Private Placement Memorandum (PPM) for AIFs – Disclosures | Audit | Material Changes

Private Placement Memorandum (PPM) is the offer document of an Alternative Investment Fund. It carries every material disclosure a sophisticated investor needs to judge the fund against their own risk-return objective: the parties in the fund structure, the fees and expenses chargeable, the tenure, the redemption limits, the investment strategy, the risk factors, the governance arrangements, the conflicts of interest and how they will be handled, the track record of the fund and its Manager, and the winding-up process. SEBI prescribes a template for it, requires it to be filed through a merchant banker, and requires most AIFs to have compliance with its terms audited every year.

Table of Contents

1. What the PPM Is and Why It Exists
2. What the PPM Must Disclose
3. Filing the PPM Through a Merchant Banker
4. The Investor Charter
5. The Annual PPM Audit
6. Material Changes and the Exit Option
7. Reading a PPM: What to Check First
8. Frequently Asked Questions

Check out NISM's Alternative Investment Fund Managers, the official NISM workbook for the Series XIX-C Certification Examination, published by Taxmann. It covers the full documentation suite alongside the PPM, being the trust deed, the Investment Management Agreement, the subscription agreement and side letters, together with the sixteen-point PPM audit scope and the Investor Charter reproduced in full as a practitioner annexure.

1. What the PPM Is and Why It Exists

An AIF raises capital by private placement, not public issue. There is no prospectus, no public filing, and no ready pool of published information about the fund. The Private Placement Memorandum fills that gap. It is the offer document, and for an investor it is the single most informative thing available about the fund before committing.

The information in a PPM is not generally in the public domain. That is the point of it. Institutional investors and high net worth individuals rely on it to assess whether the fund matches their risk-return objective, and for a Manager raising commitments it is the document on which the whole fundraise turns.

SEBI recognised that PPMs issued across the industry were disclosing inconsistently, and prescribed templates for different categories of AIF.¹ The template creates a common floor, which means an investor comparing two funds is comparing like with like.

2. What the PPM Must Disclose

The PPM covers the whole of the fund, structurally and commercially. In outline, it must set out:

• The parties comprising the fund structure: the Manager, the key investment team, the sponsors and trustees, the custodian, bankers, auditors and legal advisers
• The targeted investors
• The fees and other expenses proposed to be charged to the fund
• The tenure of the scheme
• Conditions or limits on redemption
• The investment strategy
• Risk factors and how they are to be mitigated
• The fund governance structure
• Conflicts of interest, and the procedures to identify and address them
• The performance history of the AIF and of the Manager
• Key terms of the investment management services
• Details of the other service providers
• The process for winding up the scheme

2.1 The prescribed sections

Under the SEBI template, Section A of the PPM runs through a fixed sequence.

Section I, Executive Summary. The most commercially loaded section in the document. It carries brief details of the AIF, the scheme, the sponsor, the Manager and any affiliates; the investment objective and strategy; allocation of corpus by sector or geography; target corpus; classes of unit capital and the basis on which they are classified; the terms of the fund from the final closing date including any extension; minimum capital commitments sought; the sponsor and Manager commitment; the commitment period with its start and end dates; drawdown terms; initial, subsequent and final closings; proposed management fee; the preferred return or hurdle rate, expressed in IRR terms or otherwise; the additional return or carried interest proposed; the expense structure; the distribution waterfall for each class of units; and any leverage strategies.

Section II, Market Opportunity. General economic background and data the Manager considers relevant, with sources cited; the sponsor’s or Manager’s investment outlook including macro and micro factors; and the sector or industry outlook relevant to the strategy.

Section III, Investment Objective, Strategy and Process. The strategy broken down by sector and geography, caps on investment in each investee company or sector, the split of investible corpus between domestic and overseas investee companies, the approvals required for any change or deviation in strategy, and a flow chart of the investment process.

Section IV, Fund Structure. A complete diagrammatic representation showing every key constituent, being the sponsor, trustee, Manager, custodian, investment adviser, offshore feeder and offshore manager as applicable, with a description of each entity’s activities, the jurisdictions involved, the nature of the relationship between the constituents, and the classes of units or interest each holds.

Later sections carry the fee illustration, the risk factors, the legal, regulatory and tax considerations, the track record of first-time managers, and the glossary.

3. Filing the PPM Through a Merchant Banker

An AIF must file its PPM with SEBI through a SEBI-registered merchant banker, both at the time of seeking registration and when launching a new scheme.² The merchant banker cannot be an associate of the AIF, its sponsor, Manager or trustee.

The merchant banker’s role is substantive, not clerical. It conducts independent due diligence on all the disclosures in the PPM and their adequacy, and issues a due diligence certificate that must be filed when a new scheme or fund is launched and on each annual PPM update. It files the draft PPM with SEBI for comments, and ensures SEBI’s comments are incorporated into the final PPM before the scheme launches.

Intimation of a specific change in PPM terms need not always be routed through a merchant banker and may in prescribed cases be filed directly with SEBI.

4. The Investor Charter

Every registered AIF must issue an Investor Charter, which brings together in one place the services provided to investors, the grievance redressal mechanism and the responsibilities of investors themselves.

How it is published depends on the scheme. For new schemes the Investor Charter is disclosed in the PPM. For existing schemes it was to be sent to investors at their registered email address as a one-time measure.

The Charter covers the vision and mission statement, the business the AIF transacts with investors, and the services provided under the AIF Regulations at each stage, including onboarding investors and obtaining investor consent for material changes to the fund structure.

5. The Annual PPM Audit

Disclosure without verification is of limited use, and SEBI closes that gap by requiring an annual audit of compliance with the terms of the PPM.³

The audit is carried out at the end of each financial year by an internal or external auditor or legal professional. Audit of certain sections is optional, namely Risk Factors, Legal, Regulatory and Tax Considerations, Track Record of First Time Managers, Illustration of Fees and Expenses, and Glossary and Terms.

Findings, together with any corrective steps, must be communicated to the Trustee or Board or Designated Partners of the AIF, to the Board of the Manager, and to SEBI within six months of the end of the financial year. The terms of the contribution or subscription agreement must align with the PPM and cannot go beyond it.

5.1 What the audit covers

The scope runs to sixteen points and includes compliance with the minimum subscription for each class of units, implementation of the investment strategy, disclosure of affiliates and transactions with them, review of the investment policy and of investments made under it, sample review of fund flow in the purchase and sale of securities, review of the classes of units in existence during the year against those stated in the PPM, review of capital commitments received and drawdowns made, review of management fees charged for each class of units, review of distributions and additional return charged to investors, verification of the sources for data disclosed in the market opportunity section, compliance with disclosures on scheme structure and key constituents, confirmation that a governance framework policy exists covering insider trading, anti-money laundering and conflicts of interest, review of the responsibilities entrusted to the Trustee, Sponsor and Manager, the role of the key investment team and the Investment Committee, practices around default by investors, and the working of unit transfers.

5.2 Who is exempt

Two situations fall outside the requirement. Angel funds as defined in the AIF Regulations are exempt. So are AIFs and schemes in which every investor commits at least INR 70 crore, or USD 10 million or equivalent where the commitment is in a non-INR currency, and provides a waiver from the requirement of a template PPM and annual audit in the prescribed manner.

An AIF that has not raised any money from investors is also outside the audit requirement, but must furnish a certificate from a Chartered Accountant within six months of the end of the financial year.

SEBI, in consultation with the pilot Standard Setting Forum for AIFs, has prescribed a standard reporting format for the PPM Audit Report, which is submitted on the SEBI Intermediary Portal.

6. Material Changes and the Exit Option

The AIF Regulations provide a compulsory exit option where a change to the PPM amounts to a material change. Material changes are those capable of altering an investor’s decision to remain invested.

They include a change in the sponsor or Manager, excluding internal restructuring within the same group; a change in control of the sponsor or Manager; and a change in the fee structure or hurdle rate that may adversely affect investors.

The consequence is significant for a Manager. Operating outside the confines of the AIF Regulations, the fund documentation and the PPM is not merely a compliance issue. A material departure triggers investors’ exit rights, and an exit event at the wrong point in a fund’s life is expensive.

7. Reading a PPM: What to Check First

A PPM for a large fund can run to several hundred pages. Five things repay reading before anything else.

What to check	Why it matters
The distribution waterfall, per class of units	Determines the order and proportion in which proceeds return. An investor who has not read this will miscalculate the payout. Different classes can be paid in different priority
Hurdle rate and how it is expressed	A fixed percentage per annum and an index-linked hurdle produce materially different outcomes on identical performance
The expense structure and any caps	Investors commonly negotiate caps head by head or as an overall annual or life-of-fund ceiling. Whether they exist, and at what level, changes net return
Conflicts of interest and the procedures for handling them	The PPM must disclose both. The quality of the procedure, not the existence of the disclosure, is what to assess
Tenure, extension terms and redemption limits	Determines when capital can realistically be recovered, and on whose consent an extension depends

For the underlying SEBI circulars, the PPM templates and the current text of the AIF Regulations, see Taxmann.com | Research. Step-by-step compliance procedure and checklists for AIF obligations are maintained at Taxmann.com | Practice. Funds working through PPM drafting, structuring or a specific disclosure question can take it to Taxmann Advisory. Fund finance teams handling withholding on distributions will find Taxmann’s e-TDS Returns software relevant to the return filing side of the same obligations.

8. Frequently Asked Questions

8.1 What is a PPM in an AIF?

The Private Placement Memorandum, being the offer document of the fund. It carries all material disclosures about the AIF, including the fund structure, fees, tenure, redemption limits, investment strategy, risk factors, governance, conflicts of interest, track record and winding-up process.

8.2 Is the PPM filed with SEBI?

Yes. It must be filed with SEBI through a SEBI-registered merchant banker at the time of registration and on each new scheme launch. The merchant banker issues a due diligence certificate and ensures SEBI’s comments are incorporated before launch.

8.3 Is a PPM audit mandatory?

Yes, for most AIFs. Compliance with PPM terms must be audited annually and reported to the Trustee or Board, the Board of the Manager and SEBI within six months of financial year end. Angel funds are exempt, as are schemes where every investor commits at least INR 70 crore and provides the prescribed waiver.

8.4 Which PPM sections are exempt from audit?

Risk Factors, Legal, Regulatory and Tax Considerations, Track Record of First Time Managers, Illustration of Fees and Expenses, and Glossary and Terms. Audit of these sections is optional.

8.5 What counts as a material change to a PPM?

A change capable of altering an investor’s decision to stay invested. It includes a change in sponsor or Manager other than internal group restructuring, a change in control of the sponsor or Manager, and a change in fee structure or hurdle rate that adversely affects investors. A material change triggers a compulsory exit option for investors.

8.6 Can the subscription agreement differ from the PPM?

No. The terms of the contribution or subscription agreement must align with the PPM and cannot extend beyond it.

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1. SEBI Circular No. SEBI/HO/IMD/DF6/CIR/P/2020/24 dated 5 February 2020, Disclosure Standards for Alternative Investment Funds.
2. SEBI Circular No. SEBI/HO/IMD/IMD-I/DF6/P/CIR/2021/645 dated 21 October 2021.
3. SEBI (Alternative Investment Funds) Regulations, 2012, as amended.