SEBI’s implements its proposal for Dissolution Period

On April 25, 2024, Securities Exchange Board of India (SEBI) amended the SEBI (Alternative Investment Funds Regulations), 2012 vide an amendment dated April 25, 2024 (SEBI April Amendment).  This change was made to implement the proposals outlined in its consultation paper dated January 12, 2024 (Consultation Paper).The Consultation Paper had inter alia proposed that on expiry of an AIF’s tenure (including any extension), the AIF can opt for a Dissolution Period with the positive consent of 75% of investors by value of their investment in the scheme.

Pursuant to the Consultation Paper, the SEBI April Amendment provides for, inter alia, the following:

• “dissolution period” has been defined to mean the period following the expiry of the liquidation period of the scheme. This period will be used for the purpose of liquidating the unliquidated investments of the scheme of the Alternative Investment Fund.
• Insertion of a new Regulation 29B in the SEBI (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF regulations”) , which permits AIF schemes to enter into a dissolution period in the manner and subject to such conditions as may be specified by SEBI. The scheme entering into a dissolution period is required to file an information memorandum with SEBI through a merchant banker in the manner as may be specified by SEBI.
• The dissolution period of an AIF’s scheme cannot not be more than the original tenure of the scheme and shall not be extended in any manner upon expiry of the dissolution period. Further, during its dissolution period, the scheme cannot accept any fresh commitment from any investor and shall not make any new investment during the dissolution period.
• All schemes whose liquidation period has expired or is expiring within three months from the date of notification of the SEBI April Amendment are granted an additional liquidation period.
• Regulation 29(9) of the SEBI AIF regulations has been amended to replace the reference to ‘liquidation scheme’ with ‘dissolution period’. Henceforth during a liquidation period, an AIF may enter into a dissolution period with the consent of 75% of its investors by value of their investment.
• If the unliquidated investments of an AIF scheme are not sold by the expiry of the dissolution period, such investments shall be mandatorily distributed in-specie to the investors.
• New Regulation 29A(9) prohibits the launch any new liquidation scheme after the notification of the SEBI April Amendment. However, liquidation schemes launched prior to the SEBI April Amendment shall continue to be valid till such schemes are wound up.

On April 26, 2024, SEBI issued a circular (“SEBI Circular”) for AIFs seeking to enter into a ‘dissolution period’. It prescribed the following:

• Before seeking the requisite investor consent (of 75% of its investors by value of their investment), the AIF or its manager is required to arrange a bid for a minimum of 25% of the value of its unliquidated investments. The bid shall be arranged for units representing consolidated value of all unliquidated investments of the scheme’s investment portfolio. The manager may arrange bids from multiple bidders in this regard.
• If the AIF / manager successfully arranges a bid for 25% or more of the value of unliquidated investments of the scheme, the dissenting investors of the scheme shall be offered an option to fully exit the scheme out of the proceeds of the bid arranged by the AIF. After providing an exit for the dissenting investors, any unsubscribed portion of the bid may be used to provide a pro-rata exit to non-dissenting investors should they opt for the same.
• If the AIF or its manager fails to arrange a bid for a minimum of 25% of the value of unliquidated investments of the scheme, the AIF can still opt for Dissolution Period, provided that it obtains the consent of at least 75% of its investors by value of their investment in the scheme of the AIF.
• If the bidder or its related parties are investor(s) in the scheme, such investor(s) shall not be provided an exit from the scheme out of the bid.
• If the AIF fails to sell the unliquidated investments during the Dissolution Period, such investments shall be mandatorily distributed in-specie to the investors. No further extension or Liquidation Period shall be available after the expiry of Dissolution Period.
• The manager of the AIF shall not be entitled to charge any management fee during the Dissolution Period.
• During the Liquidation Period, if an AIF fails to obtain requisite investor consent for entering into a Dissolution Period or to make an in-specie distribution, then the unliquidated investments shall be mandatorily distributed to its investors in-specie, without the requirement of obtaining the consent of 75% of its investors by value of their investment in the scheme of the AIF. In case any investor is not willing to take in-specie distribution of unliquidated investments, such investments shall be written off.

• The Consultation Paper required that, when adopting a Dissolution Period, dissenting investors of the scheme who did not consent to opt for Dissolution Period/Process, should be offered an option to fully exit the scheme. For this purpose, it was proposed that the AIF (or its investment manager) should arrange a bid for at least 25% of the unliquidated investments. However, The Consultation Paper did not provide an alternative if the AIF failed to obtain a bid for 25% of the unliquidated investments. The SEBI April Amendment has, thankfully, provided that even if an AIF fails to obtain a bid, it may enter into a Dissolution Period with the consent of 75% of its investors by value.
• The sequence of actions for entering into a dissolution period seems to be as follows: (i) A bid is obtained for at least 25% of the unliquidated investments (ii) investors, who have been provided with information regarding the bid, are invited to vote for or against the dissolution period (iii) if 75% or more of investors, by value of their investments, approve the proposal to enter into a dissolution period, dissenting investors are offered an exit, which they may or may not accept. In the unlikely event that the bid obtained is at fair market value or more, the AIF may not receive 75% consent to enter into a dissolution period.  This is because investors may be incentivised to dissent, preferring to exit directly through the proceeds from the anticipated sale to the prospective bidder.
• It is likely that the bid obtained by the AIF for 25% of its unliquidated portfolio investments would be substantially below the price at which such portfolio investments were originally acquired by the AIF, if not the fair market value of the investments. In such case, the dissenting investors may not choose to exercise their option to exit. If they do, by selling a portion of the unliquidated investments, the value of the rest of the investments may also be reduced disproportionately.

The SEBI April Amendment can be found here.
The SEBI Circular can be found here.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com
Paridhi Jain, Associate, Email – paridhijain@elp-in.com