#SEBI has recently published a Consultation Paper to strengthen the governance mechanism of alternative investment funds (#AIFs). The Consultation Paper is seeking stakeholder comments on 5 key changes proposed:
1. Guidelines for borrowing by Category I and II AIFs.: The paper discusses the existing restrictions on borrowing by Category I and II AIFs, stating that the funds borrowed should be utilized for operational requirements and not for making investments. However, it also underscores that the funds borrowed by Category I and II AIFs may have been used for making investments in unlisted securities.
Nevertheless, to ensure that investment opportunities are not missed due to a shortfall in drawdown amounts from investors, the paper
– proposes that Category I and II AIFs may be allowed to borrow to meet the shortfall, provided it does not exceed 10% of the investment made in an investee company. This borrowing should only be done in emergencies and as a last resort.
– also recommends a cooling-off period between periods of borrowing or leverage for Category I and II AIFs that predominantly invest in unlisted securities, to prevent prolonged leverage
2. To mandate AIFs to hold their securities/investments in demat form only
To enhance transparency and ease of monitoring, it suggests that AIF’s investments should also be dematerialized, similar to the dematerialization of AIF units. The proposal aims to bring uniformity and transparency in the AIF industry. It highlights that a significant portion of investments held by AIFs are already in dematerialized form, and the cost of opening and holding demat accounts is not burdensome. It suggests that AIFs should hold their investments in demat form, with exemptions for certain instruments where dematerialization is not available.
3. To extend the mandate for appointment of custodian to all AIFs and to prescribe role of custodians appointed by AIFs;
The proposal also recommends extending the requirement of appointing custodians to all AIFs, irrespective of the size of their corpus, and clarifying the custodian’s role in monitoring AIF investments. Existing AIFs with corpus less than INR 500 crore shall be given a time period of 6 months to appoint custodian.
4. To specify maximum extension of tenure by Large Value Fund for Accredited Investors (LVFs)
It suggests allowing Large Value Funds (LVFs) to extend their tenure up to four years, subject to investor approval.
5. To mandate renewal of registration of AIFs.
Lastly, it addresses the renewal of registration for AIFs and proposes introducing a renewal fee to discourage inactive AIFs from holding their registration certificates without any activity.
The consultation paper can be accessed at SEBI | Consultation paper on proposed amendment to SEBI (Alternative Investment Funds) Regulations, 2012 to strengthen governance mechanisms of Alternative Investment Funds (AIFs)
