Alerts & Updates 24th Nov 2022

AIFs priority distribution model draws SEBI’s attention – Regulator temporarily restricts such AIFs from accepting fresh commitment or making new investments

Authors

Manendra Singh Partner | Mumbai
Tanvi Goyal Principal Associate | Mumbai
Ambareen Khatri Associate | Mumbai

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  • In a major move, SEBI has decided to temporarily restrict Alternate Investment Funds (AIFs) schemes which have adopted priority distribution model among investors from accepting any fresh commitment or making investment in a new investee company, till SEBI comes up with a view in this regard.

    The aforesaid view was taken by SEBI vide SEBI circular dated November 23, 2022 (available here(SEBI Circular) and has been discussed below in brief:

    • The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) define “Alternative Investment Fund” as a privately pooled investment vehicle, which collects funds from investors, for investing it in accordance with a defined investment policy for the benefit of its investors.
    • Further, vide SEBI circular dated June 19, 2014 (available here), Guidelines on disclosures, reporting and clarifications under AIF Regulations were released under which Clause 3(c) provided that, with respect to investment by the sponsor/manager in the AIF, the sharing of loss by the sponsor/manager shall not be less than pro rata to their holding in the AIF vis-à-vis other unit holders.
    • The AIF Regulations does not explicitly restrict the sharing of loss by a class of investors to not be less than pro rata to their holding in the AIF vis-à-vis other classes of investors/unit holders.
    • Accordingly, it was brought to SEBI’s attention that certain schemes of AIFs have adopted a distribution waterfall in such a way that one class of investors (other than sponsor/manager) share loss more than pro rata to their holding in the AIF vis-à-vis other classes of investors/unit holders, since the later has priority in distribution over former (Priority Distribution Model).
    • The aforesaid matter is being examined by SEBI in consultation with Alternative Investment Policy Advisory Committee, AIF industry associations and other stakeholders. Meanwhile, it has been decided by SEBI that the AIF schemes which have adopted aforesaid Priority Distribution Model, shall not accept any fresh commitment, or make investment in a new investee company, till a view is taken by SEBI in this regard.

    The SEBI Circular has come into force with immediate effect.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Manendra Singh, Associate Partner –ManendraSingh@elp-in.com ;
    Tanvi Goyal, Principal Associate –TanviGoyal@elp-in.com;
    Ambareen Khatri, Associate- AmbareenKhatri@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein