The Securities and Exchange Board of India (SEBI) has issued a circular on December 13, 2024, to enhance investor rights in Alternative Investment Funds (AIFs). These guidelines focus on ensuring transparency and equitable treatment in pro-rata and pari-passu rights for investors.

Pro-Rata Rights

Under Regulation 20(21), investors must receive rights proportional to their commitments in an AIF scheme. Exceptions include cases of investor exclusion, default on contributions, or profit-sharing arrangements with fund managers or sponsors. To attract diverse investors, SEBI allows certain entities, like government-owned bodies and development financial institutions, to accept reduced returns or share higher losses.

Existing AIFs using priority distribution models, where some investors receive preferential returns, cannot accept fresh commitments or invest in new companies unless compliant with the new rules. SEBI clarified that breaches in investment limits arising from these changes will not be considered violations if documented appropriately.

Pari-Passu Rights

Regulation 20(22) mandates equal rights for all investors in an AIF scheme, barring specific exceptions like Large Value Funds for Accredited Investors (LVFs). Differential rights can be offered to select investors, provided they don’t impact the rights of others. A new Standard Setting Forum (SFA) will outline permissible differential rights, with implementation standards to be published by January 15, 2025.

Applicability and Compliance

Existing AIFs must terminate any differential rights that affect other investors’ interests by February 28, 2025. LVFs can maintain exceptions with proper disclosure and waivers. Compliance reports documenting adherence to these provisions will be mandatory.

These measures aim to safeguard investor interests, promote fairness, and foster a transparent investment ecosystem in AIFs.

Read the SEBI circular here.