Chapter 13: Fund Monitoring, Reporting and Exit

Ongoing Portfolio Surveillance in Category III Trading Funds

Because Category III AIFs deploy continuous active trading, derivative exposures, and structural leverage, portfolio surveillance operates on a real-time, intra-day basis:

Category III Surveillance Infrastructure:
┌───────────────────────────────────────┐
│ Real-Time Intra-Day Risk Engine       │  • Continuous tracking of Gross Exposure vs 2x NAV limit
│ (Order Management & Execution System) │  • Real-time Delta, Gamma, Vega Greeks monitoring
└───────────────────┬───────────────────┘
                    │
        ┌───────────┴───────────┐
        ▼                       ▼
┌───────────────────────┐ ┌───────────────────────┐
│ Margin Adequacy Check │ │ Stop-Loss & VaR Gate  │
│ Real-time collateral  │ │ Automated liquidation │
│ buffers with PCM      │ │ triggers upon breach  │
└───────────────────────┘ └───────────────────────┘

Statutory Reporting Obligations to Investors and SEBI

1. Quarterly Activity Reports (QAR):
   • Managers must file online quarterly activity reports on the SEBI Intermediary Portal (SI Portal) within 15 days from the close of each calendar quarter.
   • For Category III AIFs, reporting includes detailed leverage disclosures: gross exposure, net exposure, derivative open interest, Value-at-Risk (VaR), and borrow facility utilization.
2. Periodic Investor Reports:
   • In open-ended Category III schemes, managers provide unit-holders with monthly or quarterly performance statements detailing net fund returns, NAV movements, benchmark comparison, top 10 holdings, sector exposure breakdown, and risk metrics (Sharpe ratio, standard deviation).
3. Annual Audited Financial Statements:
   • Audited financial statements of the scheme must be distributed to all unit-holders within 180 days (6 months) from the financial year-end.
4. Material Changes and LP Approvals:
   • Any material modification to scheme terms (change in key investment personnel, fee revision, alteration in fundamental investment strategy) requires the consent of 75% of unit-holders by value. Dissenting investors must be provided with a fee-free exit option.

Liquidity Risk Management Framework (LRMF)

Open-ended Category III AIFs offering periodic redemptions face liquidity mismatch risks if investors request large withdrawals during market sell-offs:

Liquidity Defense Architecture:
┌─────────────────────────────────────────────────────────────────────────────────┐
│ 1. Lock-in Periods: Mandatory minimum holding period (e.g., 6 months to 1 year) │
│    prior to allowing unit-holder redemptions.                                   │
├─────────────────────────────────────────────────────────────────────────────────┤
│ 2. Redemption Notice Windows: Mandatory advance written notice (e.g., 30 to 60  │
│    days) required from investors to enable orderly asset liquidation.           │
├─────────────────────────────────────────────────────────────────────────────────┤
│ 3. Redemption Gates: Contractual cap on the maximum aggregate percentage of fund│
│    NAV that can be redeemed on any single redemption date (e.g., max 10% of NAV)│
├─────────────────────────────────────────────────────────────────────────────────┤
│ 4. Exit Loads: Anti-dilution exit charges (e.g., 1% to 3%) credited directly back│
│    to the fund scheme to compensate remaining LPs for market impact costs.      │
└─────────────────────────────────────────────────────────────────────────────────┘

Suspension of Redemptions and Side-Pocketing

• Suspension of Redemptions: In exceptional, systemic market crises where continuous price discovery ceases on exchanges, the Manager (with Trustee approval) may temporarily suspend redemptions to protect non-redeeming investors from forced fire-sales.
• Side-Pocketing: In the event that a portfolio debt security suffers a credit default or sudden rating downgrade to illiquid status, the asset may be segregated into a ring-fenced Side Pocket, allowing the remainder of the portfolio to remain liquid and tradeable.

Termination and Liquidation of Category III Funds

An Alternative Investment Fund scheme is wound up upon the expiry of its stated tenure or upon the occurrence of statutory termination events under Regulation 29:

Winding-Up Trigger Events (Regulation 29):
1. Expiry of the fund tenure disclosed in the PPM (for close-ended schemes).
2. Resolution passed by 75% of unit-holders by value approving winding-up.
3. Trustee determination that winding-up is necessary in the interest of investors.
4. SEBI directive mandating winding-up in the public interest.

The Liquidation Process and the 2024 Dissolution Period Framework

1. Notice to SEBI: Within 1 business day of a winding-up resolution being passed, formal notice must be submitted to SEBI, and no further subscriptions or redemptions can be processed.
2. 1-Year Liquidation Period:
   • The Manager has up to 12 months to orderly liquidate all exchange-traded securities, close out derivative positions, pay off outstanding margin liabilities, and distribute remaining cash pro-rata to unit-holders.
3. The Dissolution Period Framework (SEBI 2024 Reform):
   • Where a close-ended Category III AIF holds unliquidated assets at the end of the 1-year liquidation period, the Manager, with the consent of 75% of unit-holders by value, can enter a Dissolution Period.
   • During the dissolution period, the Manager cannot charge any management fee, and the assets remain ring-fenced until a liquidity event occurs.