Comprehensive Guide to Auxiliary SEBI Regulations for AIF Managers

Overview of Auxiliary SEBI Regulations (Section D)

Alternative Investment Funds (AIFs) in India operate within a sophisticated regulatory matrix governed primarily by the SEBI (Alternative Investment Funds) Regulations, 2012. However, to ensure market integrity and investor protection, AIF Managers must also adhere to several other critical SEBI regulations and international compliance standards. These include frameworks governing insider trading, fraudulent trade practices, capital issuance, foreign portfolio investments, and international tax reporting.

This section (Chapter 17.D) serves as a critical compliance roadmap for AIF Managers, Sponsors, and their key investment teams to navigate the broader legal landscape of the Indian securities market.

17.24 SEBI (Prohibition of Insider Trading) Regulations, 2015

The SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations) are designed to prevent unfair advantages in the securities market by prohibiting individuals with access to non-public, price-sensitive information from trading in a company's securities.

Key Definitions and Concepts

To maintain compliance, AIF Managers must understand the specific legal definitions that trigger PIT obligations:

• Insider: Defined as any person who is a "connected person" or is in possession of, or has access to, Unpublished Price Sensitive Information (UPSI).
• Connected Person: This includes any individual who is or has been associated with a listed company in any capacity during the six months prior to a concerned transaction. This association can be through frequent communication with officers, or via a contractual, fiduciary, or employment relationship.
• Status of an AIF: An AIF itself can be "deemed to be a connected person" if it possesses UPSI regarding an investee company or a specific class of companies.

Unpublished Price Sensitive Information (UPSI)

UPSI refers to any information relating to a company or its securities, directly or indirectly, that is not generally available and which, upon becoming available, is likely to materially affect the price of the securities. Key examples of UPSI include:

1. Financial results of the company.
2. Declaration of dividends.
3. Changes in the company’s capital structure.
4. Mergers, de-mergers, acquisitions, delistings, disposals, or major expansions.
5. Changes in Key Managerial Personnel (KMP).

Compliance Obligations for AIF Entities

The PIT Regulations mandate specific internal controls for AIFs to prevent the misuse of sensitive information.

Internal Code of Conduct

The Board of Directors of an AIF must establish an Internal Code of Conduct. This code governs the trading activities of employees and other connected persons to ensure they remain in compliance with SEBI standards.

Employee Investment Thresholds

While employees of an AIF are permitted to invest in the fund's schemes, they must possess no UPSI at the time of investment. SEBI stipulates a minimum investment of INR 25 lakh for such employees.

General Prohibitions

An insider is strictly prohibited from trading in securities that are listed, or proposed to be listed, on a stock exchange while in possession of UPSI. Furthermore, no insider shall communicate, provide, or allow access to UPSI to any person except when it is in furtherance of:

• Legitimate business purposes.
• Performance of duties.
• Discharge of legal obligations.

Statutory Exceptions to Trading Restrictions

In certain specific scenarios, trading by an insider may be permitted despite the possession of UPSI. These exceptions include:

• Off-market transfers: Inter-se transfers between insiders who both possess the same UPSI, provided the transaction is reported to the company within a specified timeframe.
• Block Deal Mechanism: Transactions carried out through the stock exchange's block deal window.
• Regulatory Obligations: Trades performed to satisfy specific regulatory requirements.
• Stock Options: Trades undertaken pursuant to the exercise of stock options at a pre-determined price.
• Institutional Safe Harbours: In the case of non-individual insiders (like AIFs), trading may be permitted if the individuals taking the trading decisions are different from the individuals in possession of UPSI, and adequate "Chinese Walls" are in place to ensure no information was shared.

Data Management and Internal Controls

AIF Managers are required to maintain rigorous digital records and oversight mechanisms.

Structured Digital Database (SDD)

AIFs must maintain a Structured Digital Database internally. This database cannot be outsourced and must contain:

• The nature of the UPSI shared.
• The names and Permanent Account Numbers (PANs) of persons sharing the information.
• The names and PANs of recipients of the information.
• Audit Trails: The database must feature time-stamping and non-tamperable audit trails.

System of Internal Controls

The Chief Executive Officer (CEO) or Managing Director of the AIF is responsible for ensuring the following controls are effective:

1. Identification of Designated Persons: Clearly identifying all employees with access to UPSI as "designated persons".
2. Confidentiality Maintenance: Identifying all UPSI and ensuring its strict confidentiality.
3. Procurement Restrictions: Placing adequate restrictions on the communication of sensitive data.
4. Confidentiality Agreements: Ensuring all employees and external parties with access to UPSI sign confidentiality agreements or receive formal notices.
5. Periodic Reviews: Conducting regular process reviews to evaluate the effectiveness of these internal controls.
6. Inquiry Policies: Formulating written procedures for conducting inquiries in the event of a suspected leak of UPSI.

Key Takeaways for PIT Compliance

Important Terms

• Designated Person: An employee or associate identified by the AIF as having regular access to UPSI.
• Chinese Walls: Internal information barriers designed to prevent the exchange of sensitive information between different departments of an organization.
• Determinate Status: Pertains to the trust structure, often impacting how information and liabilities are handled (discussed further in structural contexts).
• Audit Trail: A step-by-step record which provides evidence of the history of data sharing and access within the SDD.

This concludes Part One of the short notes for Chapter 17.D. Parts Two, Three, and Four will follow, covering Fraudulent Trade Practices (PFUTP), ICDR/FPI Regulations, and FATCA/CRS requirements respectively.