Key changes proposed for AIFs
In a bid to standardize the provisions governing Alternative Investment Funds (AIFs), SEBI, inter-alia, decided upon certain amendments in its Board Meeting held on March 29, 2023. These amendments were made available vide SEBI’s Press Release No. 6/2023.
The following is a summary of the decisions taken along with a brief analysis:
(a) SEBI has approved streamlining the framework within which AIFs are required to carry out a valuation of thei
r investment portfolio – which includes eligibility criteria of the independent valuer for valuing the investment portfolio of AIFs; valuation of unlisted and listed debt securities held by Category III AIFs to be done by an independent valuer; and casting responsibility on investment managers for true and fair valuation.
Presently, Category-III AIFs are not mandated to appoint an independent valuer. Considering the frequency in which NAV calculation is to be disclosed by Category-III AIFs (quarterly / monthly, as compared to half-yearly for Category I or II AIFs), administrative costs for Category-III AIFs will increase. Further clarity will be awaited to understand the realm and extent of manager’s responsibility and liability in regard to valuation.
(b) SEBI has further approved mandating that all (new and existing) schemes of AIFs shall dematerialize their units as per the following schedule:
Over 500 Crore
By October 31, 2023
By October 31, 2023
Under 500 Crore
By April 30, 2024
In our view, a phased-wise approach could have been followed to ease the burden on the depositories which the aforesaid tight timelines are sure to result into.
(c) The existing minimum experience requirement has been replaced with a comprehensive certification requirement as an eligibility criterion for the key investment team of the Manager of the AIF. This certification requirement is also mandated for the compliance officer of the AIF.
In our view this is a welcome move for new fund managers who now do not need to wait for 5 years to be classified as a key personnel.
(d) For buying or selling of investments potentially involving conflict of interest, it is now mandatory to obtain the approval of 75% of investors by value. This requirement covers related party transactions as specified in the press release. Furthermore, SEBI Chairperson Madhabi Puri Buch clarified that "If a single investor holds more than 50 percent of the corpus, that person is considered a related party...if you deal with him or associated with him, then it will need separate approvals."
At present, the requirement for investors’ approval is only in instances where AIF invests in associates or another scheme of the same manager. However, buy /sell of shares of underlying portfolio companies is a common practice amongst AIFs and investors approval requirement in such cases will only lead to delays in the process.
(e) For investments which are not sold due to lack of liquidity during the winding up process of an AIF, AIFs can either sell such investments to a new scheme of the same AIF i.e., Liquidation Scheme or distribute such unliquidated investments in-specie, subject to approval of 75% investors by value. The unliquidated investments shall be mandatorily distributed in-specie to investors in the absence of investor consent for the aforementioned options. Such investment shall be written off if an investor is unwilling to take in-specie distribution.
At present, AIFs can make in-specie distribution to its investors, if required, during the liquidation stage. In investment transactions (at portfolio level), exit rights of AIFs should allow for sale to an affiliate which should include another scheme of the same investment manager or LPs of the AIF and such sale should not be subject to any restrictions. It remains to be seen whether there will be any price restrictions with respect to such distribution. Clarification is needed whether the requirement is that of an affirmative consent or deemed consent since implication of no response could result in mandatory in-specie distribution. The mandatory distribution (if investors consent is not obtained) is also likely to pose certain practical difficulties vis-à-vis the framework within which the recipient LP operates, as well as exit of such LPs themselves from the companies.
The amendments that will be released pursuant to the Press Release will provide some much needed clarity to the AIF industry considering some of the aforesaid changes are likely to increase the workload as well as responsibilities of the stakeholders involved.