In a significant move aimed at ensuring fair and equitable treatment of investors in Alternative Investment Funds (AIFs), the Securities and Exchange Board of India (SEBI) has clarified the regulatory intent regarding pro-rata and pari-passu rights. 

At its 207th board meeting, SEBI approved proposals to specify in the AIF Regulations that investors' rights in investments and distributions from an AIF scheme should be proportional to their commitment in the scheme. Moreover, it was decided that subject to certain exemptions, all investors' rights should be treated equally (pari-passu).

To provide operational flexibility to AIFs, SEBI has permitted entities such as government-owned or controlled entities, multilateral development financial institutions, and State Industrial Development Corporations to subscribe to junior classes of units with fewer rights. However, existing AIF schemes that have granted priority in distribution to certain investor classes will not be allowed to raise fresh commitments or invest in new companies.

To further enhance operational flexibility, SEBI has approved allowing AIFs to offer specified differential rights to certain investors without affecting the rights of others. The Standard Setting Forum for AIFs will formulate these permissible terms for offering such differential rights in consultation with SEBI.

In addition, SEBI has granted an exemption to Large Value Funds from ensuring pari-passu rights among their investors, subject to a waiver from each investor.

This move by SEBI is expected to bring greater clarity and transparency to the AIF space, fostering investor confidence and promoting fair practices within the industry.