AIFs Face SEBI Notice For Not Adhering To Tenure Rules

The Securities and Exchange Board of India (SEBI) has sent notices to several Alternative Investment Funds (AIFs) for alleged violation of specified tenure rules on their investment vehicles.

The market watchdog sent notices to private-equity and venture capital funds, registered with SEBI as AIFs, which were not able to follow the timeline of fund tenures specified in their respective offer documents while garnering the corpus, ET reported.

Many of the early funds that floated around 2013-14, were scheduled to close operations by 2021-2022.

While a fund can extend its lifespan by up to two years, two-thirds of investors in such a fund have to give their consent for tenure extension, according to rules. Once an AIF’s life cycle is complete, the AIF manager is required to liquidate all the holdings and distribute the proceeds among the investors within a year.

Although SEBI has not provided any exemptions yet, some of these funds have extended the tenures. The market regulator also observed that the fund managers concerned had unilaterally extended the tenure of the funds without informing.

“The rules clearly say the winding up must be completed within one year, and Sebi is well within its rights to initiate action against them,” a source said as quoted in the report.

“However, this is like a double whammy for the funds that expected SEBI to provide them some leeway. Instead, they have now received SEBI notices,” the source added.

As per the report, SEBI is taking this move to ensure protection of investor interests and transparency standards in a wealth-management segment aimed at savvy and deep-pocketed savers.

Because of the poor liquidity conditions in the market, PE and VC funds investing in unlisted companies, such as startups, were unable to liquidate their holdings within the one-year timeline. However, some funds were able to find willing buyers but at significantly lower valuations.

The market watchdog has already asked the respective fund managers to explain why they unilaterally extended tenures of the funds.

The market regulator has been on a spree to overhaul regulations lately. Earlier in December, SEBI reportedly questioned old VC funds about their term extensions beyond their lifespan.

SEBI asked these funds to share information about the number of extensions taken for various schemes, the tenure of the said schemes as stated in the private placement memorandum and the deadline for exiting all investments.

It is to be noted that while AIFs may extend life by two years with investors’ consent, there are no binding deadlines for old VCFs (under 1996 regulations).

AIFs are private investment vehicles that pool funds from investors to deploy such investments in private equity, angel funds, and venture capital funds, among others. According to SEBI, fund managers for AIFs raised INR 6.41 Lakh Cr across categories till the end of June 2022.