Part 21 addresses a governance area that draws close scrutiny both from investors during due diligence and from auditors during annual review — related party dealings and structural conflicts inherent to the manager-fund relationship.
Q1. What counts as a "related party" in the context of an AIF?
Related parties typically include the investment manager, sponsor, trustee, their respective affiliates/group entities, key personnel of these entities, and portfolio companies in which the manager or sponsor (or their other funds) hold an interest — essentially, any party whose relationship with the fund creates potential for conflicted decision-making.
Q2. Why are related party transactions inherently higher-risk in an AIF structure compared to a standalone company?
Because the manager exercises discretionary control over fund investment decisions on behalf of investors who are not involved in day-to-day decision-making, any transaction between the fund and a party connected to the manager carries an inherent risk that it wasn't negotiated at arm's length — even where it may have been.
Q3. What are common examples of related party transactions in AIF operations?
Fee arrangements between the fund and manager-affiliated service providers, co-investment allocations between the AIF and another fund managed by the same manager, transactions between portfolio companies commonly held across the manager's different funds, and any direct investment by the sponsor/manager alongside the fund on preferential terms.
Q4. How should co-investment opportunities be allocated when a manager runs multiple funds with overlapping mandates?
This should be governed by a documented allocation policy set out in the PPM or a separate governance document — typically based on factors like each fund's remaining investable capital, stage of investment period, and strategy fit — applied consistently rather than discretionarily deal by deal.
Q5. Is disclosure of related party transactions sufficient, or does SEBI expect additional governance measures?
Disclosure is necessary but generally not sufficient on its own — funds are expected to have substantive internal governance processes (such as investment committee review, independent trustee oversight, or conflict committees) that actively manage conflicts, not merely disclose them after the fact.
Q6. How should a related party transaction be documented to withstand audit and regulatory scrutiny?
With clear rationale for the transaction, evidence that terms are arm's-length (or, where they aren't, explicit disclosure and justification for the deviation), the approval trail (who reviewed and approved it), and its inclusion in the fund's related-party disclosures in financial statements.
Q7. What role does the trustee play in overseeing related party transactions for trust-structured AIFs?
The trustee, in its fiduciary oversight role, is expected to satisfy itself that related party transactions are conducted appropriately and in investors' interest — this is one of the concrete areas where trustee oversight (distinct from the manager's operational role) is meant to add real protective value, not just formal sign-off.
Q8. Can a fund manager charge the fund fees for services also provided by a manager-affiliated entity?
This is permissible in principle but is a classic related-party scenario requiring careful documentation — the fee needs to be justified as reasonable and, ideally, benchmarked against what an independent third party would charge for comparable services.
Q9. What happens if a related party transaction is found, on audit, not to have been conducted at arm's length?
This can trigger a range of consequences depending on materiality — from a qualified audit opinion, to investor grievances, to regulatory scrutiny if the pattern suggests systemic governance weakness rather than an isolated instance.
Q10. How should conflicts arising from a manager's carried interest economics be managed?
Since carried interest gives the manager a direct financial stake in fund performance, structural safeguards — such as investment committee composition including independent members, or trustee review of large or unusual transactions — help ensure the manager's carry incentive doesn't distort individual investment or exit-timing decisions against investors' broader interest.
Q11. Should conflict of interest policies be included directly in the PPM, or maintained as a separate internal document?
Best practice is typically both — the PPM should disclose the general categories of potential conflicts and the fund's approach to managing them, supported by a more detailed internal conflict-of-interest and related-party transaction policy that governs day-to-day application.
Q12. How often should related party transaction policies and disclosures be reviewed?
At minimum annually, as part of the audit cycle, and additionally whenever the manager's fund family, affiliate structure, or investment activity changes materially enough to introduce new categories of potential conflict.
Building Governance That Actually Manages Conflicts, Not Just Discloses Them
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This FAQ is for general informational purposes and does not constitute governance or legal advice specific to any fund's related party arrangements.