Proposed Amendments to SEBI AIF Regulations, 2012

SEBI proposes amendments to AIF Regulations, 2012, seeking stakeholder inputs. Key changes include borrowing by AIFs, dematerialization, mandatory custodian, LVF tenure extension, and AIF registration renewal with fees. Understand the implications for the alternative investment sector.

To seek comments and inputs from stakeholders, and with the objective of strengthening governance mechanisms of AIFs, The Securities and Exchange Board of India (SEBI) has recently proposed some amendments to SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations, 2012). In this article, these proposals have been broken down in simple terms:

1. Borrowing by Category I and Category II AIFs:

Regulations 16(1)(c) and 17(c) of AIF Regulations place restriction on borrowing by Category I and II AIFs. Currently, these AIFs are not allowed to borrow money for investing. However, SEBI is considering allowing Category I and Category II AIFs to borrow funds in case there is a shortfall in the amount of money called for from investors. This borrowing will have some conditions, such as

1. borrowing not exceeding 10% of the proposed investment and being done only as a last resort in emergencies.

2. The cost of such borrowing shall be charged only to such investor who delayed/ defaulted on the drawdown payment

3. AIF shall not borrow more than once for meeting shortfall with respect to drawdown from the same investor

2. Mandate AIFs to hold their securities/investments in de-mat form only:

SEBI is suggesting that all AIFs should hold their investments in a digital form, unless a particular type of investment cannot be dematerialized. This is to make the process more streamlined and secure. For existing investments where the AIF has a controlling stake in a company, they may be given a grace period of 6 months to make the transition to digital holdings.

Views sought by SEBI:

With respect to dematerializing existing investments of AIFs in investee companies, where an AIF or AIFs together do not have controlling interest:

• Should there be a mandate to dematerialize such investments within a period of 12 months?
• Should such investments not be subject to the requirement of dematerialization?

3. Mandate for appointment of a custodian to all AIFs:

Currently, only certain categories of AIFs (with a corpus of more than INR 500 crore) are required to appoint a custodian for their assets. However, SEBI is proposing to make it mandatory for all AIFs to have a custodian. Existing Category I and Category II AIFs will be given 6 months to appoint an independent custodian. The manager of the AIF shall ensure that the custodian appointed by AIF is not an associate of manager/ sponsor/ trustee of the AIF.

4. Maximum Extension of Tenure for Large Value Funds (LVFs):

SEBI, in 2021, introduced the framework for ‘Accredited Investors’ in the Indian securities market as a class of investors who are well-informed or well-advised about investment products. SEBI also introduced the concept of LVF, which is a scheme of an AIF in which each investor is an Accredited Investor and invests at least INR 70 crore.

LVFs are currently allowed to extend their investment tenure up to 2 years with approval from two-thirds of the unit holders. The proposed change suggests extending this tenure to up to 4 years, subject to approval from two-thirds of the unit holders based on their investment value.

5. Renewal of AIF Registrations: 

It is observed from the quarterly reports filed by AIFs that, many AIFs are still holding their certificate of registration despite having no fundraising or investment activity in their schemes for several years. A table showing the number of AIFs with no commitments raised in any of their schemes since their registration is given below:

Currently, AIF registrations are granted indefinitely, without the need for renewal or fees. However, SEBI is considering introducing a renewal fee, which would be 50% of the registration fee for the subsequent 5-year period. Existing AIFs that have completed 5 years from the date of registration would also need to pay this renewal fee within a specified timeframe. Until the renewal fee is paid, AIFs cannot accept new investments or launch new schemes.

These proposed changes aim to enhance the functioning of AIFs, ensuring better investor protection and more streamlined operations. It’s important for market participants to be aware of these potential amendments and their implications for the alternative investment sector.

Note: SEBI has requested comments on the consultation paper latest by 31 May 2023. Consultation paper can be read at below link-