FAQs on Audit of AIF for compliance with conditions of PPM

What is SEBI Circular SEBI/HO/IMD/DF6/CIR/P/2020/24 dated February 05, 2020 all about?

This Circular aims at setting minimum standards for disclosures to be made in a Private Placement Memorandum (PPM) of an Alternative Investment Fund (AIF) by way of simple and comparable templates. The circular contains 2 templates in the form of Annexures:

Both the templates are divided into 2 parts viz;
  • Part A - section for minimum disclosures, and
  • Part B – supplementary section to allow full flexibility to the Fund in order to provide any additional information, which it deems fit.
The Circular also mandates an annual audit to ensure compliance with conditions of PPM. Download SEBI Circular...

Does the circular mandate any Audit? If so, what are the major conditions?

Yes! The Circular mandates an annual audit in order to ensure compliance with the terms of PPM. Major Conditions:

  • The audit can be carried out by either internal or external auditor/legal professional.
  • Audit of sections of PPM relating to ‘Risk Factors’, ‘Legal, Regulatory and Tax Considerations’ and ‘Track Record of First Time Managers’ shall be optional.
  • Audit shall be conducted annually.

What is the effective date of the Circular? What is the effect of effective date on Audit requirement?

The Circular is effective from March 1, 2020. As per circular SEBI/HO/IMD/DF6/CIR/P/2020/99 dated June 12, 2020, the audit requirement is applicable from Financial Year 2019-2020.

Are certain kind of AIFs exempted from requirements of implementing PPM templates and Audit?

Yes! The following are exempted from the requirements of PPM Templates and Audit:

  1. Angel Funds as defined in SEBI (Alternative Investment Funds), Regulations 2012.
  2. AIFs/Schemes in which each investor commits to a minimum capital contribution of INR 70 crores (USD 10 million or equivalent, in case of capital commitment in non-INR currency) and also provides a waiver to the fund from the requirement of PPM in the SEBI prescribed template and annual audit of terms of PPM, in the manner provided at Annexure 3.

What is the timeline for Audit?

The Audit should be complete within 6 months of the end of relevant financial year. For FY 2019-20 the deadline is December 31, 2020. The Statutory Auditor shall also be required to review this report before finalisation of annual accounts.

Can the Statutory Auditor of an AIF conduct this Audit?

No! The Statutory Auditor of an AIF cannot conduct the audit under this circular for the reasons given hereunder:

  1. Section 144 of the Companies Act, 2013 prohibits Statutory Auditor from providing internal audit services to the Company.
  2. The Statutory Audit Report of a Company’s financial statements includes a statement on Internal Audit system of the Company. (CARO 2020). So a Statutory Auditor should not be commenting on his own Audit Report.
  3. In case of other structures like Trust too, the same principles should prevail as it is imperative to maintain independence of Internal Auditor and Statutory Auditor.
Note: The circular of SEBI is silent, but the response is based on other applicable laws and founding principles of audits including independence and the fact that one should not review his own work.

To whom are the findings of Audit communicated?

The findings of the audit, along with corrective steps, if any, shall be communicated to the Trustee or Board or Designated Partners of the AIF, Board of the Manager and SEBI.

Should the report be submitted to SEBI even if there are no adverse findings?

Yes! A copy of the report should be submitted to SEBI even if there are no adverse findings in the Audit Report.

Is there a standard format of the Audit Report?

SEBI has not issued any format of Audit Report or suggestive checklist. The report should be made in line with the generally accepted audit standards for internal audit. An AIF may prefer to have an Auditor that has relevent experience in financial markets with adequate knowledge of business to enable covering all critical areas of Audits. The Circular also madates recording corrective steps while making submission to SEBI.

Whether an AIF that has not raised funds required to undergo the Audit?

No! Audit is not applicable to AIFs that have not raised funds. However a Certificate from a Chartered Accountant to the effect that no funds have been raised shall be submitted to Trustee or Board or Designated Partners of the AIF, Board of the Manager and SEBI, within 6 months from the end of the Financial Year. For FY 2019-20 the deadline is December 31, 2020.

The audit is required if the AIF has raised fund. It is applicale to all AIFs whether the funds have been raised in the current Financial Year or earlier Financial Years.