Ring-fencing of Schemes: Recent Amendment to the SEBI (Alternative Investment Funds) Regulation
The Securities and Exchange Board of India (”SEBI”) recently issued a notification on November 15, 2022, that amended the SEBI (Alternative Investment Funds) Regulations, 2012 to include a mandate that the Manager/Board/Designated Partners of an Alternative Investment Fund (AIF) shall ensure that the assets and liabilities of each scheme of an AIF are segregated and ringfenced from other schemes of such AIF and further the bank accounts and securities amount of each scheme is also segregated and ringfenced from other schemes.
For a while now, the fund’s industry has been requesting the SEBI to include provisions in the AIF Regulations which make it adequately clear that separate schemes of an AIF are to be construed as being ring-fenced investment vehicles and that the assets and liabilities of each scheme relate solely to that particular scheme and its investors. This was especially crucial since overseas investors frequently choose to take part in fund structures that are legally distinct from other funds managed by the same General Partner or Fund Manager and it becomes essential for them that this requirement be met whenever they engage in investments in AIFs.This used to push the fund managers to set up new AIFsfor such overseas investors (which is an intensive process) despite having the flexibility under the extant regulations to set up multiple schemes under the same
It would be interesting to see whether this clarification provides adequate confidence to overseas investors or perhaps, a clearer diktat was expected by them
It is pertinent to mention that the most recent amendment made by the SEBI in the Securities and Exchange Board of India (Alternative Investment Funds) (Fourth Amendment) Regulations, 2022, shields investors in one AIF scheme from the potential of suffering catastrophic losses as a result of the collapse of another plan administered by the same AIF. Ring-fencing, in its most basic form, precludes alternative investment funds (AIFs) from utilizing the money or assets of a plan to satisfy their obligations and offset losses in the respective schemes.
This amendment is expected to tempt Limited Partners (LPs) to invest money in schemes managed by private equity or venture capital firms without the fear of their investment getting wiped out owing to catastrophic losses in another scheme of the same private equity or venture capital firms.
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