Alerts & Updates 16th Dec 2024
The Securities and Exchange Board of India (SEBI) has issued a circular dated December 13, 2024 (“SEBI December Circular”) in order to implement the amendments made to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“SEBI AIF Regulations”) on November 18, 2024 vide the Securities and Exchange Board of India (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024 (November 2024 Amendments), which had inserted two new sub-regulations, 21 and 22, in Regulation 20 of the SEBI AIF Regulations.
Pursuant to new sub-regulation 21 of Regulation 20 of the SEBI AIF Regulations, the SEBI December Circular lists the following exceptions to the general rule that each investor’s rights in an AIF’s scheme shall always be pro-rata to such investor’s commitment to the AIF scheme:
The SEBI December Circular also allows the following classes of investors to accept returns lesser or to share losses other than in accordance with their pro-rata rights in the investments of an AIF:
The aforementioned exception would permit the issue of units by an AIF that are subordinate to the other units issued by the same AIF (“Subordinate Units”) to the classes of investors mentioned above and would facilitate fund raising by AIFs. It is interesting to note that ordinary commercial banks (scheduled banks) are not covered by the above exception and cannot subscribe to Subordinate Units.
If the investment manager or sponsor of an AIF subscribes to Subordinate Units of an AIF, investee companies of such AIF cannot use the money received from the AIF to repay any of the investee company’s obligations or liabilities towards such investment manager or sponsor of the AIF or the associates of such investment manager or sponsor.
Any AIF scheme that had in the past adopted a priority distribution model which does not fall under the limited exemption given by the SEBI December Circular to AIF to issue Subordinate Units to certain entities (that accept returns lesser or to share losses other than in accordance with their pro-rata rights in the investments of such AIF) cannot accept any fresh commitment or make investments in new investee companies, directly or indirectly.
Pursuant to new sub-regulation 22 of Regulation 20 of the SEBI AIF Regulations, the SEBI December Circular permits differential rights (DR) to be offered by AIFs to select investors, without affecting the rights of other investors, based on the following guiding principles:
SEBI has tasked the Standard Setting Forum for AIFs (‘SFA’) with formulating the implementation standards for issuance of DRs by AIFs. The implementation standards are expected to provide a positive list of specific differential rights that may be offered by AIFs to their investors and are to be published on the websites of the three industry associations which are part of SFA (namely, the IVCA[2], the PE VC CFO Association and the Trustee Association of India) on or before January 15, 2025.
Regulation 20(22) of the SEBI AIF Regulations does not apply to Large Value Fund for Accredited Investors (LVF). Therefore, LVFs whose PPMs are filed with SEBI for launch of LVF scheme post the date of issuance of the SEBI December Circular (December 13, 2024), may issue DRs provided appropriate disclosures are made in the PPM of the relevant AIF scheme and every investor in the LVF provides a waiver at the time of on-boarding. The waiver should state as follows:
“The prospective investor is aware that LVFs may avail exemption from the requirement of maintaining pari-passu rights among investors and therefore, may offer differential rights to select investors which might affect interest of other investors of the LVF.”
Vide its circular dated February 05, 2020, SEBI had prescribed standard templates for the private placement memorandums (“PPM”) of AIFs. As per such template, with effect from March 01, 2020, AIFs are required to disclose to investors through their PPMs that any differential right offered to an investor(s), through separate classes of units or side letters/agreements, shall not have any adverse impact on the economic rights or any other rights of other investors. If any AIF, which filed a PPM with SEBI on or after March 01, 2020 and granted DRs to its investors that do not fall under the folds of the implementation standards formulated by SFA, the investment manager of such AIF should email details of such DRs to SEBI on or before February 28, 2025. The format for such report is given in Annexure I of the SEBI December Circular. Further, out of the DRs that are required to be reported to SEBI as per the SEBI December Circular, the investment manager has to immediately terminate/discontinue those DRs which affect the rights of other investors.
The SEBI December 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
Akhil Ganatra, Advocate – Email – akhilganatra@elp-in.com
Zaynali Badami, Advocate – Email – zaynalibadami@elp-in.com
[1] SEBI has, vide its circular dated April 10, 2023, formulated guidelines for excusing or excluding an investor from investments by the AIF.
[2] The Indian Venture and Alternate Capital Association
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