Part 35 addresses an operationally fundamental but frequently under-discussed area of AIF governance — how investor money is actually held, moved, and safeguarded at the bank account level.
Q1. Why is segregation of investor moneys a specific regulatory concern for AIFs?
Because AIF managers exercise discretionary control over pooled investor capital, without segregation and clear governance over how fund moneys are held and moved, there's inherent risk of commingling with the manager's own operating funds, misuse, or lack of clear traceability of investor capital — segregation requirements exist specifically to mitigate this risk.
Q2. Should an AIF's fund bank account be held in the name of the fund itself, or the investment manager?
Fund moneys should be maintained in accounts clearly identified with and controlled for the benefit of the fund (or its trustee, for trust-structured AIFs), distinctly segregated from the investment manager's own corporate operating accounts — commingling fund moneys within a manager's general operating account would be a significant governance and regulatory concern.
Q3. For a multi-scheme AIF, should each scheme maintain a separate bank account, or can schemes share a common account?
Best practice, and generally the regulatory expectation, is for each scheme within a multi-scheme AIF to maintain appropriately segregated accounts or, at minimum, a clear and auditable accounting-level segregation of moneys attributable to each scheme — commingling moneys across schemes without clear segregation creates risk of one scheme's investors' capital being inappropriately exposed to another scheme's obligations or losses.
Q4. What role does the custodian play in safeguarding fund moneys, distinct from the bank account structure itself?
The custodian (mandatory above specified corpus thresholds, and always for Category III — see Part 22 of this series) provides an independent custody and safekeeping function for fund assets and securities, complementing (though distinct from) the segregation achieved through proper fund bank account structuring.
Q5. Can capital called from investors be temporarily held in an escrow arrangement before being deployed into an investment?
Yes, this is common practice, particularly for capital calls made in advance of a specific investment's completion — moneys are held in an escrow or designated fund account pending deployment, with clear documentation of the intended use and release conditions, rather than being immediately available for general, undefined fund purposes.
Q6. Who has authority to authorise transfers out of an AIF's fund bank account?
This should be governed by a clearly documented authorisation framework — commonly requiring defined signatories (potentially including a requirement for dual authorisation above certain transaction thresholds) tied to the fund's delegation of authority framework (see Part 26 of this series), rather than unilateral, unchecked authority resting with a single individual.
Q7. How should management fee payments be processed from the fund account to the manager, to maintain proper governance?
Management fee transfers should be processed against the PPM's stated fee formula, ideally with a documented calculation and, where the fund's governance structure requires it, appropriate sign-off (such as trustee or independent oversight confirmation) before transfer — rather than the manager having unrestricted, self-directed access to draw fees from the fund account.
Q8. What controls should exist around distributions paid out to investors from the fund account?
Distribution payments should be processed against the documented distribution waterfall calculation (see Part 13 of this series and our Distribution Waterfall article), verified against investor bank account details on file, with appropriate reconciliation against each investor's capital account before and after the distribution.
Q9. Does the choice of banking partner or account structure differ for a GIFT City AIF operating in foreign currency, compared to a domestic rupee-denominated AIF?
Yes — GIFT City funds typically operate through IFSC Banking Units and foreign-currency-denominated account structures specific to the IFSC ecosystem, distinct from the domestic banking arrangements a rupee-denominated SEBI-registered AIF would use (see Part 18 of this series for the broader GIFT City comparison).
Q10. How is bank account and cash management reviewed during an AIF's annual audit?
The auditor verifies bank reconciliations, confirms that fund account movements correspond to documented capital calls, investments, expenses, fee payments, and distributions, and checks for any unexplained or unauthorised transfers — this is a standard component of the broader capital account reconciliation discussed in our AIF Audit Checklist article and Part 2 of this series.
Q11. What happens if fund moneys are found to have been commingled with a manager's other funds or operating accounts during an audit or inspection?
This is treated as a serious governance and compliance failure — potentially triggering regulatory scrutiny well beyond the specific commingling instance itself, given that segregation of investor moneys goes to the core of investor protection expectations for a regulated fund manager.
Q12. Should investors specifically ask about bank account governance and segregation practices during manager due diligence?
Yes — while less visible than headline track record or fee terms, questions about how fund moneys are segregated, who authorises transfers, and what independent oversight (trustee, custodian) exists over cash movements are a meaningful, practical indicator of a manager's overall operational discipline (see our Due Diligence for AIF Managers article and Part 17 of this series).
Reviewing Fund Cash and Bank Account Governance as Part of Our Audit Work
We review bank account structuring, segregation practices, and transfer authorisation controls as a standard component of our AIF audit and compliance advisory engagements.
This FAQ is for general informational purposes and does not constitute a substitute for a fund-specific governance and controls review.