SEBI Releases Draft Framework for AIFs, VCFs To Tackle Post-Tenure Expiry Unliquidated Investments
An Introduction to SEBI’s Newly Proposed Framework
On 15 January 2024, the Securities and Exchange Board of India (SEBI) rolled out a draft framework designed to introduce more flexibility for Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs). This proposal is primarily intended to address issues surrounding unliquidated investments following the expiration of these funds’ tenures. Concurrently, the public is being welcomed to offer its comments on the proposal until the 2nd of February.
Extended Flexibility for AIFs and VCFs
Delving deeper into the specifics of the SEBI proposal, it appears that the new approach eliminates the need for AIFs to initiate a new liquidation scheme for unliquidated investments. Instead, these funds can maintain their existing schemes beyond their initially agreed-upon tenure for an extended period. This provision not only allows the funds to fully liquidate their remaining investments but also hastens the dissolution process.
The proposal also explores the possibility of extending the flexibility of the dissolution process to venture capital funds by way of migration to the AIF regime. Currently, the launch of the Liquidation Scheme is confined to those AIF schemes that exist within what is commonly referred to as the ‘Liquidation Period’. This period extends for one year following the end or extension of tenure and is primarily designed to liquidate the scheme fully.
Addressing Industry Concerns
The initiative by SEBI came after receiving several representations from AIF industry participants. They raised tax-related issues that impede the efficient implementation of the Liquidation Scheme. Other areas of concern included the cost, time, and effort involved in setting up a liquidation scheme and winding up the original plan. Makings these processes more efficient would potentially benefit the investors who bear the majority of the costs.
While the new proposal aims at providing more leeway to AIFs, SEBI emphasizes that such changes should not impede critical regulatory principles. Ensuring the integrity, transparency, disclosure, and performance of AIFs are upheld remains integral while introducing more flexibility.
Enhanced Investor Participation and Bidding Process
Under the proposed changes, an AIF deciding to opt for the Dissolution Period/Process during the Liquidation Period of a scheme must first secure positive consent from 75% of investors. This consent must be based on the value of their investment in the scheme. Moreover, upon securing the requisite investor consent, the AIF is instructed to arrange bids for at least 25% of the unliquidated investments’ value.
Transitioning Current Liquidation Schemes & Future Directions
The draft proposal also explains that existing liquidation schemes launched by AIFs will be “grandfathered”. The term refers to the process where certain rules or terms are allowed to continue to apply to existing situations while new rules will apply to all future cases.
Additionally, AIF schemes, whose Liquidation Period has elapsed or is about to elapse within a month from the date of the proposal’s notification, can deal with unliquidated investments under one-time flexibility provision. This differs from the current situation where the option to launch a Liquidation Scheme isn’t available for schemes whose Liquidation Period expired before a specific date.
By proposing changes such as easing the transition of VCFs into AIF Regulations, SEBI seeks to make the migration process smoother and more cost-effective. This would create more opportunities for VCFs to benefit from the flexibility offered to AIFs.
Concluding Remarks
The newly proposed flexibility measures underline SEBI’s proactive role in addressing concerns raised by AIFs and VCFs. It’s a call to manage unliquidated assets effectively even after the tenure expiration. The ability to grant existing schemes a smooth transition to AIF Guidelines assures continuity in operation and administrative efficiency. SEBI’s proposal hence marks another step towards fortifying India’s financial sector.
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