SEBI Offers Relief for Alternative Investment Funds on Unliquidated Holdings

On April 25, 2024, the Securities and Exchange Board of India (“SEBI”) introduced an amendment to the SEBI (Alternative Investment Funds) Regulation, 2012 (“the Amendment”).[1] The amendment provides for the concept of a “dissolution period” and its procedure.

On April 26, 2024, SEBI released a circular titled “Flexibility to Alternative Investment Funds (AIFs) and their investors to deal with unliquidated investments of their schemes.”[2] It provides greater flexibility for AIFs and their investors when dealing with unliquidated investments within their schemes. This circular aims to streamline the process and potentially reduce losses associated with such holdings.

New Option: Dissolution Period

Previously, AIFs with unsold investments at the end of their liquidation period had limited options. Now, SEBI introduces the concept of a “dissolution period.” This additional timeframe allows AIFs more time to sell off the remaining unliquidated assets. To enter the dissolution period, AIFs must obtain consent from at least 75% of their investors, based on the total value of their investments. However, before seeking this approval, certain conditions need to be met:

• AIF managers must demonstrate they attempted to sell at least 25% of the unliquidated investments before approaching investors for consent.
• AIFs must provide investors with crucial information, including the proposed duration of the dissolution period, how unliquidated investments will be valued, and an estimated range for the selling price.
• Investors who disagree with entering the dissolution period can exit the scheme using a portion of the bids received for the 25% stake.

Additional Considerations

• If the minimum 25% sale is not achieved, AIFs can still opt for the dissolution period with 75% investor consent.
• The performance of the AIF during the dissolution period will be tracked and reported separately.
• Any unliquidated investments remaining at the end of the dissolution period will be distributed to investors in their original form (in-specie). No further extensions are allowed after this.
• Management fees are waived during the dissolution period.

Mandatory In-specie Distribution

If AIFs fail to get the required investor consent for either dissolution or in-specie distribution during the standard liquidation period, the unsold investments are automatically distributed to investors in their original form. The value of these investments for performance tracking purposes is set at one rupee. Investors who are unwilling to accept these in-specie distributions will have their investments written off. Furthermore, AIFs with liquidation periods that have already expired or are expiring within 3 months of the regulation’s notification are provided a one-time benefit. They are granted a fresh liquidation period extending until April 24, 2025. This excludes AIFs with pending investor complaints. Lastly, the option to launch new “liquidation schemes” as a separate vehicle to handle unliquidated investments is no longer available. Existing liquidation schemes launched before this circular will continue to operate under the previous guidelines.

Potential Impact

AIFs

• The introduction of the dissolution period provides valuable additional time to offload unliquidated assets. This could lead to better returns for investors and the AIF itself.
• Furthermore, mandated investor disclosures regarding valuation, proposed timelines, and estimated sale prices can foster trust and facilitate informed decision-making among investors.
• Finally, the waiver of management fees during the dissolution period can incentivize AIFs to prioritize successful liquidation and potentially benefit investors.

Investors

• The mandatory investor consent requirement for entering the dissolution period empowers investors to participate in decisions that could impact their investments.
• Additionally, the requirement for AIFs to disclose crucial information regarding unliquidated investments provides investors with greater transparency and facilitates informed decision-making.
• While not ideal, the in-specie distribution option ensures investors receive the underlying assets even if they cannot be readily sold, potentially offering long-term value.

Market

• The improved framework for handling unliquidated investments could have a positive impact on the AIF market as a whole. The increased investor confidence fostered by the new framework could potentially attract more investors to AIFs. This could boost overall market activity.
• Streamlined procedures for AIFs can lead to more efficient liquidation processes, benefiting the entire AIF market.
• With more defined options for dealing with unliquidated holdings, AIFs might be more willing to invest in riskier assets. This could potentially lead to higher returns for investors.

Conclusion

Looking ahead, SEBI’s recent amendment offers AIFs and investors a promising outlook in managing unliquidated holdings. The introduction of the dissolution period fosters transparency, empowering investors with consent and crucial disclosures. Waiving management fees incentivizes AIFs to prioritize successful liquidation. This regulatory shift not only attracts more investors but also enhances market activity and efficiency, potentially leading to higher returns within a structured framework.

[1] https://www.sebi.gov.in/legal/regulations/apr-2024/securities-and-exchange-board-of-india-alternative-investment-funds-second-amendment-regulations-2024_83060.html.

[2] https://sebi.gov.in/legal/circulars/apr-2024/flexibility-to-alternative-investment-funds-aifs-and-their-investors-to-deal-with-unliquidated-investments-of-their-schemes_83065.html.