The Securities and Exchange Board of India (SEBI) has unveiled a transformative set of regulations for Alternative Investment Funds (AIFs). In a circular dated July 9, 2024, the regulator introduced a "dissolution period" to address asset liquidation challenges and streamlining the liquidation process. These measures aim to enhance operational flexibility for AIFs while upholding robust investor protection standards.

Key Regulatory Changes

Introduction of Dissolution Period: AIFs facing challenges in liquidating assets due to market illiquidity can now opt for a 'dissolution period.' This provision allows AIFs additional time beyond the standard liquidation period to divest their holdings strategically. To avail this option, AIFs must secure approval from 75% of their investors (by value of investment) and submit a detailed information memorandum to SEBI through a merchant banker.

Extension of Liquidation Period: AIFs whose liquidation period is expiring on or before July 24, 2024, can apply for an additional liquidation period. This extension aims to provide relief to AIFs grappling with the complexities of asset liquidation in the current market scenario.

Clarification on In-specie Distribution: SEBI has clarified the conditions for in-specie distribution, wherein investors receive assets directly instead of cash proceeds during liquidation. In-specie distribution, other than mandatory instances, requires the consent of 75% of investors (by the value of their investment). 

Enhanced Reporting Requirements: AIFs opting for the dissolution period or additional liquidation period must adhere to stringent reporting requirements. They are required to submit comprehensive information to SEBI, including details of unliquidated investments, valuation reports, and investor consent.

Implications for AIFs and Investors

AIF Managers: The introduction of the dissolution period offers AIF managers greater flexibility in navigating challenging market conditions. However, it also necessitates meticulous documentation and adherence to SEBI's reporting guidelines.

Investors: The changes aim to enhance transparency and safeguard investor interests. The requirement for investor consent in key decisions like in-specie distribution ensures greater investor participation in the AIF's liquidation process.

Additional Considerations

The circular emphasises the accountability of the AIF's manager, trustee, and key management personnel in ensuring compliance with the revised regulations.

SEBI has released detailed formats for the information memorandum and due diligence certificates required for AIFs opting for the dissolution period.

Takeaway

SEBI's latest circular marks a significant step in the evolution of AIF regulations in India. By introducing the dissolution period and clarifying in-specie distribution norms, SEBI aims to strike a balance between providing operational flexibility to AIFs and protecting the interests of investors. These changes are expected to foster a more resilient and transparent AIF ecosystem in India.

You can access the SEBI circular here.