Legal Foundation and Regulatory Framework

The Placement Memorandum (PM) and Trust Deed derive their legal force primarily from:

• Regulation 11: This regulation governs the registration process of AIFs, mandating submission of Form A with a detailed Placement Memorandum (PM) outlining investment objectives, risks, and governance. It ensures transparency, standardized disclosures, and investor protection during the fund’s approval by SEBI.

• Regulation 4(g): It specifies the permissible legal structures for AIFs trust, company, LLP, or body corporate offering flexibility based on operational needs and taxation. Most AIFs in India are established as trusts due to easier compliance and favorable tax treatment.

• First Schedule (Form A): This schedule details the disclosure requirements for AIF registration, including fund strategy, target investors, key personnel, and risk factors. It ensures uniformity in SEBI filings and comprehensive disclosure to safeguard investors’ interests.

• SEBI Master Circular (May 2024): This circular consolidates all AIF-related obligations, covering disclosures, audits, valuation norms, and transparency standards. It standardizes compliance procedures, ensuring consistent governance and investor confidence across all AIF categories.

• SEBI Circular (September 2025): This circular enhances Private Placement Memorandum (PPM) norms, mandates an audited PPM format, and introduces the Co-Investment Schemes framework under Regulation 17A, requiring filing of a Shelf Placement Memorandum with SEBI for transparency in parallel investments.

These regulations collectively ensure that the AIF structure is transparent, investor-centric, and aligned with global best practices.

The Role of the Trust Deed

Most AIFs in India are structured as trusts due to their flexibility and tax efficiency. The Trust Deed is the foundational document that creates the legal entity of the fund. It is executed between the sponsor (settlor) and the trustee company, which acts as a fiduciary for investors.

Legal Importance and Structure

Most Alternative Investment Funds (AIFs) in India are established as trusts due to their legal simplicity, governance flexibility, and tax efficiency. The Trust Deed serves as the foundational document creating the legal identity of the fund. It is executed between the sponsor (settlor) who contributes the initial settlement corpus and the trustee company, which acts as a fiduciary, ensuring investor protection and adherence to SEBI (AIF) Regulations, 2012. This document sets out the objectives, roles, and powers governing fund operations.

Essential Clauses in the Trust Deed

A comprehensive Trust Deed must include several key provisions:

• Name and Objective Clause: Defines that the trust is established to operate an AIF in compliance with SEBI regulations.

• Settlor and Trustee Details: The settlor provides the initial capital; the trustee ensures oversight and compliance.

• Duties and Powers of Trustees: Under Regulation 20, trustees must monitor investment restrictions, risk management, and investor reporting.

• Beneficiary Rights: Investors are recognized as beneficiaries entitled to proportionate returns.

• Investment Restrictions & Borrowing Powers: In line with Regulation 15, AIFs can use leverage only for operational needs (for Category I & II).

• Indemnity & Liability Clauses: Protect trustees and sponsors for bona fide actions taken in good faith.

• Amendment & Dissolution Clause: Lays down the procedure for altering or terminating the trust with SEBI’s prior approval.

Registration and Compliance

To attain legal enforceability, the Trust Deed must be registered under the Indian Registration Act, 1908 and duly stamped as per the applicable State Stamp Act. Registration authenticates the trust, giving it legal standing before SEBI and ensuring transparency and accountability in the fund’s governance framework.

Drafting the Placement Memorandum (PM)

The Placement Memorandum (PM), also referred to as the Private Placement Memorandum (PPM), is a mandatory disclosure document that provides potential investors with detailed information about an Alternative Investment Fund (AIF) before they commit capital. It functions much like a prospectus in public offerings, but within a private investment structure, and serves as the primary means of ensuring transparency, informed decision-making, and regulatory compliance. According to Regulation 11 of the SEBI (AIF) Regulations, 2012, every AIF must submit a comprehensive PM along with its registration application in Form A. The document must be accurate, exhaustive, and aligned with SEBI’s disclosure norms to prevent misrepresentation or investor disputes.

• Fund Structure: The PM must explicitly define the organizational and legal structure of the AIF, detailing the roles and responsibilities of the sponsor, manager, trustee, and the category of the fund (I, II, or III). This section clarifies the governance framework and establishes the lines of accountability between stakeholders. The structural details ensure that investors understand who manages their funds, under what regulatory conditions, and how fiduciary duties are distributed.

• Investment Strategy: The investment strategy section outlines how the fund plans to generate returns. It must clearly mention the sectoral focus, types of instruments (such as equity, debt, or hybrid securities), and the exit strategy. For example, Category I AIFs may focus on startups or social ventures, while Category II AIFs may invest in mature unlisted businesses or real estate. SEBI emphasizes the importance of clarity and consistency in articulating the investment philosophy, as this ensures investors are fully aware of potential risks and returns before investing.

• Fund Tenure and Corpus: As per SEBI regulations, an AIF must maintain a minimum corpus of ₹20 crore, except in the case of Angel Funds, where the minimum is ₹10 crore. Furthermore, Category I and II AIFs must operate as close-ended funds with a minimum tenure of three years. These requirements ensure long-term stability, discourage short-term speculative investments, and promote disciplined fund management aligned with the fund’s stated objectives.

• Key Personnel: This section requires detailed disclosure about the fund managers, directors, and key investment team members, including their qualifications, experience, and track record. SEBI expects transparency about who is making the investment decisions, as the competence and credibility of these individuals directly influence the fund’s performance and risk management. This section instills confidence among investors and ensures accountability at the management level.

• Fees and Charges: The fee structure is a disclosure element in the PM. SEBI mandates complete transparency in listing management fees, performance-linked fees (carried interest), administrative charges, and any other costs borne by investors. The aim is to eliminate hidden charges and ensure that investors understand how their capital will be allocated and what expenses are deducted. Clear disclosure also enables investors to compare multiple funds effectively before making investment decisions.

• Risk Factors: Every AIF operates in a risk-sensitive environment, making this section one of the most important parts of the PM. It must clearly enumerate market, credit, liquidity, operational, and regulatory risks. Investors should be informed about possible loss of capital, volatility, and restrictions on withdrawal. SEBI requires funds to present risks in a balanced manner neither overstated nor concealed allowing investors to assess the true nature of their exposure before committing funds.

• Valuation Methodology: In accordance with Regulation 23 and the 2025 SEBI Amendment, all AIFs must follow a standardized valuation methodology to determine fair asset values. Independent and third-party valuations must be conducted periodically to prevent conflicts of interest. These valuations ensure accuracy, consistency, and transparency in reporting the fund’s Net Asset Value (NAV), helping investors make evidence-based financial assessments.

• Custody and Governance: Under SEBI’s framework, Category III AIFs and all AIFs with a corpus exceeding ₹500 crore are required to appoint a SEBI-registered custodian. The custodian is responsible for safekeeping fund assets, maintaining records, and verifying transactions. The PM must also specify governance procedures such as the composition of the investment committee, internal control systems, and voting rights ensuring the fund operates with a high degree of accountability and compliance.

• Audit Requirements: As mandated by SEBI’s Template for PPM Audit (2024–25), every AIF must undergo an annual audit of its Placement Memorandum. This audit, conducted by an independent external auditor, verifies the accuracy of disclosures, adherence to the stated investment strategy, and compliance with SEBI norms. The audit acts as an integrity and compliance check, strengthening investor trust and ensuring that fund managers operate within regulatory boundaries.

• Filing and Compliance: Before launching any scheme, the AIF must file its PM with SEBI at least 30 days in advance, accompanied by a compliance certificate. This certificate must be signed by the legal and compliance officer, a SEBI-registered Merchant Banker, or a Chartered Accountant with fund regulatory experience. The certification confirms that the PM is compliant with all disclosure and legal standards, thereby enhancing transparency and investor protection from the outset.

SEBI Template for Placement Memorandum and Compliance Certification

To promote consistency and improve the quality of investor disclosures, the Securities and Exchange Board of India (SEBI) introduced a standardized two-part format for the Private Placement Memorandum (PPM) through its Circular dated May 7, 2024. This framework aims to ensure that all Alternative Investment Funds (AIFs) provide transparent, comparable, and verifiable information to investors and regulators, thereby minimizing information asymmetry and mis-selling risks.

Two-Part Structure of the PPM

Under the new format, SEBI has divided the PPM into two mandatory parts:

• Part A Private Placement Memorandum: This section contains comprehensive disclosures applicable to all schemes under the AIF. It covers essential information such as the fund’s investment strategy, governance framework, risk management approach, fee and expense structure, and valuation methodology. By setting a common baseline, Part A ensures that investors have complete clarity on how the fund will be managed and how risks are mitigated.

• Part B Supplementary Section: This part is designed to include scheme-specific details that may differ from one AIF or series to another. It provides flexibility for fund managers to disclose particular investment themes, targeted sectors, portfolio composition, or any special rights offered to investors. The inclusion of Part B allows customization while maintaining a uniform disclosure structure across the industry.

Compliance Certification Requirement

Alongside the new format, SEBI has mandated that every AIF must obtain a compliance certification confirming that its PPM adheres to the prescribed disclosure and regulatory standards. This certification can be issued by either of the following professionals:

• A SEBI-registered Merchant Banker, who verifies the accuracy and completeness of disclosures in line with SEBI’s regulatory expectations; or

• A Chartered Accountant (CA) with proven experience in fund regulatory compliance, ensuring that all financial, legal, and operational statements within the PPM are transparent and reliable.

Purpose and Impact of the Certification

The compliance certification acts as an additional layer of investor protection. It certifies that the PPM is truthful, comprehensive, and compliant, thereby enhancing accountability among fund sponsors and managers. This requirement significantly reduces the likelihood of misrepresentation and strengthens the overall credibility of the AIF ecosystem.

By introducing this standardized template and certification process, SEBI has aligned India’s AIF disclosure standards with global best practices, ensuring that investors receive consistent, high-quality information while fostering trust, transparency, and governance integrity across all categories of AIFs.

Linkage Between Trust Deed and Placement Memorandum

The Trust Deed and the Placement Memorandum (PM) are the two most crucial documents governing the establishment and operation of an Alternative Investment Fund (AIF). These instruments are interdependent and must remain consistent with each other to ensure legal and regulatory harmony. The Trust Deed acts as the legal charter, creating the fund’s legal entity and defining its foundational structure, while the Placement Memorandum serves as the operational and disclosure document, explaining how the fund will function, raise capital, and manage investor relations.

The Trust Deed establishes the legal vehicle outlining the trust’s objectives, the duties and powers of trustees, and the fiduciary framework for investors. In contrast, the PM translates these legal provisions into practice, detailing the fund’s investment policy, asset allocation, tenure, risk management strategy, and governance procedures. Therefore, any modification made to the investment strategy, fund tenure, or management structure must be reflected in both documents to maintain consistency. As per Regulation 20(13) of the SEBI (AIF) Regulations, 2012, such changes must also be reported to SEBI, ensuring ongoing regulatory oversight and investor transparency.

Additionally, SEBI requires that the sponsor’s continuing interest, stipulated under Regulation 10(d) that is, a contribution of 2.5% of the corpus or ₹5 crore, whichever is lower be recorded identically in both the Trust Deed and the Placement Memorandum. This dual documentation ensures that the sponsor’s financial stake and fiduciary responsibility are transparently disclosed and verifiable under law.

Recent SEBI Updates Impacting Drafting (2024–2025)

The Securities and Exchange Board of India (SEBI) has introduced several major reforms between 2024 and 2025 that have significantly transformed the way Placement Memoranda (PMs) and Trust Deeds are drafted and maintained. These updates aim to enhance transparency, investor protection, and regulatory efficiency within the Alternative Investment Fund (AIF) ecosystem. The reforms also align India’s AIF disclosure standards with global best practices, requiring greater legal precision and periodic review of core fund documents.

Co-Investment Schemes (Regulation 17A, September 2025)

Introduced through an amendment in September 2025, Regulation 17A provides a formal framework for Co-Investment Schemes—allowing Category I and II AIFs to establish Co-Investment Vehicles (CIVs) for parallel investments alongside their main fund. Each co-investment scheme must file a Shelf Placement Memorandum with SEBI, accompanied by a ₹1 lakh filing fee per scheme. This reform ensures proper disclosure, uniform documentation, and accountability in co-investment structures that were previously unregulated, thus improving transparency and governance in shared investment opportunities.

Revised Angel Fund Norms (2025)

To strengthen early-stage funding and boost the startup ecosystem, SEBI revised the Angel Fund Regulations in 2025. The investment limit per startup was doubled from ₹5 crore to ₹10 crore, enabling greater participation from high-net-worth investors. Additionally, SEBI extended the compliance timeline for Private Placement Memorandum (PPM) audits till April 2026, giving funds more time to adapt to new disclosure and audit requirements. These changes are aimed at easing compliance for early-stage investors while preserving transparency and accountability in fund management.

Specialized Investment Funds (SIFs, February 2025)

A landmark reform in February 2025 was the introduction of Specialized Investment Funds (SIFs) a new category of AIFs designed for sophisticated and institutional investors. These funds operate under long-short and multi-strategy models, similar to global hedge funds. The regulations mandate customized Placement Memoranda featuring enhanced risk disclosures, dynamic valuation models, and leverage management policies. This innovation allows India’s AIF ecosystem to cater to advanced investors seeking complex investment strategies while maintaining robust regulatory oversight.

Enhanced Reporting Obligations (2025)

To ensure continuous regulatory visibility, SEBI issued a Circular on Reporting Standards (2025) making quarterly filings mandatory for all AIF categories. These reports must include details of portfolio composition, investor commitments, asset valuation, and risk exposure. The move strengthens transparency, enables SEBI to monitor fund activities more closely, and enhances investor confidence by ensuring that fund managers maintain ongoing compliance and accountability.

Overall Impact on Drafting and Compliance

Collectively, these updates demand greater legal scrutiny and frequent review of both the Placement Memorandum and Trust Deed. Fund managers, trustees, and sponsors must ensure that all structural and operational changes such as co-investment terms, enhanced risk disclosures, or revised fund strategies are accurately reflected in both documents and reported to SEBI. The reforms reinforce SEBI’s long-term vision of creating a globally competitive, well-regulated, and transparent AIF framework, balancing innovation with investor protection.

Practical Drafting Considerations

The drafting of a Placement Memorandum (PM) and Trust Deed for an Alternative Investment Fund (AIF) requires meticulous attention to legal detail and strict adherence to the SEBI (Alternative Investment Funds) Regulations, 2012. Legal professionals must ensure that both documents not only comply with regulatory standards but also maintain operational harmony and investor clarity. A poorly drafted PM or Trust Deed can lead to inconsistencies, disputes, and regulatory penalties, making precision and uniformity essential.

Consistency Across Documents

The PM, Trust Deed, and Investor Agreements must align in content and intent. Any discrepancy whether in fund objectives, tenure, or fee structures can result in regulatory non-compliance or investor disputes. Therefore, all material clauses must be synchronized across documents to ensure a coherent legal and operational framework.

Clarity of Roles (Regulation 4)

Under Regulation 4 of the SEBI AIF Regulations, clear differentiation must be made between the sponsor, manager, and trustee.

• The sponsor establishes the fund and provides the initial corpus.

• The manager oversees fund operations and investment decisions.

• The trustee acts as a fiduciary, ensuring that investor interests are safeguarded.
  Defining these roles distinctly in both the PM and Trust Deed prevents conflicts of authority and enhances governance integrity.

Regulatory Language Alignment

Every AIF document must incorporate SEBI-prescribed definitions and avoid ambiguous or misleading terminology. Terms like “investor,” “corpus,” “leverage,” and “valuation” must reflect SEBI’s official interpretations. Aligning language with regulatory wording ensures uniform understanding, legal defensibility, and smooth regulatory review during audits or filings.

Disclosure of Conflicts of Interest (Regulation 21)

As per Regulation 21, the fund manager must disclose any potential or existing conflicts of interest that may arise between the sponsor, manager, trustee, and investors. These disclosures should cover related-party transactions, fee-sharing arrangements, and cross-investments. Transparent conflict reporting helps maintain investor confidence and reinforces the fiduciary responsibility of fund managers.

Investor Grievance Redressal (Regulation 22)

In accordance with Regulation 22, the PM must outline a clear grievance redressal mechanism for investors. This includes providing details of the designated grievance officer, response timelines, and the availability of SEBI’s SCORES (SEBI Complaints Redress System) platform for lodging complaints. A transparent redressal framework demonstrates accountability and strengthens investor protection.

Legal and Strategic Significance

A legally sound and well-structured PM and Trust Deed not only ensure compliance but also serve as instruments of investor confidence and fund sustainability. Proper drafting reduces regulatory risks, prevents misinterpretation, and enhances the fund’s credibility before SEBI and investors. In essence, the drafting process must combine legal precision, regulatory alignment, and strategic foresight to sustain long-term operational stability and trust in India’s growing AIF ecosystem.

Conclusion

The drafting of a Placement Memorandum (PM) and Trust Deed for an Alternative Investment Fund (AIF) is far more than a procedural formality it is the legal foundation upon which the fund’s structure, investor relations, and compliance framework rest. These documents collectively define how the fund will operate, manage investments, distribute returns, and uphold fiduciary obligations under the SEBI (Alternative Investment Funds) Regulations, 2012. They embody the fund’s commitment to transparency, governance, and regulatory integrity, ensuring that investor rights are safeguarded at every stage.

With SEBI introducing progressive reforms during 2024–2025, such as the Co-Investment Scheme framework, revised Angel Fund norms, and enhanced reporting standards, fund managers must adopt a precision-driven and compliance-oriented approach in drafting these documents. A carefully structured PM and Trust Deed not only serve as compliance safeguards but also as strategic instruments for building investor trust and aligning India’s rapidly expanding AIF industry with global governance and disclosure standards.

Frequently Asked Questions (FAQs)

Q1. What is a Placement Memorandum in AIF registration?

Ans. A Placement Memorandum (PM), also known as a Private Placement Memorandum (PPM), is a detailed disclosure document that provides prospective investors with information about the fund’s objectives, investment strategy, structure, risk factors, management, and fees. It must be filed with SEBI in Form A as part of the AIF registration process and must comply with the SEBI (Alternative Investment Funds) Regulations, 2012 and the Master Circular for AIFs (May 7, 2024).

Q2. What is the purpose of the Trust Deed in AIFs?

Ans. The Trust Deed establishes the legal existence of the AIF when structured as a trust, which is the most common model in India. It outlines the relationship between the settlor, trustees, and investors (beneficiaries), defining duties, powers, liabilities, and the fund’s investment objectives in compliance with Regulation 4(g) of the SEBI AIF Regulations.

Q3. Is SEBI approval required for every change in the Placement Memorandum or Trust Deed?

Ans. Yes. Any material change in the investment strategy, fund tenure, or structure must be reported to SEBI and reflected in both the Placement Memorandum and Trust Deed under Regulation 20(13). Such amendments typically require investor consent and SEBI’s acknowledgment before implementation.

Q4. Who can certify the Placement Memorandum before submission to SEBI?

Ans. As per SEBI’s May 7, 2024 circular, the PM must be certified by either a SEBI-registered Merchant Banker or a Chartered Accountant with relevant experience. The certification confirms that all disclosures meet SEBI’s prescribed standards and that no misleading statements are made.

Q5. What are the key differences between a Trust Deed and a Placement Memorandum?

Ans. The Trust Deed is a foundational legal document that creates and governs the trust’s structure, while the Placement Memorandum is a disclosure document intended for investors outlining how the fund will operate. The Trust Deed provides the legal basis for fund formation, whereas the PM provides operational and financial transparency.

Q6. What are the latest SEBI updates affecting AIF documentation (2024–2025)?

Ans. Recent reforms include:

• Regulation 17A (September 2025): Framework for Co-Investment Schemes and filing of a Shelf Placement Memorandum.

• Angel Fund Reforms (2025): Raised investment limit per startup to ₹10 crore and extended PPM audit compliance till April 2026.

• Specialized Investment Funds (February 2025): New class for sophisticated investors under long-short strategies.

• Enhanced Reporting Standards (2025): Mandatory quarterly reporting for all categories of AIFs.

Q7. Is registration of the Trust Deed mandatory?

Ans. Yes. The Trust Deed must be registered under the Indian Registration Act, 1908 and duly stamped under the respective State Stamp Act. This ensures legal enforceability and compliance with regulatory requirements.

Q8. What happens if an AIF fails to comply with its PPM disclosures?

Ans. Non-compliance with PM disclosures can lead to penalties, suspension, or cancellation of registration under Regulation 29 of the SEBI AIF Regulations, 2012. SEBI may also direct the fund to make refunds or corrective disclosures to protect investors’ interests.