The Securities and Exchange Board of India (SEBI) on December 13, 2024 regarding the Pro-rata and pari-passu rights of investors of AIFs.
The following has been stated namely: -
• Under the Pro-rata rights of investors of AIFs, the recent changes under Regulation 20(21) of the AIF Regulations include the following:
o Investors' rights in AIF schemes no longer have to be pro-rata to their commitment if they are excluded from an investment or default on their contribution.
o The pro-rata distribution requirement does not apply when returns or profits are shared with the AIF manager or sponsor, as per their agreement (e.g., carried interest).
o Certain entities, such as the AIF manager, sponsor, multilateral institutions, and government-controlled entities, can invest in junior/subordinate units, accepting lower returns or higher losses than their pro-rata share.
o Existing AIFs with a priority distribution model are prohibited from accepting new commitments or investing in new companies until SEBI issues further guidance.
o AIFs that breach investment limits due to compliance with these new provisions will not face non-compliance penalties, but the breach must be documented in the Compliance Test Report.
• Under the Pari-passu rights of investors of AIFs the following has been stated namely: -
o AIFs can offer differential rights to select investors without affecting the interests of other investors, with clear guidelines on non-liability, non-control over decisions, and transparent disclosures in the PPM.
o The Standard Setting Forum (SFA) will formulate standards for offering differential rights, which will be published by January 15, 2025, and AIFs must comply with these standards when issuing such rights.
o AIFs must disclose eligibility criteria for differential rights and ensure investors understand the impact on their rights through the PPM and side letters/agreements.
o AIFs with PPMs filed post-March 1, 2020, must report differential rights that do not comply with the new standards to SEBI by February 28, 2025, and discontinue rights affecting other investors.
o LVFs for Accredited Investors may offer differential rights and are exempt from maintaining pari-passu rights, provided appropriate disclosures are made in the PPM and investors give a waiver acknowledging the impact on their interests.
This shall come into effect from December 13, 2024.
Please refer to the Annexures for the Format
[Notification No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/175]
