The Securities and Exchange Board of India (“SEBI”) has issued an informal guidance dated January 10, 2019 to KellyGamma Advisors LLP (“Kelly LLP”), under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 in connection with SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).

Facts

Kelly LLP provides investment management services to KellyGamma Fund One (“Fund One”), the first scheme of KellyGamma Fund, a category III Alternative Investment Fund registered with SEBI under the AIF Regulations. 

Corpus of Fund One is INR 20 crore. Fund One invested INR 2 crore in Company A in Year 1 and INR 6 crore in other companies. No individual investment is larger than INR 2 crore, balance of INR 12 crore is lying in the bank account of Fund One. Fund One sold 75% stake in Company A over a period of 2 years i.e. Year 2 and Year 3, for INR 4 crore. As a result, at the end of Year 3, balance in the bank account of Fund One was INR 16 crore. 

Vide information submitted on November 11, 2018, the updated information provided to SEBI was as follows:

Corpus of Fund One: INR 22 crore

Investible Funds: INR 21.55 crore

Estimated expenditure on administration and management of Fund One: Management fee of 2% as per private placement memorandum of approximately INR 40 lac and other expenses of approximately INR 2 to INR 5 lac. 

Issue

Informal guidance has been sought on the following: what is the maximum amount of investment that Fund One can make in Year 4 in any portfolio companies (including existing portfolio companies)?

Applicable Regulations

Regulation 2(1)(h) of the AIF Regulations define “corpus” as the total amount of funds committed by investors to the AOF  by  way  of  a  written  contract  or  any  such  document  as  on  a particular date.

Regulation 2(1)(p) of the AIF Regulations define “investible  funds”  as  corpus  of  the AIF  net  of  estimated expenditure for administration and management of the fund.

Regulation 15 of the AIF Regulations lists out the general investment conditions for AIFs. Regulation 15(1)(d) of the AIF Regulations states that Category III AIF shall invest not more than 10% (ten percent) of the investible funds in one investee company. 

SEBI’s guidance

Basis the information submitted in November 2018, SEBI held that the maximum amount  of investment that Fund One can make in any portfolio companies (including existing portfolio companies) is 10% of Rs. 21.55 crore i.e. Rs. 2.155 crore.