[Opinion] SEBI Initiates ‘Roll-Over’ of Tail End AIF Assets | A Fresh Start for Aging Funds?

1. Introduction

In early 2023, the Securities and Exchange Board of India (“SEBI“), vide its consultation paper dated February 3, 2023 (“Consultation Paper“), sought comments on proposals to provide flexibility to tail-end alternative investment funds (“AIFs“) late into their extended phase along with their investors to carry forward unliquidated investments or its schemes upon expiry of its/their tenure as prescribed under the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations“).

Thereafter, as per the press release of the SEBI board meeting dated March 29, 2023, SEBI has, inter alia, in essence, granted its in-principal approval to the proposal(s) listed in its Consultation paper.

SEBI’s rationale in establishing regulatory mechanisms aimed at facilitating closures of tail-end AIFs is in light of the representations received from AIFs regarding the extension of the tenure of their schemes citing reasons such as lack of liquidity, legal, regulatory impediments, etc.

Therefore, as per SEBI, the way forward would entail complete closure of the scheme, recognition of the true asset value, and re-opening of a fresh fund at that value, which would satisfy the twin objectives of providing additional flexibility to investors/funds while ensuring disclosure and tracking of true asset value and fund performance, which, as per SEBI is a regulatory objective.

Though SEBI, through this Consultation Paper, has set out its intent in addressing the plethora of challenges surrounding the recognition of unrealized capital upon fund maturity, further clarity may be gathered from the circulars or amendments which shall follow for this purpose.

2. Current Position under the Existing AIF Regulations

Presently, an AIF and the investment manager of the AIF upon expiry of the tenure of a scheme of the AIF under the AIF Regulations, AIFs (except Large Value Funds for Accredited Investors (“LVF“)) may extend the tenure of a scheme only up to two years, subject to receiving the approval of two-thirds of the investors by value of their investment in the AIF. LVFs, on the other hand, are permitted to extend their tenure beyond two years, subject to the terms of their fund documents and such conditions as may be specified by SEBI from time to time.

Winding up of an AIF has its own procedural norms to be followed depending on how the AIF was set up – that is, trust, company or LLP.

AIFs also have the option to distribute the assets of the AIF in-specie, after obtaining the approval of at least seventy-five per cent of the investors by value of their investment in the AIF. In case in-specie distribution of assets does materialize, AIFs are required to fully liquidate the scheme within one year following expiration of the AIF’s tenure.

In this context, it is worth noting that the AIF Regulations do not explicitly prohibit an AIF from acquiring the residual assets of another AIF, including, where the investment manager and/or sponsor of such transacting AIFs are the same. It may very well be the case that the investment manager and/or sponsor of an AIF whose life cycle is drawing to a close will launch a new AIF and carry forward the residual investments of the existing AIF to the new AIF subject to suitable disclosures in the new AIF’s private placement memorandum.

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