Regulatory Update: SEBI Guidelines on borrowings by AIFs and extension of tenure by LVFs
Recently, the Securities Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) were amended with respect to: (a) borrowing norms for Category I and Category II Alternative Investment Funds (AIFs); and (b) maximum permissible limit for extension of tenure by Large Value Funds (LVFs).
Pursuant to this amendment, the Indian securities market regulator SEBI issued a circular laying down guidelines for borrowings by Category I and Category II AIFs and for extension of tenure by LVFs (“Circular”). The Circular is effective from 19 August 2024 and compliance with its provisions must be included in the annual compliance test report prepared by the manager of an AIF.
- Guidelines for borrowing by Category I and Category II AIFs
Earlier, Category I and II AIFs were not allowed to borrow funds, directly or indirectly, for making investments or otherwise. The AIF Regulations permitted borrowing of funds for the said categories of AIFs only to meet temporary funding requirements and day-to-day operational requirements on certain conditions.
Now, SEBI has allowed Category I and II AIFs to borrow money for the purpose of meeting temporary shortfall in the drawdown amount i.e. the amount called from investors for making investments, based on the following additional conditions:
- the borrowing shall be disclosed in the private placement memorandum (PPM) of the AIF scheme;
- the borrowing shall be done only in case of emergency and as a last recourse, when despite the best efforts of the manager the drawdown amount has not been received by the investors of the AIF;
- the borrowing shall not exceed the lower of the following amount: (i) 20% of the proposed investment, (ii) 10% of the investable funds of the AIF scheme, or (iii) the pending drawdown amount;
- the cost of the borrowing shall be charged to those investors who failed to provide the drawdown amount;
- the flexibility provided by such borrowing shall not be used to provide different drawdown timelines to investors;
- details of borrowing such as amount, terms of borrowing and repayment shall be disclosed to all the investors on a periodic basis; and
- a cooling off period of 30 days shall be maintained between two periods of borrowing, which shall be calculated from the repayment date of previous borrowing.
- Maximum permissible limit for extension of tenure by LVFs
In terms of the AIF Regulations, a LVF can extend its tenure up to 5 years subject to prior approval of 2/3rd of the unit holders by value of their investment in the LVF. In this regard, certain conditions have been provided by SEBI:
- existing LVF schemes who have not disclosed the period of extension in the PPM or the period of extension in tenure is beyond 5 years must: (i) align the period of extension with the permissible period of 5 years by 18 November 2024, and (ii) update the revised period of extension in the quarterly report submitted on the SEBI Intermediary Portal for the quarter ending 31 December 2024; and
- LVF schemes may revise their original tenure after obtaining consent of all investors. An undertaking stating that such consent has been obtained must be submitted to SEBI by 18 November 2024.
Please click here to read the Circular.
The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.