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SEBI has issued a notification on June 15, 2023, introducing the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2023. These amendments aim to enhance the regulatory framework governing alternative investment funds in India. Key changes include the establishment of the Corporate Debt Market Development Fund, valuation procedures, investment conditions, governance mechanisms, and disclosure requirements. This article provides an analysis of the amendments and their implications.

The amendments introduced by SEBI encompass various aspects of alternative investment funds. The creation of the Corporate Debt Market Development Fund, as outlined in Chapter III-C, focuses on the investment in corporate debt securities during periods of market dislocation. The eligibility criteria, investment conditions, and governance mechanisms for this fund are detailed in the regulations. Additionally, provisions regarding valuation procedures, compliance requirements, liquidation schemes, and disclosure obligations have been revised and clarified.

The amendments also address the appointment of independent valuers, continuing eligibility of key personnel, unit issuance in dematerialized form, investment restrictions, and the prohibition of listing for certain funds.

SECURITIES AND EXCHANGE BOARD OF INDIA

NOTIFICATION

Mumbai, the 15th June, 2023

SECURITIES AND EXCHANGE BOARD OF INDIA (ALTERNATIVE INVESTMENT FUNDS) (SECOND
AMENDMENT) REGULATIONS, 2023

No. SEBI/LAD-NRO/GN/2023/132.—In exercise of the powers conferred by sub-section (1) of Section 30 read with sub-section (1) of Section 11, clause (ba) and clause (c) of sub-section (2) of Section 11 and sub-section (1) and (1B) of Section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following regulations to further amend the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, namely, –

1. These Regulations may be called the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2023.

2. They shall come into force on the date of their publication in the Official Gazette: Provided that the amendments in Regulation 23 shall come into force with effect from November 1, 2023:

Provided further that the amendments in Regulation 4 shall come into force on such date as the Board may by notification in the Official Gazette appoint.

3. In the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, –

I. In regulation 2, in sub-regulation (1),

i) after clause (g), the following new clause shall be inserted, namely, –

“(ga) “Corporate Debt Market Development Fund” means an Alternative Investment Fund set up and making investments in terms of Chapter III-C of these regulations.”

ii) after clause (pa), the following new clauses shall be inserted, namely, –

“(pb) “liquidation period” means a period of one year following the expiry of tenure or extended tenure of the scheme for fully liquidating the scheme of an Alternative Investment Fund.

(pc) “Liquidation scheme” means a close ended scheme launched by an Alternative Investment Fund only for the purpose of liquidating the unliquidated investments purchased from its scheme, whose tenure has expired.”

II. In regulation 3, in sub-regulation (4), after clause (c), the following new clause shall be inserted, namely, –

“(d) specified Alternative Investment Fund under Regulation 19 of these regulations.”

III. In regulation 4, in clause (g),

i) sub-clause (i) shall be substituted with the following, namely, –

“(i) at least one key personnel with relevant certification as may be specified by the Board from time to time; and”

ii) in the proviso, the words “of experience and professional qualification” shall be omitted;

iii) after the proviso, the following new proviso shall be inserted, namely, –

“Provided further that a fresh certification shall be obtained before expiry of the validity of the existing certification to ensure continuity in compliance with the certification requirement.”

IV. In regulation 10, after clause (a), the following new clause shall be inserted, namely, –

“(aa) The Alternative Investment Fund shall issue units in dematerialised form subject to the conditions specified by the Board from time to time.”

V. In regulation 13, sub-regulation (6) shall be substituted with the following, namely, –

“(6) In the absence of consent of unit holders under sub-regulation (5) or upon expiry of the extended tenure, the Alternative Investment Fund or the scheme of the Alternative Investment Fund shall be wound up in accordance with Regulation 29 of these regulations.”

VI. In regulation 15, in sub-regulation (1), after clause (e), the following new clause shall be inserted, namely, –

“(ea) Except with the approval of seventy five percent of the investors by value of their investment in the scheme of Alternative Investment Fund and subject to the conditions specified by the Board, a scheme of an Alternative Investment Fund shall not buy or sell investments, from or to –

(a) associates; or

(b) schemes of Alternative Investment Funds managed or sponsored by its Manager, Sponsor or associates of its Manager or Sponsor; or

(c) an investor who has committed to invest at least fifty percent of the corpus of the scheme of Alternative Investment Fund:

Provided that while obtaining approval of the investors, the investor specified under sub-clause (c) who has committed to invest at least fifty percent of the corpus of the scheme of Alternative Investment Fund and is buying or selling the investment, from or to, the Alternative Investment Fund, shall be excluded from the voting process.”

VII. After Chapter III-B, the following new chapter shall be inserted, namely, –

CHAPTER III-C

CORPORATE DEBT MARKET DEVELOPMENT FUND

Applicability.

19N. (1) The provisions of this Chapter shall apply only to the Corporate Debt Market Development Fund.

(2) All other provisions of these regulations, except the following provisions and the guidelines and circulars issued under these regulations, unless the context otherwise requires or is repugnant to the provisions of this Chapter, shall apply to the Corporate Debt Market Development Fund, its sponsor, manager, trustee and investors:

i. sub regulation (2) of regulation 9;

ii. clauses (a), (c), (d), and (f) of regulation 10;

iii. sub regulations (2) and (3) of regulation 12;

iv. sub regulations (1), (2), (3), (5) and (6) of regulation 13;

v. regulations 14, 16, 17, 18, 19, Chapter III-A and III-B, 23;

vi. sub regulation (1) of regulation 15;

vii. sub regulation (15) of regulation 20;

viii. clause (a), (b) and (c) of sub regulation (1) of regulation 29;

ix. sub regulations (2),(3), (4) and (8) of regulation 29.

Registration of the Corporate Debt Market Development Fund.

19O. (1) The Corporate Debt Market Development Fund shall be constituted in the form of a Trust and the instrument of Trust shall be in the form of a deed duly registered under the provisions of the Indian Registration Act, 1908.

(2) The Corporate Debt Market Development Fund shall apply for registration as an Alternative Investment Fund in accordance with the provisions of Chapter II of these regulations.

(3) The placement memorandum of the Corporate Debt Market Development Fund shall be filed with the Board.

(4) The Board may communicate its comments, if any, to the Manager prior to the launch of the fund and the Manager shall incorporate the comments in the placement memorandum prior to the launch of the fund.

(5) The Corporate Debt Market Development Fund shall be a close ended fund, with a tenure of fifteen years from the date of its first closing:

Provided that the tenure may be extended with the prior approval of the Board.

(6) The Corporate Debt Market Development Fund shall be wound up with the prior approval of the Board.

Investment in the Corporate Debt Market Development Fund.

19P. (1) The units of the Corporate Debt Market Development Fund shall be offered to the Asset Management Companies as defined under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 and the specified debt-oriented schemes of mutual funds.

(2) The investment by the Asset Management Companies and the specified debt-oriented schemes of the mutual funds shall be in accordance with the provisions of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

(3) The Manager or Sponsor shall have a continuing interest in the Corporate Debt Market Development Fund of not less than five crore rupees in the form of investment in the fund but such continuing interest shall not be through the waiver of management fees.

Investment conditions for the Corporate Debt Market Development Fund.

19Q. (1) During periods of market dislocation, the Corporate Debt Market Development Fund shall purchase corporate debt securities from the specified debt-oriented schemes of mutual funds which meet the following eligibility criteria:

(a) corporate debt securities shall be listed and have an investment grade rating;

(b) the residual maturity of such securities shall not exceed five years on the date of purchase;

(c) securities where there is no material possibility of default or adverse credit news or views.

Explanation: For the purpose of sub regulation (1) of this regulation, the Board shall decide the trigger of market dislocation and its reversal based on the parameters as may be specified by the Board.

(2) The Corporate Debt Market Development Fund shall purchase corporate debt securities in proportion to the contribution made in it at a mutual fund level and in accordance with detailed guidelines as may be approved by the Board.

(3) The Corporate Debt Market Development Fund shall hold eligible securities as mentioned in sub regulation (1) of this regulation, till maturity or sell the same in the secondary market upon reversal of market dislocation, in the manner as specified by the Board from time to time.

(4) Other than market dislocation period, the Corporate Debt Market Development Fund shall invest in liquid and low-risk debt instruments and undertake any other activity related to corporate debt market, as may be specified by the Board from time to time.

(5) The Corporate Debt Market Development Fund shall buy corporate debt securities at fair price adjusted for liquidity risk, interest rate risk and credit risk but not at distress prices.

(6) The sharing of loss by the sellers of corporate debt securities to the Corporate Debt Market Development Fund during periods of market dislocation may be higher than their pro rata holding in the Alternative Investment Fund vis-à-vis other unit holders.

(7) The Corporate Debt Market Development Fund shall not invest in the securities of companies incorporated outside India.

(8) Investment by the Corporate Debt Market Development Fund in any one investee company shall not exceed five percent of its fund capital at the time of investment:

Provided that the combined investment in the corporate debt securities of an issuer group as specified under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 shall not exceed seven and half percent of its fund capital at the time of investment.

Explanation: For the purpose of this sub-regulation, ‘fund capital’ shall be the aggregate of the corpus of the fund and maximum permissible borrowing as per sub-regulation (9) of this regulation.

(9) The Corporate Debt Market Development Fund may borrow funds up to ten times its corpus, subject to such conditions as may be specified by the Board in consultation with the Government of India.

(10) The valuation procedure and methodology for valuing assets of the Corporate Debt Market Development Fund shall be governed by the norms applicable to Mutual Fund schemes under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

(11) In-specie distribution of assets of the Corporate Debt Market Development Fund may be made to the unit holders, only at the time of winding up subject to the consent of seventy-five percent of the unit holders by value of their investment in such fund.

(12) Any material alteration to the investment strategy of the Corporate Debt Market Development Fund shall be with the prior approval of the Board.

Disclosures.

19R. (1) The portfolio of the Corporate Debt Market Development Fund shall be disclosed to the unitholders on a fortnightly basis.

(2) The Net Asset Value of the Corporate Debt Market Development Fund shall be disclosed to the unitholders on a daily basis.

Governance Mechanism for the Corporate Debt Market Development Fund.

19R. (1) The Corporate Debt Market Development Fund shall appoint a trustee company.

(2) The Board of directors of trustee company and the Manager of the Corporate Debt Market Development Fund shall be appointed with the prior approval of the Board.

(3) The roles and responsibilities of the trustee company shall be similar to the roles and responsibilities assigned to trustees under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

(4) The trustee company of the Corporate Debt Market Development Fund shall not engage in any activity other than acting as a trustee of the Corporate Debt Market Development Fund, except with the prior written consent of the Board:

Provided that any other activity of the trustee company as permitted by the Board shall not be in conflict with its role as the trustee of the Corporate Debt Market Development Fund.

(5) Two-thirds of the members of the board of directors of the trustee company shall be independent directors and shall not be associated with the Sponsor or the Manager in any manner whatsoever.

(6) No person shall initially or any time thereafter be appointed as a director of the trustee company of the Corporate Debt Market Development Fund without the prior approval of the Board.

(7) An audit committee of the trustee company shall be constituted to review compliance with the provisions of placement memorandum as required under these regulations along with other responsibilities as may be specified by the Board from time to time.

(8) The manager of the Corporate Debt Market Development Fund shall appoint a Governance Committee.

(9) The Governance Committee shall comprise corporate bond market experts including academicians, fund managers or Chief Investment Officers, risk management professionals and independent market experts.

(10) The Governance Committee, jointly with the board of the Manager and trustee company, shall approve the policies of the Corporate Debt Market Development Fund.

(11) The Governance Committee shall supervise the activities of the Corporate Debt Market Development Fund, especially relating to management of conflict of interest, if any.

(12) The Governance Committee shall have oversight on management of asset liability mismatches during times of market dislocation.

Prohibition of Listing.

19T. The units of the Corporate Debt Market Development Fund shall not be listed on any recognised stock exchange.

Others.

19U(1) The provisions of Chapter III-C of these regulations shall cease to exist upon the winding up of the Corporate Debt Market Development Fund.

(2) Notwithstanding anything contained in sub-regulation (1) of this regulation, the Manager of Corporate Debt Market Development Fund shall continue to be responsible for any liabilities, that may arise out of the mandate in relation to its investment management activities.”

VIII. In regulation 20, after sub-regulation (16), the following new sub-regulations shall be inserted, namely, –

“(17) The Manager shall appoint a Compliance Officer who shall be responsible for monitoring compliance with the provisions of the Act, rules, regulations, notifications, circulars, guidelines, instructions or any other directives issued by the Board.

(18) The Compliance Officer shall satisfy the eligibility criteria as may be specified by the Board from time to time.

(19) The Compliance Officer shall immediately and independently report to the Board any non-compliance observed by him, as soon as possible but not later than seven working days from the date of observing such non-compliance.”

IX. In regulation 23,

i) in sub-regulation (1), after the words “The Alternative Investment Fund shall”, the words “carry out valuation of its investments in the manner specified by the Board from time to time and” shall be inserted;

ii) in sub-regulation (3), after the words “open ended funds”, the symbol “.” shall be replaced with “:” and the following new proviso shall be inserted, namely, –

“Provided that for the purpose of calculation of NAV, Category III Alternative Investment Funds shall undertake valuation of their investment in unlisted securities and listed debt securities by an independent valuer.”

iii) after sub-regulation (3), the following new sub-regulations shall be inserted, namely, –

“(4) The Manager shall ensure that the Alternative Investment Fund appoints an independent valuer who satisfies the criteria specified by the Board from time to time.

(5) The Manager and the key management personnel of the Manager shall ensure that the independent valuer computes and carries out valuation of the investments of the scheme of the Alternative Investment Fund in the manner specified by the Board from time to time.

(6) The Manager shall be responsible for true and fair valuation of the investments of the scheme of the Alternative Investment Fund:

Provided that in case the established policies and procedures of valuation do not result in fair and appropriate valuation, the Manager shall deviate from the established policies and procedures in order to value the assets or securities at a fair value and document the rationale for such deviation:

Provided further that such deviation and its rationale shall be reported to the trustee or the trustee company or the Board of Directors or designated partners of the Alternative Investment Fund and investors of the Alternative Investment Fund.”

X. In regulation 29,

i) in sub-regulation (7),

a) the words “one year from the date of intimation under sub-regulation (5) of regulation 29” shall be substituted with “the liquidation period”; and

b) after the words “in the Alternative Investment Fund”, the words “or the scheme of the Alternative Investment Fund” shall be inserted.

ii) In sub-regulation (8),

a) the words “in specie distribution of assets of the Alternative Investment Fund” shall be substituted with “in specie distribution of assets of the scheme of the Alternative Investment Fund”;

b) the words “including on winding up of the Alternative Investment Fund” shall be substituted with “including on winding up of the scheme of the Alternative Investment Fund”; and

c) the words “after obtaining approval of at least seventy five percent of the investors by value of their investment in the Alternative Investment Fund” shall be substituted with “subject to conditions as may be specified by the Board from time to time”.

iii) after sub-regulation (8), the following new sub-regulation (9) shall be inserted, namely, –

“ (9) Notwithstanding anything contained in sub-regulation (7), during liquidation period of a scheme, an Alternative Investment Fund may distribute investments of a scheme which are not sold due to lack of liquidity, in-specie to the investors or sell such investments to a liquidation scheme, after obtaining approval of at least seventy five percent of the investors by value of their investment in the scheme of the Alternative Investment Fund, in the manner and subject to conditions specified by the Board from time to time:

Provided that in the absence of consent of unit holders for exercising the options under sub-regulation (9) during liquidation period, such investments of the scheme of the Alternative Investment Fund shall be dealt with in the manner as may be specified by the Board from time to time.”

iv) the existing sub-regulation (9) shall be renumbered as (10).

XI. After regulation 29 and before regulation 30, the following regulation shall be inserted, namely,-
Liquidation Scheme.

29A. (1) The Alternative Investment Fund may launch a liquidation scheme subject to filing of placement memorandum with the Board.

(2) The requirements under Regulation 10(b), Regulation 10(c), Regulation 12, Regulation 13(1), Regulation 13(2), Regulation 13(4), Regulation 13(5), Regulation 15, Regulation 16, Regulation 17, Regulation 18, Regulation 19L(1), Regulation 19L(2), Regulation 19M, Regulation 29 (7) and Regulation 29 (9) shall not apply to a liquidation scheme of the Alternative Investment Fund.

(3) The placement memorandum of liquidation scheme of the Alternative Investment Fund shall be filed with the Board through a merchant banker along with the fees as specified in the Second Schedule.

(4) The tenure of liquidation scheme of the Alternative Investment Fund shall be determined at the time of filing of placement memorandum with the Board in the manner and subject to conditions as may be specified by the Board.

(5) The tenure of liquidation scheme of the Alternative Investment Fund shall not be extended.

(6) The liquidation scheme of the Alternative Investment Fund shall not accept any fresh commitment from any investor and shall not make any new investment.

(7) The investments of the liquidation scheme of the Alternative Investment Fund which are not sold due to lack of liquidity by the end of its tenure shall be dealt with, in the manner as may be specified by the Board from time to time.”

XII. In the First Schedule, in Form A, in clause 1, in sub-clause (e), after the words and symbol “Category III Alternative Investment Fund”, the words and symbols “9. Specified Alternative Investment Fund as provided under Regulation 19 of these regulations: Corporate Debt Market Development Fund” shall be inserted.

XIII. In the Second Schedule, in Part A, after the words and symbols “Registration Fee for Angel Funds – ₹2,00,000”, the words and symbols “Registration fee for Corporate Debt Market Development Fund (specified Alternative Investment Fund as provided under Regulation 19 of these regulations): ₹5,00,000” shall be inserted.

BABITHA RAYUDU, Executive Director

[ADVT.-III/4/Exty./194/2023-24]

Footnote:

1. The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 were published in the Gazette of India on May 21, 2012 vide No. SEBI/LAD-NRO/GN/2012-13/04/11262.

2. The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 were subsequently amended on, –

(a) 16thSeptember, 2013 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2013 vide No. LAD-NRO/GN/2013-14/24/6573.

(b) 23rdMay, 2014 by the Securities and Exchange Board of India (Payment of Fees) (Amendment) Regulations, 2014 vide No. LAD-NRO/GN/2014-15/03/1089.

(c) 26thSeptember, 2014 by the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 vide No. LAD-NRO/GN/2014-15/11/1576.

(d) 14thAugust, 2015 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2015 vide No. SEBI/LAD-NRO/GN/2015-16/011.

(e) 4thJanuary, 2017 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2016 vide No. SEBI/LAD/NRO/GN/2016-17/026.

(f) 6thMarch, 2017 by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2017 vide No. SEBI/LAD/NRO/GN/2016-17/037.

(g) 1stJune, 2018 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2018 vide No. SEBI/LAD/NRO/GN/2018/19.

(h) 10thMay, 2019 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2019 vide No. SEBI/LAD/NRO/GN/2019/16.

(i) 7thApril, 2020 by the Securities and Exchange Board of India (Regulatory Sandbox) (Amendment) Regulations, 2020 vide No. SEBI/LAD-NRO/GN/2020/10.

(j) 9thOctober, 2020 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2020 vide No. SEBI/LAD/NRO/GN/2020/37.

(k) 8thJanuary, 2021 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2021 vide No. SEBI/LAD/NRO/GN/2021/01.

(l) 5thMay, 2021 by the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2021 vide No. SEBI/LAD-NRO/GN/2021/21.

(m) 03rdAugust, 2021 by the SEBI (Regulatory Sandbox) (Amendment) Regulations, 2021 vide No. SEBI/LAD-NRO/GN/2021/30.

(n) 03rdAugust, 2021 by the Securities and Exchange Board of India (Alternative Investment Funds) (Third Amendment) Regulations, 2021 vide No. SEBI/LAD-NRO/GN/2021/33.

(o) 13thAugust, 2021 by the Securities and Exchange Board of India (Alternative Investment Funds) (Fourth Amendment) Regulations, 2021 vide No. SEBI.LAD-NRO/GN/2021/41.

(p) 9thNovember, 2021 by the Securities and Exchange Board of India (Alternative Investment Funds) (Fifth Amendment) Regulations, 2021 vide No. SEBI/LAD-NRO/GN/2021/57.

(q) 24thJanuary, 2022 by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2022 vide No. SEBI/LAD-NRO/GN/2022/68.

(r) 16thMarch, 2022 by the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2022 vide No. SEBI/LAD-NRO/GN/2022/75.

(s) 25thJuly, 2022 by the Securities and Exchange Board of India (Alternative Investment Funds) (Third Amendment) Regulations, 2022 vide No. SEBI/LAD-NRO/GN/2022/89.

(t) 15thNovember 2022, by the Securities and Exchange Board of India (Alternative Investment Funds) (Fourth Amendment) Regulations, 2022 vide No. SEBI/LAD-NRO/GN/2022/105.

(u) 9thJanuary 2023, by the Securities and Exchange Board of India (Alternative Investment Funds) (Amendment) Regulations, 2023 vide No. SEBI/LAD-NRO/GN/2023/113.

(v) 7thFebruary 2023, by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2023 vide No. SEBI/LAD-NRO/GN/2023/121.

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