SEBI Proposes Lifeline for AIFs and VCFs to Manage Unliquidated Investments on Jan 12 2024

The Problem and Proposal

The Alternative Investment Fund (AIF) industry in India has been growing rapidly, attracting investors seeking diversified investment opportunities. However, as these funds approach the end of their tenure, they often face challenges in liquidating all their investments due to market conditions or lack of liquidity. To address this issue, SEBI has proposed a comprehensive framework that aims to provide flexibility to AIFs and Venture Capital Funds (VCFs) in managing their unliquidated investments.

Two Lifelines

Under the proposed framework, AIFs would have the option to either launch a new scheme, called a “Liquidation Scheme,” to hold and sell the unliquidated investments, or opt for a “Dissolution Period/Process.” The latter would allow the existing scheme to continue beyond its original tenure for a specified period, solely for the purpose of liquidating the remaining investments.

Conditions before entering Dissolution Period

To ensure transparency and accountability, the proposal mandates that AIFs obtain consent from at least 75% of their investors by value before entering the Dissolution Period/Process. Additionally, the AIF must arrange bids for a minimum of 25% of the value of the unliquidated investments, with the bid value serving as the recorded value for performance reporting purposes.

VCF can migrate

Recognizing the unique challenges faced by VCFs, SEBI has proposed a separate framework to facilitate their migration to the AIF regime. This would enable VCFs to benefit from the proposed flexibility while retaining certain existing flexibilities under the VCF Regulations. The migration process aims to be smooth and cost-effective, with SEBI issuing fresh registration certificates to migrated VCFs without any additional fees.

Lifeline for violators

The consultation paper also addresses the concerns of VCFs operating beyond their disclosed tenure, which is a violation of the VCF Regulations. SEBI proposes a one-time Liquidation Period for such VCFs, during which they can either fully liquidate their investments, distribute them in-specie, or opt for the Dissolution Period/Process after migrating to the AIF regime.

Throughout the Dissolution Period/Process, AIFs and migrated VCFs would be subject to enhanced governance and disclosure requirements, ensuring transparency and investor protection. This includes provisions related to code of conduct, conflict of interest management, valuation norms, and reporting obligations.

By proposing these measures on Jan 12 2024, SEBI aims to strike a balance between providing flexibility to AIFs and VCFs in managing their unliquidated investments and maintaining the integrity and trust in the alternative investment ecosystem.

FAQs:

Q1: What is the purpose of the proposed framework?

A1: The proposed framework aims to provide flexibility to AIFs and VCFs in dealing with unliquidated investments after the expiry of their tenure, while ensuring transparency and proper recognition of asset quality and fund performance.

Q2: How does the Dissolution Period/Process work for AIFs?

A2: During the Dissolution Period/Process, the existing scheme of an AIF can continue beyond its original tenure for a specified period, solely for the purpose of liquidating the remaining investments. The AIF must obtain consent from at least 75% of its investors by value and arrange bids for a minimum of 25% of the value of the unliquidated investments.

Q3: What are the benefits of VCFs migrating to the AIF regime?

A3: By migrating to the AIF regime, VCFs can benefit from the proposed flexibility of the Dissolution Period/Process while retaining certain existing flexibilities under the VCF Regulations. The migration process aims to be smooth and cost-effective, without any additional fees.

Q4: How will SEBI address VCFs operating beyond their disclosed tenure?

A4: SEBI proposes a one-time Liquidation Period for VCFs operating beyond their disclosed tenure, during which they can either fully liquidate their investments, distribute them in-specie, or opt for the Dissolution Period/Process after migrating to the AIF regime.

Q5: What are the enhanced governance and disclosure requirements for AIFs and migrated VCFs during the Dissolution Period/Process?

A5: During the Dissolution Period/Process, AIFs and migrated VCFs will be subject to enhanced governance and disclosure requirements, including provisions related to code of conduct, conflict of interest management, valuation norms, and reporting obligations, to ensure transparency and investor protection.