Sebi proposes measures to curb mis-selling in AIF’s

February 4, 2023

The Securities and Exchange Board of India (Sebi) has proposed measures to check mis-selling in Alternate Investment finances (AIFs) including obligatory immolation of direct plans and preface of trail model for distribution commission. The controller has said that in certain cases the amount of outspoken commissions for AIF distribution freights has gone up to around 4- 5 per cent of married quantum.

“Similar high outspoken commissions, particularly in sharp discrepancy to the trail commissions for other products, increase the chances of mis-selling of AIF schemes,” noted Sebi. In a discussion paper issued on Friday, Sebi has proposed on espousing a trial model of distribution commissions.

Under the proposed morals, all investors for orders of AIFs will be charged distribution figure on trial base but for order I and II AIFs, certain advanced quantities may be charged. Though, this quantum could be one- third of the present value of total figure paid outspoken in the first time.

At present, investors were being charged outspoken commission figure by distributors on the total married quantum. The request watchdog has formerly done down with outspoken commissions from collective finances and portfolio operation services (PMS). Once these proffers are approved, the arbitrage in treatment will be removed.

“ Our fear is that there might be vulnerabilities in the sector, including valuation shocks and mis- sellings, which could decelerate down the pace going us 5- 7 times in factual capital conformation, ” Sebi whole- time member Ananth Narayan had said last month in an address.

“Investments in AIFs are substantially illiquid and bear a commitment for long term. For an investment of Rs 1 crore, the customer’s net worth should at least be Rs 10 crore. Indeed though the investments move in tranches, the full commission on the total married quantum is paid outspoken presently as distributors prefer outspoken rather than trail which come over numerous times, ” said Mohit Gang,Co-founder & CEO, Moneyfront.


Also, Sebi’s offer for calling direct plans comes to root out double taxation on investors who used to come through fiscal counsels. These investors were charged doubly – formerly in the form of premonitory figure or portfolio operation figure, and independently via the AIF distribution figure.

“AIFs to insure that any investor approaching an AIF through an conciliator, that’s independently charging the investor a figure( similar as premonitory or portfolio operation figure), invests in the AIF via the direct plan route only, ” said Sebi. The controller has also recommended that investors on- boarded through direct plans should be handed for an acclimated advanced number of units as lower distribution charges are applicable on them.

“In case of AIFs, since the subscription to units of AIF is on a private placement base, Sebi doesn’t regulate the freights outstanding by the unit holders. Still, Sebi expects the fund director to maintain translucency for the freights it proposes to charge. However, also SEBI has the right to step by and regulate similar conditioning for investor protection,” said Hemang Parekh, if there’s any mis-selling and the interest of investors is compromised.

AIFs can invest in adventure capital finances, start-ups, and unrecorded securities. Investment commitments in AIFs have shown multiplex growth in the last five times. At the end of June, 2017, the total commitments raised were at lower than Rs 1 trillion which by June, 2022 had risen to Rs6.94 trillion. Of this, Rs5.61 trillion is for order II AIFs and nearly Rs74, 500 crore for order III AIFs.