The Securities and Exchange Board of India (SEBI) recently issued the fourth amendment to the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) in order to bring the alternative investment funds (AIF) regulatory space closer to global standards. The amendment was accompanied by guidelines on the operational aspects of AIFs, which were prescribed in a circular issued two days later. These developments were a result of proposals approved during a SEBI Board Meeting held on September 30, 2022.

 

A] RING FENCING OF ASSETS

The Indian Trusts Act of 1882 allows for the creation of private trusts known as Alternative Investment Funds (AIFs). These trusts are managed by a common investment manager for all schemes within the trust. Each scheme operates based on the strategy outlined in its private placement memorandum (PPM) and scheme-specific agreements with investors. In order to maintain segregation between the schemes, the Securities and Exchange Board of India (SEBI) clarified in a 2015 circular that the investment manager must ensure scheme-wise segregation of bank accounts and securities accounts.

Other investor-friendly jurisdictions, such as Singapore, Hong Kong, Mauritius, Cayman Islands, Luxembourg, and the United Kingdom, require investment managers to ensure that the assets and liabilities of sub-funds of umbrella funds are segregated. These jurisdictions have introduced classes of investment vehicles, such as variable capital companies, protected cell companies, or segregated portfolio companies, to facilitate this segregation. While the code of conduct for asset managers and trustees of mutual funds in India and fund managers in International Financial Services Centers includes provisions for the segregation and ring-fencing of assets and liabilities of sub-funds, such provisions were not codified in the AIF Regulations for onshore AIFs.

In order to provide investors with greater protection and assurance, the Fourth Amendment to the AIF Regulations introduces Regulation 20(15), which requires the investment manager and trustee (or their structural equivalent) of an AIF to ensure that the assets and liabilities of each scheme of the AIF are ring-fenced and segregated from the assets and liabilities of other schemes within the AIF. This amendment also incorporates language from the 2015 circular on the segregation and ring-fencing of bank accounts and securities accounts of each scheme of the AIF.

B] FIRST CLOSE TIMELINES

Existing Schemes of AIFs that have not yet declared their first close must do so within 12 months of the date of the 2022 Circular. If the PPM for such a scheme was taken on record more than 12 months before the 2022 Circular and the scheme has not yet declared its first close, the AIF must submit an updated PPM in a standardized format to SEBI along with a due diligence certificate from a SEBI-registered merchant banker. The updated PPM must be circulated to investors before the first close is declared.

For registrations after the date of the 2022 Circular, the first close of a scheme must be declared within 12 months of the date on which the PPM for the scheme is taken on record by SEBI. For open-ended schemes of Category III AIFs, the first close must be declared within 12 months of the end of the initial offer period.

For large value funds, the first close of a scheme must be declared within 12 months of the grant of registration to the AIF or the date on which the PPM for the scheme is filed with SEBI, whichever is later. Existing schemes must declare their first close within 12 months of the date of the 2022 Circular.

If the first close of a scheme is not declared within the prescribed timeline, the AIF must file a fresh application for the launch of the scheme and pay an amount equivalent to the registration fee for the relevant category or sub-category of the AIF to SEBI.

C] CORPUS

The AIF Regulations require AIFs to have a minimum corpus, and SEBI has now mandated that the corpus of an AIF must not be lower than the minimum corpus prescribed in the AIF Regulations at the time of the AIF declaring its first close. This requirement is already followed by the industry as an unlegislated rule. In order to prevent investment managers or sponsors from making a commitment to an AIF solely for the purpose of meeting the minimum corpus requirements and then reducing that commitment for their own benefit, the commitment provided by the sponsor or investment manager at the time of the first close cannot be reduced, withdrawn, or transferred after the first close has been declared.

  1. Corpus: At the time of declaring its first close, the corpus of a scheme must not be less than the minimum corpus required under the AIF Regulations. For social impact funds and angel funds registered as Category I AIFs, this minimum corpus is INR 5 crores. For special situation funds, the minimum corpus is INR 100 crores. For all other categories and sub-categories of AIFs, the minimum corpus is INR 20 crores.
  2. Sponsor/ Fund Manager Commitment: The commitment provided by the sponsor or investment manager at the time of the first close towards meeting the minimum corpus requirement for the AIF must not be reduced, withdrawn, or transferred after the first close has been declared.
  3. Investor Commitment: Prior to the declaration of the first close, investors must be given the option to withdraw or reduce their capital commitment to the scheme.

D] TENURE

  1. The tenure of closed-ended schemes of AIFs shall be calculated from the date of the first close.
  2. An AIF may modify the tenure of a scheme at any time before the first close is declared.
  3. For existing schemes that have already declared their first close, the tenure may continue to be calculated from the date of the final close.
  4. For existing schemes that have not yet declared their final close, the final close must be declared according to the timeline provided in the Scheme's private placement memorandum (PPM), and the investment manager will have no discretion to extend this timeline.