Pro-Rata Rule Breach: SEBI Issues Settlement Order as Modulus Alternatives Investment Managers Rectifies AIF Compliance Violation

Pro-Rata Rule Breach: SEBI Issues Settlement Order as Modulus Alternatives Investment Managers Rectifies AIF Compliance Violation​

The Securities and Exchange Board of India (SEBI) has released a formal Settlement Order concerning Modulus Alternatives Investment Managers Limited. The order addresses an alleged violation regarding the maintenance of pro-rata continuing interest under the regulations governing Alternative Investment Funds (AIF).

The settlement proceedings were initiated after SEBI examined the Quarterly Activity Reports of India Credit Opportunities Fund II, which is managed by Modulus Alternatives Investment Managers Limited. This move underscores regulatory vigilance concerning internal fund governance and capital allocation adherence.

Violation of Pro-Rata Continuing Interest in AIF Operations​

The core issue relates to Regulation 10(d) of the SEBI (Alternative Investment Funds) Regulations, 2012, read with clause 11.1.2 of the Master Circular for Alternative Investment Funds dated May 07, 2024. This regulation requires that the continuing interest criteria be maintained pro-rata to the amount of funds raised net from other investors in the AIF.

SEBI's examination revealed discrepancies in the drawdowns made by the Investment Manager compared to those of other investors within the fund structure. The violation was identified based on the Quarterly Activity Reports for June 2024 and prior periods.

Analysis of Drawdown Imbalance​

The review indicated that the percentage of the Investment Manager’s drawdown against its commitment was less than that achieved by other investors across specific timeframes. This finding led to the determination that the Investment Manager violated Regulation 10(d) for a period spanning August 24, 2023, until March 27, 2025.

As documented in SEBI's records, during these periods, while other investors achieved significant drawdown percentages (reaching up to 80.69% by October 09, 2024), the Investment Manager’s commitment fulfillment lagged behind proportional standards. The company later rectified this non-compliance in the quarter ending March, 2025.

Resolution and Settling of Enforcement Proceedings​

The Applicant subsequently filed a settlement application with SEBI to resolve the potential enforcement proceedings related to these alleged violations. Following deliberation by SEBI’s Internal Committee (IC) on March 11, 2026, terms were deliberated for settlement.

The High Powered Advisory Committee (HPAC), in its meeting on March 25, 2026, considered the proposed terms and recommended a resolution pathway to the matter. This process culminated in the final approval of the case by SEBI’s Panel of Whole Time Members on May 11, 2026.

Final Settlement Terms Reached with SEBI​

SEBI has officially ordered that any enforcement action initiated for the violations related to pro-rata continuing interest shall be settled based on specific terms. The finalized settlement amount determined by the Internal Committee was ₹10,87,500/- (Rupees Ten Lakhs Eighty-Seven Thousand Five Hundred only).

The order specifies that SEBI shall not initiate any enforcement action against the Applicant for these violations provided the settlement is executed. The Settlement Order came into force with immediate effect upon issuance on August 04, 2026.

SEBI further maintained that this settlement does not prejudice its right to take appropriate action if it later finds that any representation made by the Applicant was untrue or that the Applicant breached any undertakings filed during the proceedings.