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SEBI's AIF Circular: A Major Boost for Investor-Friendly Impact Investments

Palash Moolchandani & Shaivi Shah, students of 3rd year and 2nd year respectively at National Law University, Odisha.

To facilitate the interests of modern-day investors to invest consciously and sustainably, the concept of “impact investing” was developed in 2008. The Global Impact Investment Network has defined impact investment as “investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return. They can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances.” In essence, carrying out this unique method of investing will achieve the dual objective of reaping socio-economic benefits as well as monetary returns using the market economy.

India, with its sizable population and dissatisfied wants for social, economic, and ecological services, has proved to be a breeding ground for impact investments. Priority sectors such as education, affordable healthcare, and sanitation have seen a decline in public investments, paving the way for the inflow of private capital and entrepreneurship. All this, coupled with the fact that India’s economy is one of the most vibrant, internationally, has allowed for impact investment to firmly root itself in the national markets.

Alternative Investment Funds as Instruments to Facilitate Impact Investment

Alternative Investment Funds (“AIFs”) are incorporated in India in the form of a trust, an LLP, or a company as a vehicle to privately gather funds from both Indian as well as foreign investors. These funds are then invested in accordance with a defined investment policy, which is formulated for the benefit of the investors. The SEBI Alternative Investment Funds Regulations, 2012 (“AIF Regulations”) govern these investments.

The AIF regulations also govern ‘social venture funds’ as a type of AIF, and the enactment of these regulations for the first time formally recognized such funds. AIF Regulations define social venture funds as “an alternative investment fund which invests primarily in securities or units of social ventures and which satisfies social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns.” These kinds of funds are classified as “Category I” AIFs and invest in innovative and sustainable business models that are aligned with environmental, infrastructural, and socially relevant structures. Thus, it is through these AIFs that it is possible for Indian as well as foreign investors to make impact investments in India.

These kinds of funds are classified as “Category I” AIFs and invest in innovative and sustainable business models that are aligned with environmental, infrastructural, and socially relevant structures.

SEBI’s Circular: A step in the right direction

While, in theory, India is a hotbed for impact investment, certain ambiguities with regard to the regulation of AIFs proved to make their practical application less promising. This has been remedied by the SEBI’s February 5 Circular (“Circular”), giving investors a better opportunity to make impactful investments in social venture funds.

Performance Benchmarking of AIFs

Previously, non-compliance to the required disclosures was not penalized, which inevitably resulted in the management of AIFs to shirk their responsibilities in this regard. This led to a dearth of information available to potential investors for conducting their research on potential social venture funds to invest in. This issue of transparency was rectified by introducing a mandatory performance benchmarking system. The SEBI has formulated a framework for benchmarking agencies to use the data collected by them to produce specifically curated performance reports. Through this framework, an association of AIFs, formed with at least 51% representation of SEBI registered AIFs, will notify one or more benchmarking agencies with which each AIF will be required to enter into an agreement to carry out the benchmarking process. This will necessitate AIFs to provide details regarding their cash flow and scheme-wise investment valuations as well as the valuation agency and valuation principles used for this purpose. This will be applicable on a half-yearly basis, thus, enabling investors to make a relative comparison of individual AIFs or the AIF industry as a whole with other schemes having a similar strategy, and allowing them to make more informed decisions.

Standardization of PPMs

Since impact investments are a relatively new manner of investing, not all investors are informed enough to be able to protect their interests. As a result, it was considered necessary to ensure the inclusion of certain mandatory clauses to safeguard investors. To achieve this objective, the circular calls for the standardization of Private Placement Memorandums (“PPM”) of AIFs. A PPM is essentially a document analogous to an information memorandum. It sets out detailed information pertaining to the AIF that is necessary to be disclosed to prospective investors. Earlier, the AIF regulations merely stipulated certain broad disclosures that needed to be made, without having any detailed guidelines regarding the same. The current circular has formulated a detailed format for disclosures that need to be incorporated within a PPM of an AIF. Prior to the launch of a scheme, the PPM gets sent to the SEBI for approval, after which funds are invited and separate contribution agreements, i.e., agreements between the investors and the trustees of the AIF which formalise the investment made, are entered into.

This becomes pertinent as contribution agreements are directly linked to PPMs. Earlier, contribution agreements were governed with a loose hand by the AIF regulations. Their scope was allowed to exceed that of the PPM, so long as provisions contained within the PPM were not directly contradicted. The circular has now prescribed that the terms of the contribution agreement cannot go beyond the terms of the PPM. This, coupled with the standardization of PPMs, will bring about a much-needed uniformity within the terms of contribution agreements and, in turn, protect the interests of investors.


Impact investment is the modern investor's way of giving back to society. This unique and new-age manner of investing has channelized the market power to give rise to a more ethical and sustainable way of earning monetary returns while making a difference in the world. Suffices to say that it is the need of the hour to promote such investments. This sentiment has been clearly appreciated by the SEBI and this can be seen in its release of the 5th February circular. The release of this circular has been one of the most effective ways of giving a boost to impact investments as it improves the investor-friendliness of AIFs. While there are other things that need to be improved upon, it is safe to say the 5th February circular is a step in the right direction.


The opinions expressed herein are those of the author in their personal capacity and are not intended to be construed as legal, financial or investment advice.

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