Capital markets watchdog, The Securities and Exchange Board of India (SEBI) has announced significant changes to regulations governing Alternative Investment Funds (AIFs), providing new options for managing unsold investments at the end of their investment period.
These amendments, effective April 25, 2024, aim to offer more flexibility to AIFs and enhance investor protection.
SEBI has introduced a "dissolution period," an additional timeframe for AIFs to liquidate remaining unsold assets after their initial selling period ends. To initiate this dissolution period, AIFs must obtain approval from 75% of their investors by value. During this period, AIFs must attempt to secure bids for at least 25% of the value of their unsold investments. If successful, investors wishing to exit can do so based on these bids. If sufficient bids are not obtained, AIFs can still proceed with the dissolution period given the necessary investor consent.
If an AIF cannot secure the required investor consent to either enter the dissolution period or distribute unsold assets directly to investors (in-specie distribution), they must distribute these assets in-specie without further approval. This means investors receive the actual investments instead of cash. During the dissolution period, AIF managers are prohibited from charging management fees, and their performance will be separately reported to maintain transparency.
Additionally, SEBI has granted a one-time extension for AIFs whose liquidation periods have expired or are about to expire. These funds now have until April 24, 2025, to manage their unsold assets, provided there are no unresolved investor complaints.
SEBI has also ceased the launch of new liquidation schemes after the notification of these amendments. Existing schemes will continue under current rules until they are fully wound up.
Further details include:
1. AIFs must arrange bids for at least 25% of the value of unsold investments before seeking investor consent.
2. Disclosure requirements to investors include the proposed duration of the dissolution period, details of unsold investments, and valuation information.
3. If the AIF secures the required bids, dissenting investors can fully exit based on the 25% bid arranged. Non-dissenting investors can opt for pro-rata exit if any bid portion remains unsubscribed.
4. If the AIF fails to secure the necessary bids, they can still opt for the dissolution period with 75% investor approval.
5. Performance during the dissolution period will be reported separately to Performance Benchmarking Agencies.
6. If unsold investments remain at the end of the dissolution period, they must be distributed in-specie i.e directly to investors
These regulatory updates are designed to enhance the efficiency of the liquidation process and ensure better protection for investors.
More detailed information is available on SEBI’s official website, link here.
