SEBI has introduced amendments to the SEBI (AIF) Regulations for providing greater flexibility to Category I and II Alternative Investment Funds (AIFs)

The Securities and Exchange Board of India (SEBI) has introduced amendments to the SEBI (Alternative Investment Funds) Regulations, 2012, in a move aimed at providing greater flexibility to Category I and II Alternative Investment Funds (AIFs). The key change revolves around allowing these AIFs to create encumbrance on their equity holdings in investee companies, particularly those engaged in infrastructure projects, to facilitate borrowing.

The amendments, notified on April 25, 2024, aim to streamline the process for AIFs to create encumbrance on equity, primarily for investee companies involved in infrastructure projects. This move is pivotal in promoting ease of doing business and enhancing the flexibility of AIF operations, thereby contributing to the overall growth of the alternative investment landscape in India.

Under the revised framework, Category I and II AIFs are permitted to create encumbrance on the equity of investee companies engaged in infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure issued by the Central Government. However, this is subject to certain conditions specified by SEBI.

One significant condition stipulates that existing schemes of Category I or II AIFs, which have not onboarded any investors before April 25, 2024, may create encumbrance on equity for borrowing purposes, provided explicit disclosure is made in their Private Placement Memorandums (PPMs). This ensures transparency and informed decision-making for prospective investors.

Moreover, any encumbrances created before the amendment must be disclosed in the PPM, and consent from all investors must be obtained by October 24, 2024. Failure to secure consent within the specified timeframe will necessitate the removal of encumbrances by January 24, 2025, ensuring investor protection and compliance.

Furthermore, the duration of encumbrance cannot exceed the residual tenure of the AIF scheme, reinforcing prudential norms and risk management practices. Additionally, AIFs with significant foreign investment or involvement are required to comply with RBI regulations, ensuring alignment with broader financial regulatory frameworks.

Importantly, the amendments emphasize that the encumbrance created should solely facilitate debt raising for infrastructure projects and should not be construed as extending any form of guarantee for investee companies. This underscores the regulatory intent to promote responsible investing and mitigate systemic risks.

To ensure effective implementation, SEBI, in collaboration with the Standard Setting Forum for AIFs (SFA), will formulate implementation standards. AIF managers are expected to adopt and adhere to these standards, promoting uniformity and consistency across the industry.

Lastly, trustees/sponsors of AIFs are tasked with ensuring compliance with the circular, further enhancing oversight and governance within the alternative investment ecosystem.