19 Regulating Transitions: An Overview of SEBI's Guidelines on Changes in AIF Manager/Sponsor

Key Takeaways:

- AIFs must obtain prior approval from SEBI for any change in control of the sponsor/manager or change in the sponsor/manager itself.

- A fee equivalent to the registration fee for the AIF's category/sub-category must be paid for such changes.

- The fee is not applicable in certain cases, such as when the manager acquires control of the sponsor or when a sponsor exits in a multi-sponsor AIF.

- The approval process includes provisions for dissenting investors to exit the AIF under specific circumstances.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has introduced a regulatory framework to govern changes in the sponsor, manager, or control of Alternative Investment Funds (AIFs). This move aims to ensure transparency, accountability, and investor protection during such transitions.

Under Regulation 20(13) of the AIF Regulations, AIFs must obtain prior approval from SEBI in case of a change in control of the AIF's sponsor or manager, or a change in the sponsor or manager itself. To facilitate this process, SEBI has mandated the payment of a fee equivalent to the registration fee applicable to the respective category/sub-category of the AIF.

The fee must be paid within 15 days of effecting the proposed change in manager/sponsor or change in control of manager/sponsor. This requirement applies to both new applications and pending applications where none of the AIF's schemes had declared their First Close as of November 17, 2022.

However, the fee is not levied in certain cases involving changes in the sponsor. If the manager is acquiring control of the sponsor or if a sponsor exits in an AIF with multiple sponsors, the fee is waived.

SEBI's approval for such changes is valid for six months from the date of communication. Any change in control of the manager/sponsor or change in the manager/sponsor must comply with the provisions outlined in the AIF Regulations and SEBI circulars, including provisions for dissenting investors to exit the AIF under specific circumstances.

In cases where the change in control of the sponsor and/or manager involves a scheme of arrangement under the Companies Act, 2013, SEBI has streamlined the approval process. AIFs must first file an application with SEBI for an in-principle approval, which is valid for three months. After obtaining the National Company Law Tribunal's (NCLT) order, the applicant must submit the required documents to SEBI within 15 days for final approval.

FAQs

Q1: Why is SEBI mandating approval and fees for changes in AIF sponsors/managers?

A1: SEBI's regulations aim to ensure transparency, accountability, and investor protection during transitions involving changes in the sponsor, manager, or control of AIFs.

Q2: What is the fee applicable for such changes?

A2: AIFs must pay a fee equivalent to the registration fee for their respective category/sub-category when there is a change in control of the manager/sponsor or a change in the manager/sponsor itself.

Q3: Are there any exceptions to the fee requirement?

A3: Yes, the fee is not applicable when the manager acquires control of the sponsor or when a sponsor exits in an AIF with multiple sponsors.

Q4: How long is SEBI's approval valid for such changes?

A4: SEBI's approval for changes in the sponsor, manager, or control is valid for six months from the date of communication.

Q5: What is the process for changes involving a scheme of arrangement under the Companies Act, 2013?

A5: AIFs must first obtain an in-principle approval from SEBI, which is valid for three months. After obtaining the NCLT order, the applicant must submit the required documents to SEBI within 15 days for final approval.

Key Precedents:

- Regulation 20(13) of the AIF Regulations:

This regulation mandates AIFs to obtain prior approval from SEBI in case of a change in control of the sponsor or manager, or a change in the sponsor or manager itself.

- SEBI Circular No. SEBI/HO/AFD-1/PoD/P/CIR/2022/155 dated November 17, 2022:

This circular introduced the requirement for AIFs to pay a fee equivalent to the registration fee for their category/sub-category in case of changes in the sponsor, manager, or control.

- SEBI Circular No. SEBI/HO/IMD-1/DF9/CIR/2022/032 dated March 23, 2022:

This circular streamlined the approval process for changes in control of the sponsor and/or manager involving a scheme of arrangement under the Companies Act, 2013.

The regulations and circulars issued by SEBI aim to ensure transparency, accountability, and investor protection during transitions involving changes in the sponsor, manager, or control of AIFs, while also providing a structured framework for such changes to take place.

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Here's AIF Master Circular's verbatim Chapter 19

Chapter 19 - Change in Sponsor and/or Manager or Change in control of Sponsor and/or Manager of AIF

19.1. Fee for change in control of manager/sponsor or change in manager/sponsor of AIFs{52}:

In terms of Regulation 20(13) of AIF Regulations, in case of change of Sponsor or Manager, or change in control of the AIF, Sponsor or Manager, prior approval from the Board shall be taken by the AIF, subject to levy of fees and any other conditions as may be specified by SEBI from time to time. In this regard, the following is specified:

19.1.1. A fee equivalent to the registration fee applicable to the respective category / sub-category of the AIF, shall be levied in case of change in control of manager/sponsor and in case of change in manager/sponsor. The cost paid towards such fee by manager/sponsor shall not be passed on to the investors of the AIF in any manner.

19.1.2. In case change in control of manager/change of manager and change in control of sponsor/change of sponsor of an AIF is proposed simultaneously, aforesaid fee equivalent to single registration fee shall be levied.

19.1.3. The aforesaid fee shall not be levied in the following cases for change in sponsor or change in control of sponsor:

(i) The manager is acquiring control in or replacing the sponsor and

(ii) Exit of sponsor(s) in case of AIF having multiple sponsors.

19.1.4. The aforesaid fee shall be paid within 15 days of effecting the proposed change in manager/sponsor or change in control of manager/sponsor.

19.1.5. In case of the applications pending with SEBI as on November 17, 2022, for change in control of manager/sponsor or change in manager/sponsor, the requirement of fee shall be applicable only in those applications where none of the schemes of AIFs managed/sponsored by manager/sponsor had declared their First Close.

19.1.6.The prior approval granted by SEBI in this regard shall be valid for a period of 6 months from the date of SEBI communication for the approval.

19.1.7. Any change in control of manager/sponsor or change in manager/sponsor shall be carried out in compliance with provisions specified at para 2.5.4 and 2.5.5 above.

19.2. Change in control of Sponsor and/or Manager of AIF involving scheme of arrangement under Companies Act, 2013{53}

To streamline the process of providing approval to the proposed change in control of the Sponsor and/or Manager of the AIF involving scheme of arrangement which needs sanction of National Company Law Tribunal (“NCLT”) in terms of the provisions of the Companies Act, 2013, following is specified:

19.2.1. The application seeking approval for the proposed change in control of the Sponsor and/or Manager of the AIF under Regulation 20(13) of AIF Regulations shall be filed with SEBI prior to filing the application with the NCLT;

19.2.2. Upon being satisfied with compliance of the applicable regulatory requirements, in-principle approval will be granted by SEBI;

19.2.3. The validity of such in-principle approval shall be three months from the date of issuance, within which the relevant application shall be made to NCLT;

19.2.4. Within 15 days from the date of order of NCLT, applicant shall submit the following documents to SEBI for final approval:

(i) Application for the final approval;

(ii) Copy of the NCLT Order approving the scheme;

(iii) Copy of the approved scheme;

(iv) Statement explaining modifications, if any, in the approved scheme vis-a-vis the draft scheme and the reasons for the same; and

(v) Details of compliance with the conditions/ observations mentioned in the in-principle approval provided by SEBI.

Note:-

{52}SEBI circular no. SEBI/HO/AFD-1/PoD/P/CIR/2022/155 dated November 17, 2022

{53}SEBI Circular No. SEBI/HQ/IMD-1/DF9/CIR/2022/032 dated March 23, 2022