SEBI Issues Borrowing Guidelines For Category-I & II AIFs

The Securities and Exchange Board of India (SEBI) has issued guidelines for borrowing by Category-I and Category-II alternative investment funds (AIFs). 

Under the new rules, the AIFs will be allowed to avail loans to meet temporary funding needs and day-to-day operational requirements for a period of up to 30 days. The new mandates also cap the number of times that AIFs can borrow in a year at four and up to 10% of its total investible funds.

“The regulator has capped borrowings to 10% of investible funds, or 20% of drawdown value, which is the amount called from investors for making  investments in  investee companies,” SEBI added.

The market regulator has also mandated that the information about leveraging ought to be disclosed to investors of the AIFs.

“The borrowing could be done only in case of emergency and as a last recourse, when the investment opportunity is imminent to be closed and the drawdown amount from investor(s) has not been received by the AIF before the date of investment, in spite of best efforts by manager to obtain the drawdown amount from the delaying investor(s),” read the guidelines.

With this, the market regulator aims to offer operational flexibility to the AIFs while enabling ease of doing business. 

Additionally, the market regulator added, “The amount borrowed shall not exceed 20% of the investment proposed to be made in the investee company, or 10% of the investable funds of the scheme of AIF, or the commitment pending to be drawn down from investors other than the investor(s) who has failed to provide the drawdown amount, whichever is lower”.

The guidelines noted that the cost of such a borrowing will be chargeable only to the investors who have failed to provide the drawdown amount for making investments. It also added that the flexibility of borrowing to meet shortfall in drawdown amount cannot be used as a means to provide different drawdown timelines to investors.

Additionally, the AIF manager will be mandated to disclose the details with respect to the amount borrowed, terms of borrowing and repayment to all the investors of the scheme on a periodic basis.

While noting that all Category-I & II AIFs will be required to maintain a 30 day “cooling-off” period between two periods of borrowing, SEBI also announced that the maximum permissible limit for extension of tenure for large value funds (LVFs) could extend up to five years subject to the approval of two-thirds of the unit holders (by value).

The new guidelines are expected to have  direct bearing on Indian startups as venture capital (VC) firms primarily float AIFs to invest in new-age tech companies. 

For the uninitiated, an AIF is a fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors for investing it in accordance with a defined investment policy for the benefit of its investors.  

AIFs span three categories – Category-I, II and III. While Category-I AIFs include venture capital SME funds, the third category encompasses funds which use complex strategies for investments in listed and unlisted derivatives.

Meanwhile, Category-II AIFs fall in neither of the two categories. Funds such as real estate funds, private equity funds, and funds for distressed assets fall under this category.

The latest circular is expected to enable AIFs to streamline their operations, which, in turn, could have a trickle-down effect and spur funding for local startups. 

In the past five years, the Indian AIF sector has surged by more than 70%, surpassing the growth rates of mutual funds and portfolio management services.