The Securities and Exchange Board of India (SEBI), on April 26, 2024, notified the Framework for Category I and II Alternative Investment Funds (AIFs) to create encumbrance on their holding of equity of investee companies.
SEBI has amended the Alternative Investment Funds (AIF) Regulations, 2012 to enable Category I and II AIFs to create encumbrances on their equity holdings in investee companies for facilitating debt raising by such companies. The amendments, notified on April 25, 2024, allow AIFs to create encumbrances specifically for borrowing purposes, subject to certain conditions.
The following has been stated-
•Eligibility Criteria and Disclosure are that Existing Category I or II AIF schemes without investors prior to April 25, 2024, can create encumbrances on investee company equity, with explicit disclosure in Private Placement Memorandums (PPMs).
•Encumbrances created after April 25, 2024, with explicit disclosure in the PPMs, can continue.
•Investor Consent is that encumbrances created without explicit disclosure require investor consent by October 24, 2024, or must be removed by January 24, 2025.
•Utilization of Borrowings are that Borrowings against encumbered equity must be utilized solely for the development, operation, or management of the investee company.
•The duration of encumbrances should not exceed the residual tenure of the AIF scheme. Compliance of AIFs with significant foreign investment or involvement must comply with RBI Master Direction on Foreign Investments in India.
•In case of default by the borrower investee company, AIFs must ensure that the fund or its investors are not subject to any additional liability beyond the encumbered equity. AIFs are prohibited from extending any form of guarantee for investee companies. Encumbrances are not permitted on investments in foreign investee companies.
•The Standard Setting Forum for AIFs (SFA) in consultation with SEBI will formulate implementation standards to ensure that encumbrances are utilized solely for facilitating debt raising in infrastructure sector investee companies.
•These standards will be published on the websites of industry associations, including the Indian Venture and Alternate Capital Association (IVCA), PE VC CFO Association, and Trustee Association of India. The trustee/sponsor of AIFs must ensure that the Compliance Test Report prepared by the manager includes compliance with the provisions of this circular.
•These amendments aim to promote ease of doing business and flexibility for AIFs while ensuring responsible investment practices and investor protection.
The circular shall come into force with immediate effect.
[Notification No. SEBI/HO/AFD/PoD1/CIR/2024/027]
