On 19th August 2024, the Securities and Exchange Board of India (SEBI) has introduced new guidelines for borrowing by Category-I and Category-II Alternative Investment Funds (AIFs) and maximum permissible limit of tenure by Large Value Fund(LVF) for Accredited Investors.
- These new guidelines are introduced by making amendments to Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) and notified on 6th August, 2024.
Key Guidelines for Category-I and Category-II AIFs:
i.As per the new guidelines, Category-I and Category-II AIFs will be allowed to take loans to meet temporary funding requirements and day-to-day operational requirements but for not more than 30 days.
ii.Such borrowing can occur for maximum 4 times in a year, and must not exceed 10% of the investable funds and subject to such conditions as may be specified by SEBI from time to time.
- This aims to promote ease of doing business and provide operational flexibility to the AIFs.
Additional Conditions:
SEBI has further outlined additional conditions for Category-I and Category-II AIFs who want to borrow for the purpose of meeting shortfall in drawdown amount such as:
i.If AIF intends to borrow funds for meeting shortfall in drawdown amount, then, it will be required to disclose in the Private Placement Memorandum (PPM) of the scheme.
ii.The borrowed amount shall not exceed 20% of the investment proposed to be made in the investee company, or 10% of the investable funds of the scheme of AIF or the pending commitments from other investors, and such borrowings must only occur in emergencies.
iii.As per SEBI, the cost of such borrowing will be charged only to such investor(s) who delayed in payment for drawdown practice.
iv.Also, it is mandatory for the manager to disclose the details with respect to the amount borrowed, terms of borrowing and repayment to all the investors of the AIF/scheme, on a periodic basis as per the terms of agreement with the investors of the AIF.
v.SEBI has mandated to all Category-I and II AIFs to maintain 30 days cooling off period between two periods of borrowing as permissible under AIF Regulations.
- Moreover, the cooling period of 30 days will be calculated from the date of repayment of previous borrowing.
Maximum Permissible Limit for Extension of Tenure by LVFs:
i.As per the proviso to Regulation 13 (5) of AIF Regulations, 2012, LVF are now allowed to extend its tenure up to 5 years with the consent of two-thirds (2/3rd) of the unit holders by value of their investment in the LVF and the extension in tenure of any existing LVF scheme will be subject to such conditions as may be specified by SEBI from time to time.
ii.While, Existing LVF schemes which have not disclosed a definite period of extension or whose period of extension is beyond 5 years are required to realign the period of extension within 3 months from the date of this circular i.e. on or before 18th November 2024.
- Such LVF schemes will be required to update their revised period of extension in tenure in the quarterly report submitted on the SEBI Intermediary Portal (SI Portal) for the quarter ending 31st December 2024.
- While realigning the period of extension in tenure, LVF schemes are required to have the flexibility to revise their original tenure subject to the approval of all investors of the scheme.
SEBI Introduced New Framework for VCFs to Migrate to AIF Rules:
On 19th August 2024, the SEBI has introduced new framework for Venture Capital Funds (VCFs) to migrate to AIF rules. In July 2024, SEBI has permitted VCFs registered under the SEBI (Venture Capital Funds) Regulations, 1996, before the introduction of AIF regulations to transition to the current regulations by becoming migrated VCFs.
- This framework is introduced by making amendments to Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) and notified on 20th July 2024.
- Now, VCFs have option to transition to AIF Regulations to handle unliquidated investments after the end of tenure of their schemes. This option is available till 19th July 2025.
Note: A ‘Migrated VCF’ is a VCF that transitions or migrate to become a sub-category of VCF under Category-I AIF as per the AIF rules.
Key Modalities:
i.As per new framework, on application requirements, VCFs who want to migrate must submit their original registration certificate and specific information as outlined by the SEBI.
ii.SEBI has outlined conditions for VCFs with active schemes:
- If the liquidation period of such schemes has not expired, then, VCFs can migrate with the scheme’s tenure continuing as initially disclosed or as determined with the investor approval.
- If the liquidation period has expired, they must not have any unresolved investor complaints and will get an extra year i.e. until 19th July, 2025 to liquidate.
iii.On post migration considerations, SEBI mentioned that existing investors, investments, and units after migration, will be transferred under the AIF regulations without change.
iv.For VCFs who have not opt for migration, then, VCFs with active schemes will be subject to stricter reporting requirements and VCFs with expired schemes may face regulatory action.
- Also, for VCFs which have minimum one scheme whose liquidation period (in terms of Regulation 24 (2) of VCF Regulations) has expired will be subject to appropriate regulatory action for continuing period beyond the expiry of their original liquidation period.
v.As per the new framework, VCFs that have wound up all schemes or haven’t made any new investments will be required to give up their registration by 31st March, 2025.
About Securities and Exchange Board of India (SEBI):
Chairman- Madhabi Puri Buch
Headquarter- Mumbai, Maharashtra
Established- 1992
