The capital market regulator, in the consultation paper, suggested that instead of launching a new liquidation scheme by AIFs, the same scheme itself can be allowed to continue with the unliquidated investments beyond their tenure for a certain period or dissolution period for fully liquidating their unliquidated investments.
The market regulator also proposed to extend the flexibility of the dissolution process to venture capital funds through migration to the AIF regime.
The option to launch the Liquidation Scheme is presently available only to those schemes of AIFs which are under ‘Liquidation Period’ i.e. the period of one year following the expiry of tenure or extended tenure of the scheme for fully liquidating the scheme.
The SEBI proposal came after the capital market regulator received representations from participants in the AIF industry highlighting certain tax-related issues which come in the way of an efficient implementation of the Liquidation Scheme. The AIFs also highlighted that setting up a liquidation scheme and winding up the original scheme is a process involving time, cost, and effort, which directly or indirectly, would ultimately be paid by investors.
While providing flexibility to AIFs, the market regulator said it is also to be ensured that such an option should not become a means to delay proper recognition and disclosure of true asset quality, asset liquidity, and performance by AIFs and their managers, since these are core regulatory principles to ensure integrity and trust in the AIF ecosystem.
Sebi also suggested that during the Liquidation Period of a scheme of an AIF, if the AIF decides to opt for the Dissolution Period/Process, the AIF shall obtain positive consent of 75% of investors by the value of their investment in the scheme.
The SEBI further said upon obtaining the requisite investor consent for opting for the Dissolution Period/Process, the AIF shall arrange bids for a minimum of 25% of the value of the unliquidated investments. The bids shall be arranged for units representing the consolidated value of all unliquidated investments of the scheme’s investment portfolio.
“Liquidation schemes that have already been launched by AIFs shall be grand-fathered,” the market regulator said.
The capital market regulator suggested one-time flexibility to AIF schemes, whose Liquidation Period has expired or would be expiring within one month from the date of notification in this regard, to deal with unliquidated investment.
Presently, the option to launch a Liquidation Scheme is not available to schemes of AIFs whose Liquidation Period has expired before June 15, 2023, i.e. the date of notification of the aforementioned amendment to AIF Regulations.
The market regulator also recommended extending the flexibility of the dissolution process to venture capital funds through migration to the AIF regime. It further suggested that such migration should be smooth and cost-effective.
Under the VCF Regulations, VCFs are required to liquidate their investments within three months from the expiry of their tenure, whereas AIF Regulations provide AIFs a Liquidation Period of 12 months for the said purpose.
The capital market regulator suggested a new framework to facilitate VCFs to migrate to AIF Regulations, so that the proposed flexibility of the Liquidation Period and the flexibility of dealing with unliquidated investments by opting for the dissolution period/process, can be availed by VCFs.
Under the proposed regulatory framework for migration of VCFs to AIF Regulations, a sub-category should be created under Category I – VCFs called Migrated VCFs. Such VCFs can migrate themselves within 6 months of the date of Sebi’s notification in this regard.
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Published: 15 Jan 2024, 05:49 PM IST