The Securities and Exchange Board of India (SEBI) on February 07, 2025, issued a Consultation Paper on review of Regulation 17 (a) of SEBI (AIF) Regulations, 2012, with the objective of Ease of Doing Business.
The objective of this consultation paper is to seek comments/views /suggestions from the public on the proposals to allow more holdings in listed debt below a certain rating considering the possible shrinking of the universe of investment opportunities in unlisted debt securities pursuant to the recently introduced Regulation 62A of SEBI (LODR) Regulations, 2015.
The Regulation 17(a) under ‘Conditions for Category II Alternative Investment Funds’, of the SEBI (Alternative Investment Funds) Regulations, 2012, states as under:
“Category II Alternative Investment Funds shall invest in investee companies or in the units of Category I or other Category II Alternative Investment Funds as may be disclosed in the placement memorandum;
Explanation. – Category II Alternative Investment Fund shall invest primarily in unlisted companies directly or through investment in units of other Alternative Investment Funds.”
SEBI has received representations from AIF industry association and from funds which predominantly invest in debt securities, highlighting the following concerns:
• The entities that had issued listed Non-Convertible Debentures (NCDs) on or before 1st January 2024, would not be eligible to issue any unlisted NCDs till even one listed NCD is live. Regulation 17(a) of the SEBI (AIF) Regulations, 2012 mandates Category II AIFs to invest primarily in unlisted securities.
• Further, the debt securities of investee companies which are issued on or after January 01, 2024 and are currently unlisted, would also be mandatorily required to be listed by the investee companies at any time subsequently, in case such investee company propose to list any one of their debt securities in future (in light of Regulation 62A (3) of SEBI LODR Regulations). In light of the above, while a Category II Debt Fund may have invested in unlisted debt securities, the same may subsequently be mandatorily required to be listed by the investee companies. The above provision is beyond the control of the Category II AIFs and may be considered as onerous compliance.
Based on the recommendations of AIPAC and internal deliberations, public comments are sought on the following proposal:
Proposal 1: Category II Alternative Investment Fund to invest more than 50% of their total investible funds in unlisted securities, and/or listed debt securities having credit rating ‘A’ or below, directly or through investment in units of other AIFs.
Considering the implications of the aforementioned matters on the market participants, public comments are invited on the above-detailed proposals. The comments/ suggestions should be submitted latest by February 28, 2025, through the following link: https://www.sebi.gov.in/sebiweb/publiccommentv2/PublicCommentAction.do?doPublicComm
