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Flexibility to AIFs and their investors to deal with unliquidated investments of their schemes

The Securities and Exchange Board of India (SEBI) has recently announced amendments to the Alternative Investment Funds (AIFs) regulations, aimed at providing additional flexibility for AIFs and their investors in managing unliquidated investments. These amendments come as a response to the unique challenges faced by AIFs in dealing with illiquid assets.

Summary of key points:

1. Definition of Dissolution Period: A clear definition of the "dissolution period" is provided, which follows the expiry of the liquidation period of a scheme, specifically for the purpose of liquidating unliquidated investments.


2. Conditions for Entering Dissolution Period:

a.  AIFs can distribute investments in-specie or enter the dissolution period with the approval of at least 75% of investors by value.


b. Before seeking consent, the AIF must arrange bids for a minimum of 25% of the value of unliquidated investments.


c. Disclosure of proposed dissolution period tenure, details of unliquidated investments, and bid values to investors is required.


d. SEBI must be informed before entering the dissolution period.


3. Handling of Bid Arrangements:

a. Dissenting investors have the option to fully exit the scheme if the bid is successfully arranged.


b. After exercising the exit option by aforesaid dissenting investors, the remaining portion may be used for pro-rata exits for non-dissenting investors.


c. If the AIF or its manager fails to secure bids for at least 25% of the value of unliquidated investments within the scheme, the AIF still has the option to enter a Dissolution Period. However, this is subject to obtaining consent from at least 75% of the investors by the value of their investment in the AIF's scheme.


d. In case where the bidder or any related parties are investors in the scheme, these investors will not be allowed to exit the scheme due to the bid. The term "related party" will hold the same definition as outlined in Regulation 2(1) (zb) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.


4. Performance Reporting and Fees: If the AIF/manager organizes bids for at least 25% of the unliquidated investments' value, the valuation will be based on the bid amount. However, if the AIF/manager fails to arrange bids for at least 25% of the unliquidated investments' value, the valuation will be considered as One Rupee. The manager's performance during the Dissolution Period will be evaluated separately and reported to Performance Benchmarking Agencies, distinct from the scheme's performance prior to entering the Dissolution Period. If the AIF scheme fails to sell the unliquidated investments during the Dissolution Period, they must be distributed in-specie to the investors. It is important to note that no further extension or Liquidation Period will be granted to these schemes after the Dissolution Period expires.


5. Mandatory In-Specie Distribution: During the liquidation period, if an Alternative Investment Fund fails to obtain the required investor consent for entering the dissolution period or distributing investments in-specie, the unliquidated investments must be mandatorily distributed to investors in-specie. This distribution does not require the consent of 75% of investors by the value of their investment in the AIF scheme. The value of these investments distributed in-specie is recognized as one rupee, primarily for tracking the manager's performance and reporting to Performance Benchmarking Agencies. If any investor declines to accept the in-specie distribution of unliquidated investments, those investments will be written off.


6. Extension of Liquidation Period: Regulation 29(9A) of the AIF Regulations offers a one-time flexibility to schemes of Alternative Investment Funds whose liquidation period has expired or is expiring within three months from the date of notification of the AIF Regulations Amendment, 2024. Such schemes may be granted an additional liquidation period, subject to specified conditions set by the Board. This additional liquidation period, granted under sub-regulation (9A), does not prejudice the issuance of any directions or measures under the Act or regulations framed thereunder.


a. Schemes of AIFs whose liquidation period has expired or will expire on or before July 24, 2024, will be granted a fresh liquidation period until April 24, 2025.


b. This fresh liquidation period is available only to schemes without any pending investor complaints regarding non-receipt of funds/securities as of April 25, 2024 (the date of the AIF Regulations Amendment notification).


c. Schemes with pending investor complaints may avail the fresh liquidation period upon resolution of such complaints. However, it will be available only from the date of resolution of the complaint until April 24, 2025.


d. During the fresh liquidation period, the scheme must fully liquidate its investments, distribute the investments in-specie, or opt for the dissolution period.


7. Responsibility for Compliance: Managers, trustees, and key personnel are responsible for compliance and must submit reports accordingly.


8. Discontinuation of New Liquidation Scheme Launch:  Regulation 29A (8) of the AIF Regulations mandates that no Alternative Investment Fund can introduce any new liquidation scheme under this regulation after the notification of the Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2024. However, any liquidation scheme initiated by an AIF prior to April 25, 2024 (the date of notification of the AIF Regulations Amendment), will continue to be governed by Regulation 29A and other provisions of these regulations until such schemes are wound up. Furthermore, any liquidation scheme launched before April 25, 2024, will be regulated by SEBI Circular No. SEBI/HO/AFD/PoD1/CIR/2023/098, dated June 21, 2023, concerning the modalities for launching liquidation schemes and distributing AIF investments in-specie, until their closure.

The circular is effective immediately upon issuance.




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