Part 26 addresses the internal governance body that, in practice, makes or approves every investment decision an AIF takes — the investment committee.
Q1. What is an Investment Committee (IC), and is it mandatory for every AIF?
An Investment Committee is the internal body responsible for approving (or, depending on the fund's governance structure, advising the manager on) individual investment and divestment decisions. While not universally mandated in identical form for every fund, having a defined decision-making body — whether termed an investment committee or otherwise — with clearly documented authority is standard governance practice and, for many funds, an explicit PPM commitment to investors.
Q2. Who typically sits on an AIF's Investment Committee?
Composition varies by fund, but commonly includes senior members of the investment management team, and, particularly for institutionally-backed funds, one or more independent members not otherwise affiliated with the manager or sponsor, intended to bring an additional layer of objective judgment to investment decisions.
Q3. Why do sophisticated investors specifically look for independent members on a fund's Investment Committee?
Because an IC composed entirely of manager-affiliated individuals lacks a structural check against decisions that may be influenced by fee or carry incentives rather than pure investment merit — independent members are intended to provide that check, even if only in an advisory rather than a binding-veto capacity.
Q4. What does "delegation of authority" mean in the context of AIF investment decisions?
It refers to the documented framework specifying which decisions require full Investment Committee approval, which can be approved by designated individuals (such as the fund manager or a specific senior executive) under defined authority limits, and which require investor consent or trustee approval — creating a clear, auditable decision-making hierarchy rather than ad hoc authority.
Q5. Should smaller, lower-value follow-on investments go through the same IC approval process as new, first-time investments?
Many funds build tiered delegation frameworks precisely to avoid this inefficiency — smaller follow-on investments within a pre-approved envelope may be approved through a lighter, faster process, while new investments or those exceeding specified thresholds require full IC review, as defined in the fund's internal governance policy.
Q6. How should Investment Committee decisions be documented to withstand audit or regulatory scrutiny?
Through formal minutes recording the decision, the rationale, dissenting views (if any), and confirmation that the decision falls within the fund's stated investment strategy and any applicable concentration or sector limits — informal or undocumented IC approvals are a recurring weakness identified in compliance reviews.
Q7. What happens if an investment decision is made without going through the properly constituted IC process?
This creates both a governance gap and, depending on the fund's PPM commitments to investors, a potential breach of disclosed process — auditors and, in the event of a SEBI inspection, the regulator itself would treat this as a significant internal control deficiency.
Q8. Can the Investment Committee override the fund manager's recommendation on a proposed investment?
This depends on how the fund's governance documents define the IC's authority — some ICs have binding approval/veto authority over manager recommendations, while others operate in a purely advisory capacity with ultimate decision authority resting with the manager; this distinction should be explicit in the fund's internal governance policy and, where material to investors, disclosed in the PPM.
Q9. How does Investment Committee governance interact with the conflict-of-interest concerns discussed elsewhere in this series?
A well-constituted IC, particularly one including independent members, is one of the primary structural mechanisms funds use to manage related-party and conflict-of-interest risk in individual investment decisions (see Part 21 of this series) — since a properly functioning IC provides scrutiny that a single decision-maker acting alone would not.
Q10. Does the trustee (for trust-structured AIFs) have any role in Investment Committee decisions?
Generally, the trustee's role is oversight of the overall governance framework and compliance — including satisfying itself that the IC process is being followed — rather than direct participation in individual investment decisions, which typically remain the IC/manager's domain.
Q11. Should IC composition and authority be disclosed to investors in the PPM?
Yes — sophisticated investors increasingly expect PPM disclosure of the IC's composition (including whether independent members are included), its decision-making authority (binding versus advisory), and quorum requirements, as part of evaluating the fund's overall governance quality before committing capital.
Q12. How often should a fund's delegation-of-authority framework be reviewed and updated?
At minimum whenever the fund's AUM, team composition, or strategy changes materially — a delegation framework calibrated for a fund's early, smaller-scale stage often needs revision as the fund matures, adds team members, or increases deal volume.
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This FAQ is for general informational purposes and does not constitute governance advice specific to any fund's internal structure.