Summary of this article
Sebi proposed to allow AIFs to retain funds beyond fund life
The funds can be used to meet residual operating expenses while surrender of registration
The markets regulator Securities and Exchange Board of India (Sebi) has proposed to allow alternative investment funds (AIFs) to retain funds beyond the permissible fund life. The proposed change seeks to provide regulatory and operational certainty with respect to winding up of AIF schemes and in surrendering AIF registrations.
Sebi also suggested that AIFs which do not retain any funds after the expiry of their fund life should be allowed to seek an 'inoperative' status, subject to compliance with prescribed norms.
“These proposals are premised on the principle that while entry into the securities market is subject to specified eligibility criteria, the regulatory framework for exit, where an entity seeks to discontinue its activities, should be clear, predictable and operationally efficient,” the regulator said.
Sebi noted that AIFs typically need to retain some funds in order to meet residual operating expenses such as processing consultant and retainership fees, registrar and transfer agent (RTA) payments, legal costs and filing of private placement memorandum (PPM) audit reports. Such retained amounts are usually small compared to the overall fund size. Additionally, since many of these expenses are finalised near the end of a financial year or during the surrender process, AIFs face difficulty in achieving a nil bank balance by the end of the permissible fund life.
As of now, a surrender of registration is only allowed once all other liabilities have been paid. Due to this, such AIFs need to continue to comply with all regulatory requirements despite not managing any fund actively.
In order to address this operational challenge, Sebi suggested that AIF schemes can be allowed to retain liquidation proceeds beyond the permissible fund life. These proceeds may be used to meet these operational expenses. These expenses need to be substantiated through supporting documents and invoices, or have to be consistent with the incurred expenses of the previous year, Sebi said.
The proposed changes could help improve operating efficiency of AIFs. For investors in these funds, a faster process of surrendering of registration could also mean that they will likely to receive the bulk of their final redemption proceeds sooner. The increased accountability and transparency is also a plus for investors.
Sebi said that the intention of these changes is to allow retention of funds while keeping the fund operational for limited purposes. For this purpose, AIFs need to show the necessity of retaining such funds, which should include the proposed duration, not exceeding three years.
Sebi also observed that in some scenarios, AIFs may not retain any funds beyond the permissible fund life and may not have any active investment activity. However, they may continue to exist because of the possibility that inflow may come in the future due to favourable litigation outcomes or tax-related matters. In such scenarios, the AIF remains subject to full regulator compliance despite operating for contingent reasons, Sebi said.
Sebi has also proposed extending the option to be classified as ‘inoperative funds’ for such AIFs, with required regulatory compliance. This includes obtaining consent from at least 75 per cent of investors by value for such classification and in cases where potential liabilities may arise due to litigation or tax demands.
