Sebi issues new guidelines allowing Alternative Investment Funds (AIFs) to retain liquidation proceeds past fund life and introduces ”Inoperative Fund” status.
The regulator also introduced an ‘Inoperative Fund’ framework for wound-up funds with residual obligations.
The move follows amendments to the Sebi (Alternative Investment Funds) Regulations on April 18 aimed at providing operational flexibility to AIFs during the winding-up process and surrender of registration.
Under the new framework, AIFs or their schemes may retain liquidation proceeds beyond the liquidation or dissolution period if they have received litigation notices or regulatory demands, obtained consent from at least 75 per cent of investors by value for retaining funds against anticipated liabilities, or need to meet residual winding-up related operational expenses, Sebi said in its circular.
The regulator said litigation-related communications could include notices from tax authorities, regulators, law enforcement agencies, courts, investors or counterparties that indicate potential tax, legal or regulatory liabilities, even if such liabilities have not crystallised.
For retention of money against anticipated liabilities, fund managers will be required to disclose the amount proposed to be retained and the estimated duration of retention while seeking investor approval. If funds are retained for residual operational expenses, the retention period cannot exceed three years from the end of the permissible fund life.
The regulator has asked the Standard Setting Forum for AIFs (SFA) to formulate implementation standards for eligible operational expense heads in consultation with Sebi. Also, Sebi has introduced an ‘Inoperative Fund’ status for AIFs that have completed liquidation of all investments but continue to hold retained proceeds or remain registered pending the outcome of litigation.
“An AIF having one or more schemes with retained monies… and intending to surrender its registration, may apply for obtaining the ‘Inoperative Fund’ status,” Sebi said.
Such funds will be prohibited from making new investments, launching new schemes or charging management fees. Retained monies can only be invested in instruments permitted under the AIF Regulations.
The regulator has exempted Inoperative Funds from several compliance requirements, including quarterly and annual activity reports, compliance test reports, performance benchmarking disclosures, audit of private placement memorandum (PPM) terms, and certain certification requirements for key investment personnel.
The regulator has mandated annual reporting on retained money and outstanding liabilities by AIFs retaining funds and those classified as Inoperative Funds. The report is required be filed with Sebi and investors within 30 days from the end of each financial year. The framework, which comes into force immediately, has also been extended to Venture Capital Funds registered under the erstwhile Sebi (Venture Capital Funds) Regulations, 1996.