On November 18, 2024, the Securities and Exchange Board of India (SEBI) issued the Securities and Exchange Board of India (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024 (November 2024 Amendments) to amend the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (SEBI AIF Regulations). These amendments took effect from November 18, 2024. The salient features of these amendments are as follows:
A new sub-regulation 21 has been inserted in Regulation 20 of the SEBI AIF Regulations to state that the investors in schemes of alternative investment funds (AIF Schemes) shall have rights, pro-rata to their commitment to the AIF Scheme, in each investment of the scheme and in the distribution of proceeds of such investment.
SEBI may, from time to time, specify exemptions to this rule and allow investors in AIF Schemes to have rights which are not pro-rata to their commitment to the AIF Scheme.
SEBI shall issue directions to deal with rights of the investors of AIF Schemes issued prior to November 18, 2024, which are not pro-rata to their commitment to the AIF Scheme and which do not enjoy any exemption granted by SEBI.
The new sub-regulation 21 shall not apply to angel funds.
A new sub-regulation 22 has been inserted in Regulation 20 of the SEBI AIF Regulations to state that the rights of investors of AIF schemes, other than the rights specified in the newly inserted sub-regulation 21 mentioned above, shall be pari-passu in all aspects.
SEBI may issue rules to allow differential rights to be offered to select investors of AIF schemes, without affecting the interest of other investors of the scheme.
SEBI shall issue directions to deal with differential rights granted to investors of AIF schemes prior to November 18, 2024, which are not in accordance with rules to be framed by SEBI for the grant of differential rights.
The aforementioned new sub-regulation 22 shall not apply to Large Value Fund for Accredited Investors.
ELP Comments
The SEBI AIF Regulations operate on the principles that investors in AIFs (i) share all risks and rewards pro rata to their share in the total corpus of the AIF and (ii) have voting rights which are pro rata to their capital contribution to the corpus of the AIF. The November 2024 Amendments seem to be an acknowledgement from SEBI that some AIFs have given to investors in their schemes, rights which are not:
pro-rata to their commitment to the scheme; and
pari-passu in all aspects.
The exact difference between rights held by an investor in an AIF scheme that are not pro-rata to the investor’s commitment to the scheme (dealt with by new sub-regulation 21) and rights held by an investor in an AIF scheme that are not pari-passu (dealt with by new sub-regulation 22) is not clear.
We will most probably receive this clarity when SEBI issues directions (in the form of circulars) to deal with non-pro-rata rights and differential rights granted to investors of AIF schemes prior to November 18, 2024.
It is interesting to note that SEBI plans to issue rules to allow differential rights to be offered to select investors of AIF schemes (without affecting the interest of other investors of the scheme), but SEBI does not intend to allow investors in AIF Schemes to have rights that are not pro-rata to their commitment to the AIF Scheme.
Sub-regulation 21 (non-pro-rata rights) does not apply to angel funds. This is possibly because angel funds allow investors to opt out of investments and each investment by an angel fund is treated as a separate sub-scheme of the AIF. Therefore, in an angel fund, investors do not have rights, pro-rata to their commitment to the main AIF Scheme.
Sub-regulation regulation 22 (differential rights) does not apply to Large Value Fund for Accredited Investors. Does SEBI intend to provide that in a Large Value Fund for Accredited Investors, some accredited investors may be given rights that are not pari-passu with that of other investors in the same AIF Scheme?
It is commons for AIFs to issue “Carry” shares that offer returns on capital that are not proportionate to the holders’ commitment to the scheme. Are the November 2024 Amendments primarily targeted at the holders of such Carry shares? We shall have our answer when SEBI issue circulars to implement the November 2024 Amendments to the SEBI AIF Regulations.
The Securities and Exchange Board of India (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024 can be found here.
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