An anchor investor asks for a lower management fee and a right to exit early. The manager agrees and adds a clause to that investor's contribution agreement, while the Private Placement Memorandum (PPM) shown to everyone else stays unchanged. The deal closes, but the fund now carries a compliance problem. This article explains SEBI's rule that the contribution agreement must be aligned with the PPM and cannot go beyond it, where mismatches usually creep in, and how differential rights can be offered lawfully.
SEBI's Master Circular for AIFs requires the contribution or subscription agreement to be aligned with the terms of the PPM and not go beyond them. The agreement operationalises the PPM; it cannot add fees, rights or conditions the PPM does not disclose. Differential rights are permitted only within the pari-passu framework under Regulation 20(22), with AI-only funds exempt subject to conditions.
What does SEBI say about contribution agreements and the PPM?
Among the conditions for fund raising, the SEBI Master Circular for AIFs (reissued on 3 June 2026) requires managers to ensure that the terms of the contribution or subscription agreement are aligned with the terms of the PPM and do not go beyond them. The same chapter requires the PPM to be given to investors before they commit, with an acknowledgement obtained.
The logic is straightforward. The PPM is the disclosure document filed with SEBI and reviewed before launch. Investors decide on the basis of it. The contribution agreement is the contract that binds the investor to fund the commitment. If the contract can rewrite the disclosure, the disclosure loses its value.
The rule also protects the manager. When every investor signs the same form, derived from the same PPM, the manager can administer drawdowns, fees and distributions uniformly, and the trustee, auditor and PPM auditor can test compliance against one set of terms rather than dozens of negotiated variants.
The agreement may add detail needed to execute the commitment (bank details, drawdown mechanics, notices, KYC representations). It may not change economics, rights or obligations that the PPM sets out, or add new ones that are not disclosed in it.
Where do contribution agreements usually drift from the PPM?
Mismatches are rarely deliberate. They arise because the PPM and the fund documents are drafted at different times, by different advisers, and then negotiated investor by investor.
| Area | Typical mismatch | Why it matters |
|---|---|---|
| Fees and expenses | A fee rate, fee base or expense head in the agreement that is not in the PPM | Investors bear costs they were not told about |
| Distribution waterfall | Different hurdle, catch-up or carry split | Changes who gets paid first and how much |
| Drawdown and default | Harsher or softer default penalties for some investors | Unequal treatment and disputes on default |
| Exit and transfer | Early exit or transfer rights for one investor | Can prejudice remaining investors' liquidity |
| Indemnity and liability | Wider indemnity for the manager than the PPM states | Shifts risk to investors without disclosure |
| Information rights | Portfolio-level information to one investor only | Information asymmetry among investors |
Even minor wording differences can matter when a dispute arises at exit or winding up, because each side will rely on the document that suits it.
How do pro-rata and pari-passu rights limit side arrangements?
Since the amendments effective 18 November 2024, the Regulations contain two investor-equality rules:
- Regulation 20(21) – pro-rata rights: each investor's right in every investment of the scheme, and in distribution of proceeds from it, is pro-rata to the investor's commitment, subject to limited exceptions such as defaulting or excused investors.
- Regulation 20(22) – pari-passu rights: other rights of investors must be pari-passu, subject to differential rights offered in the manner SEBI specifies, without affecting the interests of other investors.
SEBI's circular of 13 December 2024 set principles for differential rights and asked the Standard Setting Forum for AIFs to frame a list of permitted differential rights, which it issued as implementation standards in January 2025. So a side letter is not automatically unlawful, but it must fall within that framework and be disclosed.
Accredited investor-only (AI-only) funds, including Large Value Funds, are exempt from the pari-passu requirement under Regulation 20(22), provided this is disclosed in the PPM and each accredited investor gives the required undertaking at onboarding. The November 2025 amendments extended this exemption from Large Value Funds to all AI-only funds.
Are side letters still allowed?
Side letters remain common, especially with anchor, institutional and foreign investors. The question is not whether a side letter exists, but whether its content is permissible and disclosed. A practical test:
- Is the right on the permitted list of differential rights, or is it purely administrative (for example, tax reporting formats or regulatory confirmations the investor needs)?
- Does it affect other investors' economics or rights? If yes, it is unlikely to be permitted outside an AI-only fund.
- Is the existence and nature of the differential right disclosed as the framework requires?
- Is it consistent with the PPM, or does the PPM need to be updated and the change intimated to SEBI?
If a negotiated term amounts to a change in the PPM itself, follow the PPM change process. Where it is a material change, investors may need to be offered an exit. See our guides on material changes in AIFs and annual intimation of PPM changes.
Illustrative example: a fee discount for an anchor investor
A Category II scheme's PPM states a management fee of 2% a year on commitments for all investors. An anchor committing ₹50 crore negotiates 1.5%. The manager inserts this only in the anchor's contribution agreement.
The agreement now goes beyond the PPM, and the anchor receives a right that other investors did not know about. Correct approaches include disclosing a fee class structure for anchor commitments in the PPM before launch, or checking whether the discount fits within the permitted differential rights framework and making the required disclosure. Simply editing one agreement is not one of them.
If the arrangement is discovered after the fact, the manager should document it, assess whether other investors are affected, consider corrective disclosure, and report it through the compliance test report and PPM audit process.
Contribution agreement review checklist for managers
- Use one master form. Prepare a single contribution agreement template derived from the final filed PPM.
- Cross-reference. Map each economic clause (fees, expenses, waterfall, hurdle, carry, default) to the PPM paragraph it reflects.
- Track deviations. Keep a register of every negotiated change and side letter, with the reason and the compliance view.
- Test against Regulation 20(21) and 20(22). Check each deviation against pro-rata and pari-passu requirements and the permitted differential rights list.
- Disclose. Make the required disclosures of differential rights to investors.
- Update the PPM when needed. Where a term is not covered by the PPM, update it through the proper process instead of the agreement.
- Audit. Include agreement-to-PPM consistency in the annual PPM audit sample.
Frequently asked questions
Can a contribution agreement contain terms not in the PPM?
It can contain operational detail needed to execute the commitment. It should not add or change fees, rights, obligations or investor protections that the PPM sets out, because SEBI requires the agreement to be aligned with the PPM and not go beyond it.
What happens if a contribution agreement conflicts with the PPM?
It is a compliance deviation that can lead to unequal treatment and disputes. The manager should correct it, assess the effect on other investors, make any required disclosure and report it through the compliance test report and PPM audit.
Are side letters prohibited for AIFs?
No. Differential rights can be offered within the framework under Regulation 20(22), based on the permitted list issued by the Standard Setting Forum for AIFs, provided they do not affect other investors and are disclosed.
Do pari-passu rules apply to accredited investor-only funds?
AI-only funds, including Large Value Funds, are exempt from Regulation 20(22) if the exemption is disclosed in the PPM and each accredited investor provides the required undertaking at onboarding.
Who is responsible for keeping fund documents consistent?
The manager is responsible for fund raising and investor documentation, and the trustee or sponsor oversees compliance. In practice, legal advisers draft the documents, but the compliance officer should sign off on consistency before execution.
Conclusion
A contribution agreement is an execution document, not a second chance to negotiate the fund. When it mirrors the PPM, investors know what they signed up for and disputes at exit become far less likely. Where an investor genuinely needs a different term, the route is through the PPM or the permitted differential rights framework, with disclosure, never through quiet edits to one agreement.
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H K Davra & Co. supports AIF managers with SEBI compliance, PPM audits, CA certifications and investor reporting.
Talk to usThis article is for general information only and does not constitute professional advice or solicitation. Examples are illustrative. Provisions are summarised as of October 2026. Please refer to the relevant provisions and seek advice on your specific facts.