SEBI proposes new AIF framework to strengthen corporate governance rules

The Securities and Exchange Board of India (SEBI), the regulator of capital markets, has proposed amendments to the existing rules that govern alternative investment funds (AIFs). The objective of these proposed changes is to enhance the corporate governance mechanism and ensure its robustness in the AIF sector.

Under the proposal, Category I and Category II AIFs should not borrow funds directly or indirectly or engage in leverage for the purpose of making investments, Sebi said in a consultation paper on Thursday.

These AIFs can borrow for the purpose of meeting shortfall in drawdown while making investment in an investee company, subject to certain conditions.

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The conditions included that such borrowing by these AIFs should be done only in case of emergency and as a last recourse, the amount borrowed should not exceed 10 per cent of the investment proposed to be made in the investee company and the cost of such borrowing should be charged only to such investor who delayed or defaulted on drawdown payment.

Category I and Category II AIFs should maintain 30 days cooling off period between two periods of permissible leverage.

“The regulatory intent behind permitting borrowing for Category I and II AIFs is that the funds borrowed shall be utilized for meeting operational requirements of the AIF, and not for the purpose of making investment,” Sebi noted.

Further, the regulator proposed to mandate that AIFs should hold the instruments or securities of their investments only in dematerialised form.

Also, it has been suggested that the requirement of mandatory appointment of a custodian for safekeeping of securities for AIFs with corpus of over Rs 500 crore, should be extended to AIFs with corpus of less than Rs 500 crore as well.

Large Value Fund for accredited investors (LVFs) should be permitted to extend their tenure up to four years, subject to approval of two-thirds of the unit holders by value of their investment in the LVF.

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Sebi noted that many AIFs are still holding their certificate of registration despite having no fund raising or investment activity in their schemes for several years.

Considering this, Sebi suggested that an AIFs manager should ensure that the AIF pays renewal fee equal to 50 per cent of its applicable registration fee for the subsequent block of five years from the date of grant of registration, within three months before expiry of the said block period.

Besides, existing AIFs who have completed five years from the date of grant of certificate of registration should also pay renewal fee equal to 50 per cent of its applicable registration fee.

The Securities and Exchange Board of India (Sebi) has sought comments on the proposal till May 31.

Last month, the markets regulator had asked AIFs funds to provide an option of “direct plan” for investors and introduced a trail model for distribution commission in order to bring transparency in expenses and curb mis-selling.

(With agency inputs)