at the time of on-boarding.