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AIF & SEBI Lifecycle · Step 2 of 4

✓SEBI Registration›
2PPM & LPA Drafting›
3Ongoing Compliance›
4Investor Tax Planning
Audit & Assurancevia SEBI Intermediary Portal (intermediary.sebi.gov.in)

PPM & LPA Drafting — AIF Private Placement Memorandum and Limited Partnership Agreement

Drafting and CA review of the Private Placement Memorandum (PPM) and Limited Partnership Agreement (LPA) for SEBI-registered AIFs — fee waterfall computations, hurdle rate, carried interest mechanics, key man clause, co-investment policy, and SEBI Schedule I compliance.

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STARTING FROM₹49,999
TYPICAL TIMELINE21 days
DOCS REQUIRED6 documents
APPLICABLE TOCompany

Regulatory Framework

SEBI (Alternative Investment Funds) Regulations, 2012: Regulation 11 — mandatory PPM disclosures; investment strategy, fee structure, investment restrictions, valuation methodology, governance, tax treatment, distribution policy. Schedule I (AIF Regulations): prescribed format for PPM — mandatory items including fee schedule, exit strategy, risk factors, and worked financial examples. Regulation 12 — material changes to PPM require SEBI approval (material) or investor consent (non-material). SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2022/121: valuation methodology for AIF portfolio investments — Cat I/II: IPEV guidelines; Cat III: as per fund documents. Section 10(23FB) Income Tax Act, 1961: tax pass-through for Category I and Category II AIFs — characterisation disclosed in PPM tax section. FEMA Non-Debt Instruments (NDI) Rules, 2019: foreign LP investment pricing, FC-GPR/TRS reporting obligations.

Overview

The Private Placement Memorandum (PPM) is the foundational offering document of a SEBI-registered Alternative Investment Fund (AIF). It is the primary disclosure document provided to prospective investors before they commit capital to the fund. The PPM must comply with the disclosure requirements of the SEBI (Alternative Investment Funds) Regulations, 2012, and the format specified in Schedule I of the AIF Regulations. A Chartered Accountant's role in PPM drafting is focused on the financial representations, fee structure mechanics, and tax disclosures — three areas where errors can expose the Investment Manager to regulatory and investor liability.

Under Regulation 11 of the SEBI AIF Regulations, the PPM must disclose: the investment objective and strategy; the fee structure (management fee, hurdle rate, carried interest/performance fee, fund expenses); the investment restrictions and concentration limits; the valuation methodology for portfolio investments; the governance structure (investment committee, key man provisions); the distribution waterfall and NAV calculation methodology; and the tax treatment applicable to different categories of investors.

The Chartered Accountant's specific deliverables in PPM drafting include: (i) fee waterfall computation — modelling the distribution waterfall (return of capital → preferred return → catch-up → carried interest split) with worked examples for investors; (ii) hurdle rate and carried interest mechanics — European waterfall vs. American waterfall, clawback provisions, high-water mark if applicable; (iii) tax disclosures — pass-through status under Section 10(23FB) ITA 1961 for Category I/II AIFs, withholding tax obligations, DTAA implications for non-resident investors, carry taxation; (iv) FEMA disclosures for funds accepting foreign investment — pricing, FCGPR/TRS reporting obligations; and (v) NAV calculation methodology and unit pricing for the fund.

The Limited Partnership Agreement (LPA) is the constitutional document for AIFs structured as LLPs. It governs the relationship between the General Partner (GP — the Investment Manager) and the Limited Partners (LPs — the investors). The LPA must align with the PPM on all financial terms and additionally covers: capital call mechanics, defaulting investor provisions, transfer restrictions on LP interests, tag-along and drag-along rights, LPAC (Limited Partner Advisory Committee) formation, and the GP removal mechanism. The CA reviews and certifies the financial provisions of the LPA.

How It Works

  1. 1

    Fee Structure Design — Management Fee, Hurdle Rate & Carry Mechanics

    Design and model the fee structure: management fee (as % of committed corpus or NAV), hurdle rate (preferred return — typically 8-12% IRR), performance fee / carried interest (typically 20% above hurdle), catch-up provision, and fund expenses policy. Model the economics for investors at various return scenarios.

    Government3-5 days
  2. 2

    Distribution Waterfall Modelling (European vs. American)

    Model the distribution waterfall — European (all capital returned + hurdle before any carry) vs. American (deal-by-deal carry with clawback). Prepare worked examples of the waterfall for inclusion in the PPM to satisfy SEBI Schedule I disclosure requirements. Model clawback and high-water mark provisions if applicable.

    Government3-5 days
  3. 3

    Tax Disclosures — Pass-through, Carry Taxation, DTAA & FEMA

    Draft tax disclosure section of the PPM: pass-through characterisation under Section 10(23FB) ITA 1961 (Cat I/II); withholding tax on distributions to non-residents; DTAA implications for FPI investors; carry taxation at Investment Manager level; FEMA pricing, FC-GPR/TRS reporting for foreign LPs. Caveat: disclosures are based on existing law; investor should seek independent tax advice.

    Government3-5 days
  4. 4

    PPM Financial Sections Drafting & CA Review

    Draft and review the financial sections of the PPM: fee schedule, NAV computation methodology, valuation policy (SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2022/121 for Cat I/II/III valuation), distribution policy, and worked financial examples. Review draft for consistency with SEBI AIF Regulations Schedule I mandatory disclosures.

    Government5-7 days
  5. 5

    LPA Financial Provisions Review & SEBI Schedule I Compliance

    Review the LPA (if fund is LLP-structured) for consistency with the PPM on all financial terms: capital call mechanics, GP/LP economic split, defaulting LP provisions, and LPAC role. Confirm the PPM complies with SEBI AIF Schedule I mandatory disclosure requirements before SEBI registration filing.

    Government3-5 days

Frequently Asked Questions

What must be disclosed in the financial sections of an AIF PPM?
Under SEBI AIF Regulations Schedule I, the PPM must disclose: (i) the complete fee schedule — management fee (rate, basis, frequency), performance fee/carried interest (rate, hurdle, calculation basis), fund-level expenses; (ii) the distribution waterfall with a worked numerical example showing how returns are distributed between investors and the Investment Manager; (iii) the NAV calculation methodology and unit pricing for the fund; (iv) the valuation policy for portfolio investments per SEBI Circular SEBI/HO/IMD/DF2/CIR/P/2022/121; and (v) the tax treatment applicable to different categories of investors (resident, NRI, FPI, corporate).
What is a distribution waterfall and why does it matter?
A distribution waterfall is the order in which cash flows from the AIF are distributed between investors (Limited Partners) and the Investment Manager (General Partner/carried interest recipient). The typical structure is: (1) Return of capital to all investors; (2) Preferred return (hurdle rate — typically 8% IRR) to investors; (3) Catch-up to the Investment Manager (100% of distributions until they receive their share of returns); (4) Carried interest split (e.g. 80% investors / 20% Investment Manager). European waterfall is more LP-friendly (all capital back before any carry); American waterfall is deal-by-deal. The CA models both to show economic impact.
What is the difference between a European and American waterfall?
In a European waterfall, carried interest is calculated on the fund as a whole — the Investment Manager receives carry only after all investors have received their full capital back plus the hurdle return on the entire fund. In an American waterfall (deal-by-deal carry), the Investment Manager receives carry on each successful exit, with a clawback mechanism if the fund underperforms later deals. European waterfall is more conservative and LP-friendly; American waterfall improves the Investment Manager's cash flow timing but requires a robust clawback provision.
Must a PPM be registered or approved by SEBI before it is circulated to investors?
The PPM does not need prior SEBI approval before it is circulated to investors, but it must be filed with SEBI before the AIF accepts any investment. Under Regulation 11 of the SEBI AIF Regulations, the PPM must be filed with SEBI as part of or along with the AIF registration application (Form A). Any material changes to the PPM after registration require prior SEBI approval; non-material changes require investor consent. SEBI has issued guidance on what constitutes a material vs. non-material change.
What is the CA's role specifically in a PPM — can any lawyer draft the whole document?
The PPM is primarily a legal document drafted by legal counsel, but the financial sections require CA expertise that lawyers typically do not have. The CA's specific role covers: (i) modelling the fee waterfall and carried interest mechanics with worked numerical examples; (ii) drafting the tax disclosure section (pass-through characterisation, withholding tax, DTAA treatment for FPIs, carry taxation); (iii) reviewing the NAV calculation methodology for consistency with applicable accounting standards; and (iv) reviewing the FEMA disclosures for foreign investors. The CA also co-signs or certifies specific representations in the PPM where regulations require a CA certification.

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