23 SEBI Unveils Liquidation Scheme and In-Specie Distribution for AIFs

Key Takeaways:

- AIFs can launch Liquidation Schemes to sell unliquidated investments from expired schemes.

- AIFs can distribute unliquidated investments in-specie to investors upon scheme expiry.

- Consent of 75% investors by value is required for both Liquidation Schemes and in-specie distribution.

- AIFs must arrange bids for at least 25% of unliquidated investments' value and disclose valuations.

- Dissenting investors have the option to exit using the arranged bids.

- Specific valuation and reporting requirements ensure transparency and accurate performance tracking.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has introduced comprehensive guidelines for Alternative Investment Funds (AIFs) to facilitate the liquidation of unliquidated investments upon the expiry of a scheme's tenure. These guidelines provide two distinct options for AIFs: launching a Liquidation Scheme or distributing unliquidated investments directly to investors in-specie.

Under the first option, AIFs can launch a Liquidation Scheme specifically designed to sell the unliquidated investments from an expired scheme. To proceed with this route, the AIF must obtain consent from at least 75% of the investors by value of their investment in the original scheme. Upon receiving the requisite consent, the AIF must arrange a bid for a minimum of 25% of the value of the unliquidated investments.

The AIF is required to disclose the bid value, along with valuations carried out by two independent valuers, to all investors of the original scheme. Dissenting investors who did not consent to selling the unliquidated investments to the Liquidation Scheme will be offered an option to fully exit the original scheme using the arranged 25% bid. After accommodating the dissenting investors' exits, any remaining unsubscribed portion of the bid will be used to provide pro-rata exit opportunities to non-dissenting investors.

Subsequently, the unliquidated investments from the original scheme will be sold to the Liquidation Scheme. For capturing the performance track record and reporting to benchmarking agencies, the value of this sale will be either the bid value (if the 25% bid threshold was met) or one rupee (if the bid threshold was not met).

The second option available to AIFs is the direct distribution of unliquidated investments in-specie to investors upon the expiry of the scheme's tenure. Similar to the Liquidation Scheme route, the AIF must obtain consent from 75% of investors by value. Upon receiving consent, the AIF must arrange a bid for at least 25% of the unliquidated investments' value and disclose the bid value and independent valuations to investors.

Dissenting investors who did not consent to the in-specie distribution will be offered an exit option using the arranged 25% bid. Any remaining unsubscribed portion of the bid will be used to provide pro-rata exits to non-dissenting investors. The unliquidated investments will then be distributed in-specie to the remaining investors.

For both options, the AIF manager is responsible for ensuring compliance with the prescribed procedures and reporting requirements. The value of unliquidated investments sold to the Liquidation Scheme or distributed in-specie will be recognized at either the bid value (if the 25% bid threshold was met) or one rupee (if the bid threshold was not met) for capturing the performance track record and reporting to benchmarking agencies.

FAQs:

Q1: What are the two options available to AIFs for liquidating unliquidated investments upon scheme expiry?

A1: The two options are: (1) launching a Liquidation Scheme to sell the unliquidated investments, or (2) distributing the unliquidated investments directly to investors in-specie.

Q2: What is the minimum investor consent required for both options?

A2: AIFs must obtain consent from at least 75% of investors by value of their investment in the original scheme.

Q3: What is the requirement for arranging bids for unliquidated investments?A3: AIFs must arrange a bid for a minimum of 25% of the value of the unliquidated investments and disclose the bid value and independent valuations to investors.

Q4: How are dissenting investors treated in both options?

A4: Dissenting investors who did not consent to the Liquidation Scheme or in-specie distribution will be offered an option to fully exit the original scheme using the arranged 25% bid.

Q5: How is the value of unliquidated investments recognized for performance tracking and reporting?

A5: The value will be recognized as either the bid value (if the 25% bid threshold was met) or one rupee (if the bid threshold was not met).

Key Precedents:

- SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2024:

Introduced the concepts of "Liquidation Period" and "Liquidation Scheme" for AIFs.

- Regulation 29(9) of AIF Regulations (prior to the Second Amendment):

Allowed AIFs to distribute unliquidated investments in-specie or sell them to a Liquidation Scheme during the Liquidation Period, subject to investor consent.

- SEBI Circular No.: SEBI/HO/AFD/PoD1/CIR/2023/098 dated June 21, 2023:

Provided detailed guidelines for launching Liquidation Schemes and distributing unliquidated investments in-specie, including procedures, valuation requirements, and reporting obligations.

SEBI's introduction of guidelines for Liquidation Schemes and in-specie distribution aims to provide a structured framework for AIFs to liquidate unliquidated investments upon scheme expiry. By outlining specific procedures, valuation requirements, and reporting obligations, SEBI seeks to enhance transparency, investor protection, and accurate performance tracking during the liquidation process.

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Here's AIF Master Circular's verbatim Chapter 23

Chapter 23 - Modalities for launching Liquidation Scheme and for distributing the investments of Alternative Investment Funds (AIFs) in-soecie{58}

Regulation 2(1)(pb) of AIF Regulations, prior to SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2024, states as follows:

‘“liquidation period’ means a period of one year following the expiry of tenure or extended tenure of the scheme for fully liquidating the scheme of an Alternative Investment Fund. ”

Regulation 2(1)(pc) of AIF Regulations, states as follows:

‘“Liquidation scheme’ means a close ended scheme launched by an Alternative Investment Fund only for the purpose of liquidating the unliquidated investments purchased from its scheme, whose tenure has expired. ”

Regulation 29(9) of AIF Regulations, prior to SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2024, states as follows -

“Notwithstanding anything contained in sub-regulation (7), during liquidation period o f a scheme, an Alternative Investment Fund may distribute investments of a scheme which are not sold due to lack of liquidity, in-specie to the investors or sell such investments to a liquidation scheme, after obtaining approval of at least seventy five percent of the investors by value of their investment in the scheme of the Alternative Investment Fund, in the manner and subject to conditions specified by the Board from time to time. Provided that in the absence of consent of unit holders for exercising the options under sub-regulation (9) during liquidation period, such investments of the scheme of the Alternative Investment Fund shall be dealt with in the manner as may be specified by the Board from time to time. ”

In this regard, the following is specified -

23.1. Liquidation Scheme:

23.1.1. During the Liquidation Period of a scheme of an AIF (‘Original Scheme’), if the AIF decides to launch Liquidation Scheme, the AIF shall obtain consent of 75% of investors by value of their investment in the Original Scheme.

23.1.2. The scheme launched by the AIF for this purpose shall contain the words ‘Liquidation Scheme’ in its name.

23.1.3. Upon obtaining the requisite investor consent for launching Liquidation Scheme, the AIF shall arrange bid for a minimum of 25% of the value of the unliquidated investments. The bid shall be arranged for units representing consolidated value of each unliquidated investment of the Original Scheme’s investment portfolio.

23.1.4. The AIF shall disclose the bid value, along with the valuation of the unliquidated investments carried out by two independent valuers, to all the investors of the Original Scheme.

23.1.5. The dissenting investors of the Original Scheme who did not consent to sell the unliquidated investments to the Liquidation Scheme, shall be offered an option to fully exit the Original Scheme out of the 25% bid arranged by the AIF/ manager. After exercising the exit option by aforesaid dissenting investors, any unsubscribed portion of the bid shall be used to provide pro­ rata exit to non-dissenting investors.

23.1.6. If the bidder or its related parties are investors in the Original Scheme, they shall not be provided exit from the Original Scheme out of the bid. [Related party shall have same meaning as provided in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.]

23.1.7. Subsequently, the unliquidated investments of the Original Scheme shall be sold to the Liquidation Scheme. For capturing in the track record of the manager and for reporting to Performance Benchmarking Agencies, the value of such sale shall be -

a. Bid value, if the AIF/ manager arranges bid for a minimum of 25% of the value of unliquidated investments of the Original Scheme.

b. One Rupee, if the AIF/ manager fails to arrange bid for a minimum of 25% of the value of unliquidated investments of the Original Scheme.

23.1.8. Liquidation Scheme shall allot its units to the Original Scheme for purchasing investments from Original Scheme in the manner specified above.

23.1.9. Upon receipt of units of Liquidation Scheme, the Original Scheme shall mandatorily distribute such units of Liquidation Scheme in-specie in lieu of its units issued to investors.

23.1.10. The Liquidation Scheme shall be launched and Original Scheme shall be wound up, prior to the expiry of the Liquidation Period of the Original Scheme.

23.1.11. In terms of Regulation 29A(2) of AIF Regulations, Liquidation Scheme has been provided exemption, inter alia, from the requirement of obtaining SEBI’s comments on the PPM. Accordingly, the tenure of the Liquidation Scheme shall be calculated from the date of filing of PPM with SEBI and such tenure shall not be more than the tenure of the Original Scheme excluding any permissible extension.

23.1.12. Liquidation Scheme shall not extend its tenure or sell its investments to another Liquidation Scheme. Further, Liquidation Period, as defined in Regulation 2(1)(pb) of AIF Regulations, shall not be available to Liquidation Scheme.

23.1.13. If an AIF (viz. A1) has invested in units of another AIF (viz. A2) and the investee AIF (i.e. A2) has launched a Liquidation Scheme, then the investor AIF (i.e. A1) upon expiry of its tenure or extended tenure, shall mandatorily distribute the units of Liquidation Scheme held by it, in-specie to its investors (i.e. investors of A1).

23.1.14. Performance of Liquidation Scheme shall also be reported to Performance Benchmarking Agencies, in terms of Chapter 16 of this Master Circular.

23.1.15. While obtaining the requisite investor consent, manager shall disclose to the investors that the value of the unliquidated investments sold to the Liquidation Scheme shall be in the manner given at para 23.1.7 above, for capturing in the track record of the manager and for reporting to Performance Benchmarking Agencies.

23.2. In specie distribution of unliquidated investments of a scheme

23.2.1. During the Liquidation Period of an Original Scheme of an AIF, if the AIF decides to distribute unliquidated investments in-specie, the AIF shall obtain consent of 75% of investors by value of their investment in the Original Scheme.

23.2.2. Upon obtaining the requisite investor consent for in-specie distribution of unliquidated investments, the AIF shall arrange bid for a minimum of 25% of the value of the unliquidated investments. The bid shall be arranged for units representing consolidated value of each unliquidated investment of the Original Scheme’s investment portfolio.

23.2.3. The AIF shall disclose the bid value along with the valuation of the unliquidated investments carried out by two independent valuers to all the investors of the Original Scheme.

23.2.4. The dissenting investors of the Original Scheme who did not consent to in­ specie distribution, shall be offered an option to fully exit the Original Scheme out of the 25% bid arranged by the AIF/ manager. After exercise of the exit option by aforesaid dissenting investors, any unsubscribed portion of the bid shall be used to provide pro-rata exit to non- dissenting investors.

23.2.5. If the bidder or its related parties are investors in the Original Scheme, they shall not be provided exit from the Original Scheme out of the bid. [Related party shall have same meaning as provided in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.]

23.2.6. Subsequently, the unliquidated investments shall be distributed in-specie. For capturing in the track record of the manager and for reporting to Performance Benchmarking Agencies, the value of such in-specie distribution shall be -

a. Bid value, if the AIF/ manager arranges bid for a minimum of 25% of the value of unliquidated investments of the Original Scheme.

b. One Rupee, if the AIF/ manager fails to arrange bid for a minimum of 25% of the value of unliquidated investments of the Original Scheme.

23.2.7. The in-specie distribution shall be carried out and Original Scheme shall be wound up, prior to the expiry of the Liquidation Period of the Original Scheme.

23.2.8. While obtaining the requisite investor consent, manager shall disclose to the investors that the value of the unliquidated investments distributed in-specie shall be in the manner given at para 23.2.6 above, for capturing in the track record of the manager and for reporting to Performance Benchmarking Agencies.

23.3. Mandatory in-specie distribution of unliquidated investments:

If the AIF fails to obtain requisite investor consent for launch of Liquidation Scheme or in-specie distribution of unliquidated investments, then the unliquidated investments shall be mandatorily distributed to investors in-specie, without requirement of obtaining consent of 75% of investors by value of their investment in the scheme of the AIF. The value of such investments distributed in-specie shall be recognised at One Rupee for capturing in the track record of the manager and for reporting to Performance Benchmarking Agencies. In case any investor not willing to take the in specie distribution of unliquidated investments, such investments shall be written off.

23.4. Responsibility for compliance:

23.4.1. The manager, trustee and key management personnel of AIF and manager shall be responsible for compliance with the procedure prescribed above.

23.4.2. The manager of AIF, upon exercising any of the options mentioned above, shall submit report on compliance with the provisions of this circular on SEBI Intermediary Portal (www.siportal.sebi.gov.in) in the format as specified therein and/or as part of quarterly regulatory reporting to SEBI, as the case may be.

23.4.3. The manager of AIF shall report the value, as specified above, with regard to sale of unliquidated investments to Liquidation Scheme or distribution of unliquidated investments in-specie, to Performance Benchmarking Agencies in a timely manner for the purpose of performance benchmarking. The manager shall also make suitable disclosure with regard to the same in the PPMs of subsequent schemes.

Note:-

{58}SEBI Circular No.: SEBI/HO/AFD/PoD1/CIR/2023/098 dated June 21, 2023