SEBI Mulls To Provide Option To AIFs To Carry Forward Unliquidated Investments To New Schemes

Capital markets regulator SEBI on Friday proposed to provide an option to alternative investment funds (AIFs) and their investors to carry forward unliquidated investments after the closure of a scheme to a new plan.

At the same time, there should be a clear regulatory and financial stability objective of ensuring proper recognition and disclosure of true asset quality, liquidity, and fund performance by AIFs, SEBI said.

"A full closure of the scheme, recognition of the true asset value, and re-opening of a fresh fund at that value would satisfy both objectives of providing additional flexibility to investors/funds while ensuring disclosure and tracking of true asset value and fund performance," SEBI said in its consultation paper.

At end of the tenure of a scheme beyond two years and extended tenure of Large Value Funds for Accredited Investors (LVF), SEBI proposed that the AIF manager may close the existing scheme and transfer the unliquidated investments to a new scheme, subject to obtaining the consent of 75 per cent of investors by value. 

In case the consent of 75 per cent of investors by value is not received, the AIF should mandatorily liquidate the investments at liquidation value within a year of expiry. 

The Securities and Exchange Board of India (SEBI) has sought comments from the public till February 18 on the proposal. 

In the recent past, SEBI has received requests from a few AIFs regarding the extension of the tenure of their schemes, citing many reasons, such as lack of liquidity, regulatory impediments, etc. 

In this context, sample data collected by SEBI for the expiry of the tenure of schemes of AIFs suggests that the two-year extension period for 24 schemes of AIFs with a valuation of Rs 3,037 crore will expire in FY 2023-24. Further, the tenure of another 43 schemes with a valuation of Rs 13,450 crore will expire in FY 2024-25. 

With regard to obtaining the consent of investors for closing the existing scheme and transferring the unliquidated investments to a new scheme, SEBI said that AIF must arrange bids for a minimum of 25 per cent of the unliquidated investments to provide exits to the investors who do not wish to continue in the new scheme. 

The AIF should offer pro-rata exit to all participating investors who choose to redeem their units through this option, the value at which the exit is proposed to be provided to such investors, along with the valuation carried out by two independent valuation agencies, should be disclosed to all investors. 

If the minimum 25 per cent bid is obtained from related parties of the AIF or from other existing investors, the same should be transparently disclosed to all investors. Such bids can only be used to provide pro-rata exit to other remaining investors.  

In case such fresh bids for a minimum of 25 per cent of unliquidated investments cannot be arranged, the closing valuation of the scheme will be based on the liquidation value as determined under IBBI (Insolvency Resolution Process for Corporate Persons) rules.

The performance of the fund managers should be computed in accordance with the value at which investors are provided exit or liquidation value, as the case may be. 

In setting up the new fund, fresh investors will be explicitly informed that the new scheme holds unliquidated investments from a previously closed scheme and the reasons thereof. 

If such a new scheme has been launched with the objective to only transfer unliquidated investments from the old scheme, and not to make any new investment, then such scheme should be exempted from the AIF Regulations related to minimum scheme corpus requirement and minimum investment requirement from the investor.

Presently, AIFs can extend the tenure of a scheme up to two years, subject to the approval of two-thirds of the investors by the value of their investment in the AIF. Further, AIFs have the option to distribute the assets of the AIF in-specie, after obtaining approval of at least 75 per cent of the investors by the value of their investment in the AIF.

Also, large-value funds for accredited investors are permitted to extend the tenure beyond two years, subject to certain conditions.