Investors don’t all come in at the same scale. A pension fund writing a ₹100 crore cheque isn’t going to want the exact same terms as someone investing the minimum ₹1 crore. And frankly, they shouldn’t.
But how do you accommodate these requests without rewriting the PPM every time or creating multiple classes of units? That’s where the side letter comes in.
Think of it as the “pre-nup” of the fund world - a separate, private agreement between a fund and a particular investor, granting them rights beyond the standard documents. Used well, it’s a powerful tool. Used carelessly, it can create serious regulatory headaches.
What is a Side Letter?
A side letter is simply a supplemental agreement. It doesn’t change the fund structure for everyone—it adjusts terms for a specific investor.
Common side letter provisions include:
Fee breaks – Lower management or performance fees for anchor investors.
Extra reporting – More frequent updates, or access to portfolio-level data.
Co-investment rights – The ability to invest directly into certain deals, often with no extra fees.
Advisory seats – A role on the Advisory Committee for strategic backers.
Liquidity tweaks – Early redemption or special transfer rights in close-ended funds.
MFN clauses – A promise that if another investor later negotiates better terms, they’ll get those too.
Example: Suppose the Sunrise India Tech Fund charges everyone 2% management fees. A large pension fund committing ₹75 crore might negotiate, via a side letter, to pay only 1.5%.
Why Use Side Letters?
There are two main reasons:
Fundraising leverage – Large, strategic investors are critical. Offering tailored terms can be the difference between landing them or losing them.
Flexibility – Institutional investors like sovereign funds or pensions often have unique internal requirements. Side letters allow you to meet those needs without overcomplicating the PPM.
SEBI’s Ground Rules
This is where you need to be careful. SEBI doesn’t ban side letters, but it does regulate them tightly. The key points from the Master Circular (Annexure B, point 24):
Mandatory disclosure
The PPM must clearly state that side letters can be used.
It must also outline the categories of terms that could be negotiated—fee discounts, reporting rights, co-investment rights, etc.
You don’t have to name who got what, but you must be upfront about the areas where special deals are possible.
No adverse impact
Any special rights must not hurt other investors.
More information? Fine. Preferential returns that dilute others? Not fine.
Consistency with the PPM
A side letter cannot contradict the core agreement or alter the economic structure of the fund.
Best Practices
Plan for it – Build a section into your PPM covering the possibility of side letters.
Be consistent – Decide upfront which terms are negotiable and stick to that.
Put it in writing – Every side letter should be documented and signed.
Keep trustees in the loop – They’re responsible for investor fairness, so don’t leave them in the dark.
Reference: SEBI Master Circular May 7, 2024
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Closing Thoughts
Side letters are standard practice globally, and in India they can be an effective way to land anchor investors. But they aren’t meant to be secret weapons. Transparency is non-negotiable.
Handled correctly, they let you be flexible with big backers while still treating all investors fairly. Handled badly, they erode trust and invite regulatory trouble.
Disclaimer: This post is for educational purposes only and does not constitute legal or financial advice. SEBI regulations referenced are based on the Master Circular dated May 07, 2024 (SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/39). Rules may change. Please consult a qualified legal professional or SEBI-registered intermediary before drafting or entering into any side letter.