The placement memorandum (PPM) is the promise an Alternative Investment Fund (AIF) makes to its investors: what it will invest in, within which limits, at what cost and under which governance arrangements. SEBI requires an annual audit to test whether the fund actually kept that promise. In practice, the audit of compliance with the terms of the PPM is sometimes treated as a report to be filed and forgotten, when its real purpose is to find deviations and fix them.
This article explains who must carry out a PPM audit, the timeline and recipients of the report, the exemptions after the 2025 amendments, how corrective action should be handled, and a practical checklist for investment managers, trustees and auditors.
Key points at a glance
- An audit of compliance with the terms of the PPM must be carried out at the end of each financial year.
- Findings, along with corrective steps, go to the trustee or the AIF's board or designated partners, the manager's board or designated partners, and SEBI, within 6 months of the year-end.
- Large Value Funds for accredited investors (minimum ₹25 crore per investor since November 2025, earlier ₹70 crore) are not required to carry out a PPM audit.
- Angel Funds need a PPM audit only if their total investments at cost exceed ₹100 crore (from FY 2025-26).
- An AIF that has not raised any funds submits a Chartered Accountant's certificate to that effect instead.
What is a PPM audit in an AIF?
A PPM audit is an independent review of whether the fund's actual operations during the year matched the disclosures and commitments in its placement memorandum and related fund documents. The requirement is contained in the SEBI Master Circular for AIFs (currently the Master Circular dated 3 June 2026) issued under the SEBI (Alternative Investment Funds) Regulations, 2012.
It is different from the statutory audit of the fund's financial statements. The statutory audit asks whether the accounts are true and fair; the PPM audit asks whether the fund did what it told investors it would do.
What does a PPM audit cover?
The scope follows the PPM itself. Typical areas include:
- Investment strategy and objective: whether investments fall within the stated strategy, sectors and instruments.
- Investment limits: concentration limits per investee company, limits on listed or unlisted securities, overseas investment limits, and any tighter limits in the PPM.
- Fees and expenses: management fee, carried interest, hurdle rate, and expenses charged to the scheme.
- Drawdowns and distributions: whether capital calls and distributions followed the agreed waterfall and pro-rata rights.
- Governance: investment committee approvals, conflict of interest handling, related party transactions and valuation policy.
- Investor matters: on-boarding, minimum investment, disclosures and reporting to investors.
- Regulatory conditions: tenure, borrowing, co-investment, dematerialisation of units and investments, and filing of changes.
Timeline and recipients of the PPM audit report
| Item | Requirement |
|---|---|
| Frequency | At the end of each financial year |
| Deadline | Within 6 months from the end of the financial year (30 September for a March year-end) |
| Report content | Findings of the audit along with corrective steps, if any |
| Recipients | Trustee (or board of directors or designated partners of the AIF), board of directors or designated partners of the manager, and SEBI |
| AIF with no funds raised | Certificate from a Chartered Accountant that no funds were raised, within the same 6 months |
Which AIFs are exempt from the PPM audit?
Large Value Funds for accredited investors
Schemes in which each investor is an accredited investor committing at least ₹25 crore are Large Value Funds. The threshold was reduced from ₹70 crore by the SEBI (AIF) (Third Amendment) Regulations, 2025, notified on 18 November 2025. PPM audit is not mandatory for such schemes, reflecting the view that large, accredited investors negotiate and monitor terms themselves.
Angel Funds
After the September 2025 overhaul, Angel Funds must carry out the annual PPM audit only if their total investments at cost exceed ₹100 crore, starting from FY 2025-26.
AIFs that have not raised funds
The audit does not apply to an AIF that has not raised any funds from investors, but a Chartered Accountant's certificate confirming this must be submitted.
Corrective action: the part that matters most
SEBI asks for the findings along with corrective steps. A report that lists deviations without a plan does not meet the purpose. Where deviations are found, the following sequence works in practice:
- Identify and classify each deviation: breach of a regulatory limit, breach of a PPM term that is stricter than the regulation, or a disclosure gap.
- Assess impact on investors, on fees charged and on the fund's regulatory position.
- Define corrective steps with owners and timelines, for example rebalancing a portfolio, refunding excess fees or amending a process.
- Communicate the findings and steps to the trustee, the manager's board and SEBI, and to investors where the PPM or the nature of the deviation requires it.
- Strengthen controls so the deviation does not recur, and verify closure in the next audit.
Illustrative example
Consider a Category II AIF whose PPM limits investment in any single investee company to 15% of investable funds, which is stricter than the regulatory limit of 25%. During the year, a follow-on investment takes one holding to 18%.
- The PPM audit identifies the breach of the PPM limit, even though the regulatory limit was not crossed.
- The manager records a corrective plan, such as reducing the exposure within a defined period or, if the PPM permits, obtaining the required investor consent.
- Investors and the trustee are informed, and the investment committee approval process is amended to test PPM limits before every follow-on.
Practical point: Keep a running deviation register during the year rather than waiting for the auditor. Deviations found and corrected in real time show a working compliance culture and make the annual report shorter and cleaner.
Common gaps seen in PPM audits
- Expenses charged to the scheme that are not listed in the PPM, or exceed a disclosed cap.
- Management fee computed on a base different from the one in the PPM.
- Investment committee approvals missing or recorded after the investment.
- Changes to the PPM made during the year but not consolidated and intimated to SEBI and investors within one month of year-end.
- Valuation not carried out in the manner and frequency disclosed.
Practical checklist for managers and trustees
- Prepare a PPM compliance matrix listing every commitment in the PPM and its evidence.
- Appoint the auditor early enough to complete the work well before 30 September.
- Maintain a deviation register with corrective action and closure dates.
- Ensure the report is placed before the trustee and the manager's board and filed with SEBI within 6 months.
- For LVFs and Angel Funds, record the basis of exemption each year (investor commitments, or total investments below ₹100 crore).
- For schemes without funds, obtain the CA certificate on time.
Frequently Asked Questions on PPM Audit in AIFs
What is the due date for the PPM audit of an AIF?
The audit is done at the end of each financial year, and the findings with corrective steps must be communicated to the trustee, the manager's board and SEBI within 6 months of the year-end.
Who receives the PPM audit report?
The trustee or the board or designated partners of the AIF, the board or designated partners of the manager, and SEBI.
Are Large Value Funds exempt from PPM audit?
Yes. Large Value Funds for accredited investors, where each investor commits at least ₹25 crore, are not required to carry out a PPM audit.
Do Angel Funds need a PPM audit?
Only if total investments at cost exceed ₹100 crore, starting from FY 2025-26, under the revised Angel Fund framework.
What if an AIF has not raised any funds?
It does not need a PPM audit but must submit a Chartered Accountant's certificate stating that no funds were raised, within 6 months of the year-end.
Is the PPM audit the same as the statutory audit?
No. The statutory audit covers the financial statements; the PPM audit tests whether operations complied with the terms of the PPM.
Conclusion
The PPM audit is SEBI's annual check that an AIF's practice matches its disclosures. Its value lies less in the list of deviations than in the corrective steps and the control improvements that follow.
With the 2025 relaxations for Large Value Funds and Angel Funds, managers should also confirm each year whether the audit applies, and keep evidence of the basis for any exemption.
This article is intended for general information and knowledge sharing only and does not constitute professional advice or solicitation of any kind. Provisions are summarised as of September 2026. Readers should refer to the relevant provisions, regulations and judicial pronouncements for their specific facts.