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The Securities and Exchange Board of India (SEBI), the capital markets regulator, has recommended amending the current regulations regulating Alternative Investment Funds (AIFs) in order to strengthen corporate governance mechanisms. According to the plan, Category I and Category II AIFs shouldn’t use leverage or directly or indirectly borrow money to make investments, SEBI stated in a consultation issued on May 18, 2023. Subject to certain restrictions, these AIFs may borrow to cover any deficit in drawdown while making an investment in an investee firm. The cash borrowed must be used to cover the AIF’s operational needs and not to make investments, SEBI underlined. It is the regulatory aim behind allowing borrowing for Category I and II AIFs.
AIF stands for Alternate Investment Fund, which is a privately pooled investment vehicle that collects money from domestic and international investors to invest it in line with a specified investment strategy for the benefit of its investors. In India, AIF can be founded or incorporated as a trust, company, limited liability partnership, or other type of body corporate. Funds covered under the SEBI (Mutual Funds) Regulations of 1996, the SEBI (Collective Investment Schemes) Regulations of 1999, or any other Board regulations governing fund management operations are not included in Alternate Investment Fund.
Restrictions on borrowing by Category I and Category II AIFs are found in Regulations 16(1)(c) and 17(c) of the Alternate Investment Fund Regulations. These AIFs are not currently permitted to borrow money for investing. However, SEBI is thinking about enabling Category I and Category II AIFs to borrow money in the event that the amount of money required from investors falls short.
Borrowings by Category I and II
Additionally, Category II AIFs are defined as follows in Regulation 3(4)(b) of the AIF Regulations: “Category II Alternative Investment Fund which does not fall under Category I or Category III and which does not undertake borrowing or leverage other than to meet day-to-day operational requirements and as permitted in these regulations.”
Tabular Coloum:
This step ensures that Alternate Investment Fund don’t endanger market stability by using excessive leverage or borrowing, which is not allowed as per regulation. Striking a balance between promoting the development and effectiveness of the Alternate Investment Fund and guaranteeing systemic stability and investor protection is the goal.
Read our Article: Proposed Amendment to SEBI (Alternative Investment Funds) Regulations, 2012
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