The Securities and Exchange Board of India (SEBI) issued a circular on October 8, 2024, mandating stricter due diligence protocols for Alternative Investment Funds (AIFs). This move aims to bolster regulatory compliance and prevent misuse of investment routes in India’s financial markets.

In line with the amended SEBI (Alternative Investment Funds) Regulations, 2012, AIF managers and key personnel must ensure stringent due diligence concerning investors and investments. The mandate covers regulatory frameworks like the SEBI (ICDR) Regulations, the SARFAESI Act, RBI's stressed asset guidelines, and the NDI Rules pertaining to investments from bordering countries.

Significantly, the circular addresses potential circumvention tactics used by investors seeking Qualified Institutional Buyer (QIB) or Qualified Buyer (QB) benefits via AIFs. Specific checks are required for schemes with substantial investor contributions before accessing such regulatory benefits.

SEBI has also imposed measures to curb ever-greening practices by RBI-regulated entities using AIF investments to bypass provisioning norms.

Investments from countries sharing land borders with India face heightened scrutiny. Due diligence will be mandatory for schemes where such investments constitute 50% or more of the corpus. Non-compliant investors may be excluded, and detailed reporting obligations are set for 2025.

The circular, effective immediately, emphasizes the need for adherence to implementation standards published by industry bodies. SEBI’s initiative reflects its ongoing commitment to safeguarding the integrity of India’s securities market while promoting investor confidence.

Read the circular here.