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Author: Gaurav Shanker, Managing Partner And Yamini Mishra, Associate |

Article by Business Law Chamber

The Securities and Exchange Board of India (SEBI) introduced certain amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) vide its notification dated 15 November 2022 (“Fourth Amendment”). The Fourth Amendment primarily focuses on the following items:

  1. Timeline for declaration of first close of schemes of Alternative Investment Funds (“AIFs”);
  2. Calculation of tenure of AIFs;
  3. Ring-fencing of assets and liabilities of schemes of AIFs; and
  4. Regulatory provisions with regard to change in control of manager/sponsor and change in manager/sponsor of AIFs.

Timeline for declaration of first close of schemes

In accordance with the AIF Regulations, AIFs may launch schemes subject to filing of the Private Placement Memorandum (PPM) of the scheme with SEBI. The AIF Regulations do not specify the period within which a scheme shall be launched by an AIF. It was observed by SEBI that the PPMs of certain schemes were filed with or taken on record by SEBI more than 4 years ago which have not raised any commitments from investors. Such outdated PPMs may not have disclosures that are in line with the current regulatory requirements. AIFs may seek commitment from investors, based on the information and disclosures provided in such outdated PPMs. Further, AIF Regulations do not specify what constitutes 'launch' of a scheme. In common parlance, ‘launch’ of scheme can be construed as the date from which the AIF begins seeking commitment from prospective investors.

Considering the above, there was a need for SEBI to prescribe a timeline for AIFs to launch their schemes, after the PPM of the scheme is taken on record by SEBI.

In addition to the Fourth Amendment, SEBI vide its circular dated November 17, 2022, issued guidelines for AIFs for declaration of first close, calculation of tenure and change of sponsor/manager or change in control of sponsor/manage (“Circular”).

The ‘First Close’ is the initial closing upon which AIFs are able to obtain certain level of commitments from its investors, which is an ascertainable / verifiable event, after which the AIF can drawdown funds from the investors for making investments. The Circular details the timelines for declaring the First Close of a scheme of AIF, along with the minimum corpus at which the First Close is declared.

(i) First close by existing schemes
Existing Schemes of AIFs, who have not declared their First Close, shall declare their First Close within 12 months from the date of the Circular. Existing Schemes of AIFs, whose PPMs were taken on record prior to 12 months from the date of the Circular and have not declared their First Close, shall submit an updated PPM with SEBI in the specified format through a SEBI registered merchant banker along with a due diligence certificate from the merchant banker in the prescribed manner and such updated PPM shall be circulated to investors before declaration of First Close.

(ii) Corpus
The corpus of the scheme at the time of declaring its First Close shall not be less than the minimum corpus prescribed in AIF Regulations for the respective category/sub-category of the AIF. The commitment provided by sponsor or manager at the time of declaration of First Close, to the extent to meet the aforesaid minimum corpus requirement, shall not be reduced or withdrawn or transferred, post First Close.

(iii) First close for registrations after the date of the Circular
The first close of a Scheme shall be declared within 12 months from the date on which communication is sent to SEBI for taking the PPM of the scheme on record. In case of open-ended Schemes of Category III AIFs, the first close shall be declared within 12 months from the close of their 'initial offer period'.

(iv) Large Value Funds
The first close of schemes of Large Value Funds (LVF) for accredited investors shall be declared within 12 months from the date of grant of registration of the AIF or date of filing of PPM of Scheme with SEBI, whichever is later. Existing LVF schemes shall declare their first close within 12 months from the date of the Circular.

(v) Failure to declare first close
In case the first close of a scheme is not declared within the timeline prescribed, the AIF shall file a fresh application for launch of the said Scheme as per applicable provisions of AIF Regulations by paying requisite fee to SEBI.

Calculation of tenure of AIFs

In order to facilitate that AIFs calculate their tenure in a uniform manner, SEBI specified in its circular dated October 1, 2015, that the tenure of any scheme of the AIF shall be calculated from the date of the Final Close of the scheme. Since, tenure of the scheme is calculated from Final Close, each extension in Final Close by the manager may result in extension of overall tenure of the scheme, thus adversely affecting the investment horizon of the investors i.e. the length of time that an investor has to remain invested in the AIF.

Therefore, considering the said issue, following amendments have been made to the AIF Regulations:

  1. The tenure of close ended schemes of AIFs shall be calculated from date of declaration of its First Close.
  2. AIFs may modify the tenure of the scheme at any time before declaration of First Close and the investor may also withdraw or reduce commitment provided to the scheme, prior to declaration of First Close of the scheme.
  3. Existing schemes of AIFs which have declared their First Close, may continue to calculate their tenure from the date of Final Close in terms of SEBI Circular dated October 1, 2015.
  4. Existing schemes of AIFs, which have declared their First Close, and are yet to declare Final Close, shall declare the Final Close as per the timeline provided in the PPM of the scheme and the AIF/manager shall not have any discretion to extend the said timeline provided in the PPM.

Ring-fencing of assets and liabilities of schemes

AIFs can launch multiple schemes under a single AIF registration with SEBI as per AIF Regulations. Each scheme under an AIF may have separate sets of investors and different investment portfolios. Therefore, SEBI, vide circular dated October 01, 2015, specified that all managers of AIFs shall ensure scheme-wise segregation of bank accounts and securities accounts.

Taking the SEBI circular dated October 01, 2015 [as a basis], the AIF Regulations have been amended to specify that, based on the legal structure of the AIF, the Manager and the Trustee or Trustee company or the Board of Directors or Designated Partners of the AIF, shall ensure that the assets and liabilities of each scheme of an AIF and bank accounts and securities accounts of each scheme are segregated and ring-fenced from other schemes of the AIF.

This amendment leads to a certainty for the investors of AIF, especially foreign investors, with respect to protection of their assets in a scheme of an AIF from any liability which may arise from other schemes of the same AIF.

Change in control of manager/sponsor and change in manager/sponsor of AIFs

As per the earlier framework, AIFs were required to inform/intimate SEBI in case of any change in the sponsor, manager or designated partners or any other material change from the information provided by the AIF at the time of application for registration. However, as per the Fourth Amendment, the AIFs shall now be required to take prior approval from SEBI in case of change of sponsor or manager, or change in control of the AIF, sponsor or manager, prior approval from SEBI, subject to levy of fees and any other conditions as may be specified by SEBI, from time to time.

The fee for such change shall be equivalent to the registration fee as may be applicable to the respective category / sub-category of the AIF. In case change in control of manager/change of manager and change in control of sponsor/change of sponsor of an AIF is proposed simultaneously, then, the fee equivalent to single registration fee shall be levied. It has also been clarified that the cost paid towards such fee should not be passed on to the investors of the AIF in any manner whatsoever.

SEBI has introduced stringent but investor friendly amendments, bringing in more protection for the investors and providing further clarifications to certain terms under the AIF Regulations.

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