Cat II AIFs permitted to invest more than 50% of the investible funds in listed debt securities

The Securities of Exchange Board of India (“SEBI”), at its board meeting held on March 24, 2025, decided to amend Regulation 17(a) of the Securities of Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regulations”).

Investment requirement mandating Category II AIF to not invest more than 50% of investible funds in unlisted securities

Prior to this amendment, Regulation 17 (a) required Category II Alternative Investment Funds (“AIF”) to invest primarily in unlisted companies directly or through investment in units of other Alternative Investment Funds.  SEBI had clarified, vide clause 11.1.5 of SEBI AIF Master Circular dated July 31, 2023 that for the purposes of Regulation 17(a) of the SEBI AIF Regulations, the investment portfolio of a Category II AIF ought to be more in unlisted securities as against the aggregate of other investments. Therefore, Category II AIFs were required to invest more than 50% of the investible fund in unlisted securities.

Pursuant to the aforementioned amendment of Regulation 17 (a), investments by Category II AIFs in listed debt securities rated ‘A’ or below will be treated as akin to investments in unlisted securities for the purpose of their compliance with minimum investment conditions in unlisted securities.

Therefore, a Category II AIF may invest 100% of its corpus in listed debt securities rated ‘A’ or below, once the decision made by SEBI’s Board at its meeting held on March 24, 2025, is implemented through a formal amendment of Regulation 17 (a) of the SEBI AIF Regulations.

Recent changes to the SEBI Listing Obligations and Disclosure Requirements Regulations (LODR) 2015 (“SEBI LODR”), inter alia, require that any entity that has issued listed debt securities can issue fresh debt only in listed form.  These amendments to SEBI LODR are expected to adversely impact the availability of unlisted debt securities for AIFs, thereby, shrinking the investment universe.

Therefore, SEBI had issued a consultation paper on February 7, 2025 (“Consultation Paper”) proposing that Regulation 17(a) of the SEBI AIF Regulations be amended to provide that Category II AIFs should be allowed to invest more than 50% of their total investible funds in unlisted securities, and/or listed debt securities having credit rating ‘A’ or below, directly or through investment in units of other AIFs. SEBI makes it clear that if Category II AIFs invest in listed debt securities, debt securities should have the colour of equity by carrying some risk.

It should be noted that even after this amendment, Category II AIFs can continue to invest in listed securities, and/or listed debt securities having credit rating above ‘A’, but such investments should be less than 50% of their total investible funds. Investors who wish to have exposure only to debt securities having credit rating above ‘A’ should invest in mutual funds.

The minutes of the Board Meeting held on March 24, 2025 can be found here.

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:

Vinod Joseph, Partner, Email – vinodjoseph@elp-in.com

Paridhi Jain, Associate, Email – paridhijain@elp-in.com