SEBI Proposes Relaxation In Norms For AIFs To Deal With Unliquidated Investments

The Securities and Exchange Board of India (SEBI) has proposed relaxation in norms to help alternate investment firms (AIFs) and venture capital funds (VCFs) in dealing with unliquidated investments of their schemes beyond their tenure expiry.

In a new consultation paper, the markets regulator has proposed that AIFs be allowed a dissolution period post the completion of their scheme’s tenure to deal with unliquidated investments, without the requirement of launching liquidation scheme for this purpose.  

The paper has also proposed providing one-time flexibility to schemes of AIFs whose liquidation period has expired to deal with their unliquidated investments.

 The development comes months after the market regulator amended the AlF Regulations to provide flexibility to such funds in dealing with investments of their original schemes, which are not sold due to lack of liquidity during the winding-up process. The flexibility options included either selling such investments to a new scheme of the same AIF, also known as the Liquidation Scheme, or distributing such unliquidated investments in-specie to investors.

Currently, the option to launch liquidation scheme is available only to those schemes of AIFs which are already under the liquidation period – the period of one year following the expiry of tenure or extended tenure of the scheme for fully liquidating the scheme.

However, SEBI received representations from stakeholders of the AIF industry highlighting certain concerns. The discussion paper has been released to address these concerns.

Meanwhile, the market regulator also noted that while providing such flexibility to AlFs, it must also be ensured that such an option doesn’t become a means to delay proper recognition and disclosure of true asset quality, asset liquidity, and performance by AlFs and their managers.

The paper said that the liquidation schemes that have already been launched by AIFs will continue to follow the existing norms. 

On the other hand, SEBI has also proposed extending the flexibility of the dissolution period to VCFs through migration to the AIF regime.

In terms of the VCF Regulations, VCFs are required to liquidate their investments within three months from the expiry of their tenure, whereas AIF Regulations provide AlFs a liquidation period of 12 months for the said purpose.

“Thus, it may be appropriate to provide the same duration to VCFs also for liquidating their investments,” SEBI said in the consultation paper.

“…it is felt appropriate that a new framework may be specified to facilitate VCFs to migrate into AIF Regulations, so that the proposed flexibility of Liquidation Period and the flexibility of dealing with unliquidated investments by opting for Dissolution Period / Process, may be availed by VCFs,” it added.

The market regulator has sought comments and suggestions on the draft paper till February 2, 2024.

It is pertinent to note that in the recent past SEBI has made or proposed multiple changes pertaining to AIF and VCF norms. A few months back, SEBI issued a circular directing AIFs with a corpus of INR 500 Cr and above to dematerialise their units by October 31, 2023.

Other AIFs, with a corpus of less than INR 500 Cr, were given time till April 30, 2024 to dematerialise their units.

Last year, the market regulator also overhauled the quarterly reporting format for AIFs to streamline compliance. 

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