Alerts & Updates 1st Oct 2024
The 207th meeting of the Securities and Exchange Board of India’s (SEBI) board of directors (SEBI’s Board) was held in Mumbai on September 30, 2024, and a number of crucial decisions have been taken, one of which is very significant for Alternative Investment Funds (AIF).
SEBI’s Board has clarified that its regulatory intent, vis-a-vis AIFs, is to ensure the fair and equal treatment of all investors of each AIF. An AIF is meant to be a pooled investment vehicle and SEBI’s Board has approved proposals to specify in the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) that the rights of the investors in investments of and distributions of the returns from a scheme of an AIF shall be pro-rata to their commitment in the scheme and that in all other respects (subject to specified exemptions), the rights of the investors of a scheme of an AIF shall be pari passu. In other words, risks and rewards from investments made by an AIF Scheme have to be shared in proportion to investors’ contributions to the scheme.
As an exception to the abovementioned rule, SEBI’s Board has permitted entities such as those owned or controlled by Governments, multilateral or bilateral development financial institutions, State Industrial Development Corporations and other entities as may be specified from time to time, to subscribe to junior classes of units of AIFs with less than their pro-rata rights in the investments of the scheme.
SEBI’s Board has categorically stated that existing schemes of AIFs that had provided priority in distribution to certain class of investors over others, while continuing with the existing investments, will not be permitted to raise fresh commitments or make investment in a new investee company, directly or indirectly. On a slightly different note, SEBI’s Board has allowed AIFs to provide specified differential rights to certain investors, without affecting the rights of other investors. Based on certain principles as specified by SEBI, the permissible terms for offering such differential rights would be formulated by the Standard Setting Forum for AIFs in consultation with SEBI.
Large Value Funds are not required to ensure pari-passu rights among its investors, provided a waiver is provided by each investor to this effect.
| On November 23, 2022, SEBI had issued a circular in which SEBI clarified that though the AIF Regulations do not explicitly restrict the sharing of loss by a class of investors other than pro rata to their holding in the AIF vis-à-vis other classes of investors/unit holders, such disproportionate sharing is not acceptable. Therefore, the aforementioned circular expressly prohibited AIF schemes from adopting 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. Schemes of AIFs which had adopted such a priority distribution model were prohibited from accepting any fresh commitments or from making investments in a new investee company, till a view is taken by SEBI in this regard. Subsequent to the circular of November 23, 2022, SEBI appointed a working group to analyse whether models of distribution that gave priority to one or more classes of investors (“Priority Distribution Model”) could affect the pro-rata distribution rights of investors. The working group recommended that Priority Distribution Models should not be entirely prohibited. Prohibition of the Priority Distribution Model should apply only in cases where evidence of misuse is actually found.
On May 23, 2023, SEBI had issued a consultation paper in which it was made clear that SEBI did not agree with the working group’s proposals. The consultation paper proposed that the rights of each investor shall be maintained a) pro-rata to their commitment to the scheme, in each investment of the scheme, while making investment, and; b) pro-rata to investment made in the investee company, while distributing the proceeds of the investment. Existing schemes of AIFs which have adopted a priority distribution model could continue with the existing investments, but shall not accept any fresh commitment or make investment in a new investee company. An exemption was proposed for differential rights provided on terms with respect to hurdle rate of return, performance linked fee/additional return and management fees. The decision taken by SEBI’s Board on September 30, 2024 is in line with SEBI’s views on priority distribution model. Interesting, Large Value Funds can escape the restricted that are to be put in place on priority distribution models, provided all their investors agree. This exemption raises an interesting question. Why can’t the same flexibility be made available to all AIFs. Surely, every investor in an AIF who has invested north of Rs. 1 crore is capable to taking an informed decision on priority distribution models? The minutes of SEBI’s Board’s 207th meeting can be found here. The consultation paper dated May 23, 2023 issued by SEBI can be found here. SEBI’s circular dated November 23, 2022 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 |
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