SEBI’s Regulatory Focus: Examining AIF Investors’ Excuse And Exclusion Rights

[Shreya Singh is a 5th year B.B.A., LL.B. (Hons.) student at National Law University, Odisha in Cuttack, Odisha]

Over the past decade, the alternative investment funds (“AIFs”) regime (which structures in the private equity and venture capital investment) in India, has experienced substantial expansion. Private equity investments in India reached a cumulative value of $44 billion between 2015 and 2020, accompanied by an upward trend in average deal size from $40 million to $65 million during this timeframe. As a result, the Securities and Exchange Board of India (“SEBI”), which oversees the AIFs, has placed greater emphasis on modifying and enhancing the SEBI (Alternative Investment Funds) Regulations, 2012. These changes aim to foster greater transparency and address various other aspects. Most recently, SEBI, through its circular issued on February 5, 2020, introduced disclosure standards for registered AIFs via a private placement memorandum (“PPM”) template. This template encompassed various disclosures, including those pertaining to “Excuse and Exclusion” and “Direct Plan for investors and fees charged by AIFs.” However, SEBI identified inconsistencies and transparency issues in the disclosed information, prompting the issuance of new guidelines through circular dated April 10, 2023 (“the Guidelines”). These updated guidelines aim to establish consistency in the disclosures made within the PPM, thereby enhancing the regulatory framework.

Meaning and Implication of Excuse and Exclusion Rights

Excuse rights provide investors with the ability to opt out of certain investment opportunities for various reasons. These rights are typically supported by a range of factors. Firstly, regulatory or legal restrictions may exist that limit investors’ participation in specific deals. Secondly, excuse rights can be invoked on religious grounds, allowing investors to avoid investments that go against their moral or ethical beliefs. Thirdly, investors may have established policies, such as ESG policies, which dictate their investment decisions. Excuse rights come into play when proposed investments conflict with these policies, enabling investors to abstain. Lastly, some investors have investment restrictions in place, be it specific asset types, activities, or jurisdictions, and excuse provisions grant them the option to decline deals that violate these restrictions.

In addition to the excuse right, an investment manager may seek to exclude an investor from certain investments if the investor’s participation would result in a violation of applicable laws, potentially causing significant harm to the fund or other investors. This exclusion serves as a corollary to the excuse right, allowing the investment manager to prevent the involvement of an investor when their participation could have negative consequences due to legal non-compliance.

Usually, the conditions in which the excuse and/or exclusion provisions are triggered are typically predetermined through initial agreements between investment managers and relevant investors in the contribution. Alternatively, such conditions may be outlined in a separate, more confidential side letter arrangement.

What the SEBI Circular Entails

In February 2020, SEBI introduced a template for private placement memorandums (PPMs) to promote consistent information disclosure among AIFs. However, the disclosed details concerning excuse and exclusion rights fell short of SEBI’s standards, displaying inconsistency and inadequate disclosure. Certain AIFs, especially those with institutional investors, received permission to deviate from the SEBI format, resulting in additional discrepancies in disclosure. As a result, SEBI, in consultation with Alternative Investment Policy Advisory Committee (AIPAC) issued a circular that specifies the circumstances in which an AIF can excuse or exclude investors from participating in an investment opportunity.

When the Investors Can be Excused

According to the SEBI Guidelines, the investors can request to be excused from participating in a specific investment opportunity in two situations. The first situation arises when the investor’s participation would result in a violation of applicable laws or regulations. In such cases, the investor must provide supporting evidence in the form of an opinion from a legal professional or advisor confirming the potential violation.

Additionally, investors can also be excused if their involvement in the investment would contravene their disclosed internal policies, as stated in the contribution agreement or any other agreement with the AIF. If there are any changes to these internal policies, the investor must notify the AIF within 15 days of the modification.

When the Investors Are to be Excluded

In a circumstance where the investor’s participation in a specific investment opportunity would result in the fund violating applicable laws or regulations or causing significant harm to the fund, the investment manager, according to the circular, has the authority to prevent the investor from taking part in that investment opportunity. The investment manager has the discretion to exclude the investor from the opportunity and is required to document the reasoning behind the exclusion, including any relevant supporting documents, if applicable.

In the guidelines, SEBI also includes fund of funds, where an AIF (acting as an investor in another fund) may be partially excused or excluded from participating in an investment opportunity. This applies to the extent of the contribution made by the underlying investors of the said fund or investment vehicle who are also excused or excluded from the same opportunity. The investment manager of the AIF will be responsible for documenting the reasoning behind such excuse or exclusion, including any supporting documents, if available.


SEBI’s recent guidelines on excuse and exclusion rights in alternative investment funds aim to simplify the disclosure process and provide specific criteria for when an investor may be exempted from participation. These guidelines, supported by the requirement for a legal opinion in investor-requested exclusions, enhance transparency and prevent selective deal selection under the guise of excuse rights. By limiting the investment manager’s ability to grant excuse rights through side letters, the guidelines set clear boundaries for negotiations and help preserve the integrity of ‘blind-pool’ fund structures. Overall, these measures contribute to a more standardized and transparent framework for managing excuse and exclusion rights in AIFs, ensuring the fair and efficient operation of the investment ecosystem.

Shreya Singh

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