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Exploring Flexibility: A Consultation Paper on Extending Tenure for Unliquidated Investments in Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs)




Introduction:

The Securities and Exchange Board of India (SEBI) recently released a consultation paper with proposals aimed at providing greater flexibility to Alternative Investment Funds (AIFs) and Venture Capital Funds (VCFs), along with their investors, in handling unliquidated investments beyond the expiry of their tenure. This article delves into the key objectives, background, and proposals outlined in the consultation paper.


Objective:

The primary objective of the consultation paper is to gather feedback and opinions from the public regarding proposed measures that would offer AIFs, VCFs, and their investors increased flexibility in managing unliquidated investments beyond the stipulated tenure.


Background:

The backdrop of the consultation paper lies in the amendments to the AIF Regulations on June 15, 2023. These amendments provided AIFs with the flexibility to handle unliquidated investments by either launching a Liquidation Scheme or distributing such investments in-kind to investors. However, concerns were raised about the complexities involved in the Liquidation Scheme process, including time, cost, and tax-related issues.


Issues for Consideration:

The consultation paper addresses various concerns and proposes solutions to streamline the handling of unliquidated investments, presenting gist of the main proposals for consideration:

A.    Providing flexibility to AIFs to deal with unliquidated investments within the same scheme, without the requirement of launching a new liquidation scheme.

  • The proposal suggests amending AIF Regulations to allow schemes of AIFs to enter a "Dissolution Period" after the completion of their tenure.

  • The AIF can proceed with this Dissolution Process after obtaining positive consent from 75% of investors by value.

  • The AIF must arrange bids for at least 25% of the value of unliquidated investments, disclosing bid values to all investors.

  • The Dissolution Process shall commence from the date of expiry of liquidation period and shall not be more than the original tenure of the scheme.

  • Dissenting investors have the option to exit the scheme, with the remaining portion of the bid used for pro-rata exits.

  • Various safeguards, such as restrictions on manager fees during the Dissolution Period and limitations on reporting, are proposed.

 

B.    Granting one-time flexibility to AIFs, whose liquidation period has expired, to deal with unliquidated investments.

  • A one-time liquidation period of one year is proposed for AIFs whose liquidation period has expired, allowing them to fully liquidate, distribute in-kind, or opt for the Dissolution Process.

 

C.    Extending the flexibility of Dissolution Period/Process to VCFs through migration to the AIF regime.

  • The consultation paper highlights challenges faced by VCFs operating beyond their tenure, urging a migration to the AIF regime.

  • A new framework for migration is proposed, creating a sub-category called "Migrated VCFs" under Category I AIFs.

 

Principles of Migration for VCFs:

  • Smooth and cost-effective migration, with no additional fees for application/registration/migration.

  • Certain flexibilities under VCF Regulations continue for Migrated VCFs, and selected benefits of AIF Regulations are extended to them.

  • Tenure, extension, and liquidation provisions ensure a definite investment horizon.

 

Conclusion:

SEBI's consultation paper seeks to strike a balance between providing flexibility for AIFs and VCFs in managing unliquidated investments and maintaining regulatory principles for transparency and investor protection. Stakeholders are encouraged to provide feedback on these proposed changes, which could significantly impact the dynamics of the alternative investment landscape in India.

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