Having reviewed the PPM and aligned with the fund’s strategy, the next step for an investor is formalising their participation. This is done through the Subscription Agreement—the binding contract that legally cements the investor’s commitment and the fund’s obligations.
Why the Subscription Agreement Matters
Unlike the PPM, which is standardized for all prospective investors, the Subscription Agreement is personalized. It incorporates the PPM’s terms by reference and ensures investors are bound by the rules disclosed. Importantly, SEBI’s Master Circular (Chapter 4, Para 4.4) requires that:
“The terms of contribution or subscription agreement… shall be aligned with the terms of the PPM and shall not go beyond the terms of the PPM.”
This safeguards investors from unexpected, unfavourable provisions being introduced at the contract stage.
Key Clauses to Scrutinize
1. Investor Representations and Warranties – The Eligibility Test
Investors must confirm compliance with SEBI’s eligibility rules (Master Circular, Chapter 4, Paras 4.1.1 & 4.1.2). Misrepresentation can lead to rejection or forced redemption. Common declarations include:
Accredited Investor status (per Chapter 12).
Legality and source of funds.
Jurisdictional compliance (IOSCO/MMOU requirements for foreign investors).
Confirmation of not being on sanctions lists.
Residency in non-high-risk jurisdictions (per FATF).
Knowledge and experience to evaluate risks.
Acknowledgement of illiquidity and risk of total loss.
Confirmation of no assured returns.
Accuracy of all submitted information.
2. Confidentiality – The Secrecy Clause
Investors agree to keep fund materials (e.g., reports, portfolio details) confidential, safeguarding proprietary information and ensuring compliance with securities laws.
3. Power of Attorney – The Convenience Clause
A limited power of attorney authorizes the Manager to execute routine administrative acts (e.g., signing investment documents on behalf of all investors). It must be carefully scoped to actions in the collective interest of investors.
4. Commitment and Drawdown Terms – The Money Clause
Details include:
Investor’s total commitment.
Mechanics of capital calls (notice periods, payment timelines).
Designated bank account details.
Consequences of default (penalties, dilution, or potential exit).
5. Governing Law and Dispute Resolution
Specifies applicable law (commonly Indian law) and forum (often arbitration in Mumbai or Delhi). Arbitration provides speed and confidentiality versus court litigation.
Reference: SEBI Master Circular May 7, 2024
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Conclusion
The Subscription Agreement is the cornerstone of an investor’s legal relationship with an AIF. It protects both parties: the fund ensures investors meet regulatory eligibility, while investors are shielded from undisclosed terms beyond the PPM. Signing signifies informed consent, acknowledgment of risks, and readiness to participate in the fund’s journey.
Disclaimer: This article is for educational purposes only and does not constitute legal or financial advice. It is based on the SEBI Master Circular for AIFs dated May 07, 2024 (SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/39). Rules and regulations are subject to change. Investors should consult qualified legal and compliance professionals before making commitments.