The move aims to address concerns over investment restrictions for Category II Alternative Investment Funds (AIFs) following recent amendments to the Listing Obligations and Disclosure Requirements (LODR) regulations.

Currently, Category II AIFs are mandated to invest primarily in unlisted securities. However, SEBI's recent rule change under Regulation 62A of the LODR Regulations requires that any non-convertible debt securities (NCDs) issued on or after January 1, 2024, must be listed. This has raised concerns within the AIF industry, as it could significantly reduce the availability of unlisted debt securities for investment.

According to SEBI, 192 Category II AIF schemes currently invest over 50% of their portfolios in unlisted debt. The shrinking universe of unlisted securities could impact these funds' ability to meet regulatory requirements. SEBI acknowledges that this situation is beyond the control of AIFs, as issuers may be required to list their debt securities at a later stage.

To address this issue, SEBI has proposed allowing Category II AIFs to meet their 50% investment threshold by including listed debt securities rated ‘A’ or below. The Alternative Investment Policy Advisory Committee (AIPAC) also suggested exploring privately placed listed debt securities, though SEBI has not incorporated this recommendation.