Starter Guide To The Investment Management Agreement (IMA)
Aligning Investment Practice with Regulatory Expectations.
For fund managers, the Investment Management Agreement (IMA) can feel like both an anchor and a compass. It anchors you to a framework of fiduciary and regulatory responsibilities and directs the way you manage investments, interact with investors, and comply with SEBI’s regulatory landscape.
Unlike marketing brochures or high-level strategies, the IMA is a technical document where regulatory obligations meet commercial terms. For managers of Category I, II, or III funds, mastering the IMA is essential for survival and credibility.
1. Setting the Stage: Parties and Roles
The first task of the IMA is to establish who is who. On one side is the AIF vehicle, which could be a trust, LLP, or company recognized under SEBI. On the other side is the Manager, the entity that drives investment decisions. Standing alongside are the Sponsor and Trustee, who provide oversight. Sometimes, there may also be an Investment Committee, a group of professionals with delegated authority to approve or advise on investment decisions.
This clarity matters. Investors and regulators want assurance that responsibilities are unambiguous, accountability is clear, and decision-making gaps do not exist.
2. Defining Authority: How Decisions Are Made
The IMA specifies what the manager is empowered to do. Can you make investments independently? Must an Investment Committee ratify them? What happens if disagreements arise? These questions must be addressed.
The guiding principle is alignment with the Private Placement Memorandum (PPM). SEBI insists that no agreement, whether the IMA or the contribution agreement, should contradict or exceed what the PPM promises. In practice, this makes the IMA the rulebook that enforces the strategy and commitments made to investors.
3. Money Matters: Fees, Expenses, and Waterfalls
Every investor wants clarity on costs. The IMA must explain how fees and expenses will be charged. Management fees, performance carry, and fund expenses should be detailed precisely. SEBI also requires distribution waterfall examples, with numerical illustrations showing how profits will flow between investors and the manager.
For Category III AIFs, distribution commissions can only follow a trail model. No upfront placement fee can be charged. For Category I and II funds, a portion can be upfront, but the rest must follow a trail.
This level of detail builds investor trust by showing transparency and accountability in how returns and costs are shared.
4. Fiduciary Responsibilities: Acting in the Investor’s Best Interest
SEBI has embedded fiduciary duty into the IMA. The agreement must make it clear that managers are bound to act in the best interest of unitholders. This includes:
Operating with integrity and fairness.
Avoiding exaggerated claims about track record.
Refraining from promising assured returns.
Ensuring segregation of bank and securities accounts for each scheme.
These duties are enforceable legal commitments.
5. Compliance and Governance: Building the Infrastructure
The IMA must reflect governance practices such as:
Appointment of a Compliance Officer, separate from the CEO.
Disclosure of Key Management Personnel (KMPs) in the PPM.
Preparation of an annual Compliance Test Report (CTR).
Adoption of the Stewardship Code when investing in listed equities.
Together, these provisions create accountability at every level.
6. Managing Risk and Valuation: Precision Required
Risk management and valuation practices must be clearly defined. The IMA should commit to:
Appointment of independent valuers with SEBI eligibility.
Disclosure of valuation methodologies in the PPM.
Reporting deviations if valuations swing more than 20% consecutively or 33% in a year.
For Category III funds, where leverage is permitted, risk management must be strict, with daily monitoring of exposure. These mechanisms preserve investor confidence and regulatory goodwill.
7. Custody and Asset Segregation: Safeguarding Investor Assets
To protect investor capital, SEBI mandates custodianship:
A SEBI-registered custodian must be appointed before the first investment.
Category III funds and large Category I/II funds (over INR 500 crore) are required to maintain custodians.
All schemes must segregate and ring-fence their assets and liabilities.
The IMA must reflect these obligations so investors know their assets are protected and isolated.
8. Conflicts of Interest: Identifying and Managing Risks
Conflicts are inevitable in investment management. The IMA must address them directly. Provisions should include:
A written conflict of interest policy.
Full disclosure of transactions with associates.
Mechanisms to excuse or exclude investors from deals that may breach laws or internal policies.
Investor approval requirements (75% by value) for associate transactions.
Transparency here is both a regulatory requirement and a competitive differentiator.
9. Term, Termination, and Liability: Planning for the End
The IMA provides the script for how to manage closure. It should specify:
Term aligned with the tenure of the scheme.
Termination triggers, including regulatory violations, fraud, or change in control of the sponsor or manager.
Indemnity provisions that balance protection for managers with accountability to investors.
The goal is to create stability while ensuring misconduct is not shielded.
10. Reporting and Transparency: Communicating with Stakeholders
The IMA must codify obligations to:
Submit quarterly reports via SEBI’s intermediary portal.
Share annual audited reports with investors.
Disclose performance benchmarking comparisons whenever track record is showcased.
Provide transparent reporting on investor complaints and their resolutions.
These obligations transform the IMA into a tool for sustained investor engagement.
Final Thoughts
For a first-time fund manager, the IMA is a declaration of intent. It tells regulators, investors, and counterparties how you plan to manage money, govern operations, and honor your fiduciary duty.
Think of it as your fund’s operational constitution. Draft it carefully, review it rigorously, and treat it as a living document that guides your conduct every day.
Work with experienced legal counsel, and conduct a compliance audit of your IMA alongside the PPM. This alignment will save you from costly regulatory friction and help you build long-term trust with investors.
Previous post: Drafting the Foundational Agreement - The LLP Deed or Trust Agreement
Reference: SEBI Master Circular May 7, 2024
Disclaimer: This post aligns with the provided SEBI Master Circular dated May 07, 2024. SEBI regulations are subject to change, and this should not be construed as legal advice. Always consult with a qualified legal professional or SEBI-registered intermediary for advice tailored to your specific circumstances.