Change in control of Sponsor or Manager of AIF involving Scheme of Arrangement

Ankita Tiwari

22 May, 2024

SEBI has taken steps to make the process for approval with respect to the change in control of the sponsor and/or manager of an Alternative Investment Fund (AIF) simpler and more efficient by way of Circular No. SEBI/HO/IMD-1/DF9/CIR/2022/032, dated 23^rd March 2022. Under Section 11(1) of the Securities Exchange Board of India Act of 1992, SEBI has the power to issue circulars to protect the interests of investors and promote development,and regulate the securities market. The circular provides clarity that the application seeking approval for the proposed change in control of the sponsor and/or manager of the AIF is to be filed with SEBI before filing the application with the National Company Law Tribunal (NCLT). Before getting on to discuss the process of approval prescribed in the circular, let’s understand what “change in control” means.

As per the SEBI (Change in Control in Intermediaries) (Amendment) Regulations, 2023, “change in control” means the following:

1. In the case of a body corporate, listed shares shall be construed as per the definition of control prescribed in the regulations framed under clause (h) of sub-section (2) of section 11 of the Act, and in case of unlisted shares, it shall be construed as per the definition of control provided under sub-section (27) of Section 2 of the Companies Act, 2013.
2. In any case, other than a body corporate, it would mean a change in the legal formation, ownership,or controlling interest. Controlling interest means a direct or indirect interest to the extent of at least 50% of the voting rights or interest.

Regulation 20 (13) of the Securities Exchange Board of India (Alternate Investment Funds) Regulations, 2012 (SEBI (AIF) Regulations, 2012) provides that the change in control of the sponsor and/or manager of an Alternate Investment Fund (AIF) shall be done only with the prior approval of SEBI.

Process followed by AIF in case of Change in Control of sponsor and/or manager involving the scheme of arrangement.

The SEBI vide Circular No. CIR/IMD/DF/14/2014, dated 19^th June 2014, read with Circular No. CIR/IMD/DF/16/2014, dated 18^th July 2014, provides for the process to be followed in case of a change in control of the sponsor and/or manager, which significantly affects the investor’s decision to continue to invest in AIF.

The AIFs should inform all the unit holders, including those who have provided a commitment to the AIF, about any change in the placement memorandum. The intimation about the change should be made within 7 (seven) days of making such a change. These changes are to be intimated to SEBI also. The changes shall include modifications in the terms or documents of the fund/scheme& the same may be intimated to investors and SEBI every 6 (six) months on a consolidated basis and changes in the fundamental attributes of the fund/scheme. An exception to the process for exit is available when the AIF has the approval of at least 75% of the unit holders based on the value of their investment in the AIF. The process to be followed by the AIF is as follows:

1. If any existing unit holder does not wish to continue after the change, then they shall be provided with an exit option. The unit holders shall take a minimum 1 (one) months’ time to express their dissent.
2. If the scheme of the AIF is open-ended, then the exit option is provided by either buying out the units of the dissenting investors by the manager or any other person as may be arranged by the manager, the valuation of which shall be based on the market price of the underlying assets; or by redeeming units of the investors through the sale of underlying assets.
3. If the scheme of the AIF is close-ended, then the exit option shall be provided by the buying out of units by the dissenting investors by the managers or any other person as may be arranged by the manager. However, before buying out such units, the valuation of the units shall be conducted by 2 (two) independent valuers, and the exit shall be at a value not less than the average of the two valuations.
4. The manager is responsible for facilitating the exit of the dissenting investors. The manager or sponsor or proposed new manager or sponsor shall bear the expenses for the entire process, and the unit holders shall not be charged for it.
5. The entire process of exit of dissenting investors shall be completed within 3 (three) months from the date of expiry of the last date of the offer for expressing dissent.
6. The trustee (if the AIF is a trust) or the sponsor (in case of any other AIF) shall be liable for overseeing the process, ensuring compliance & regularly updating SEBI on developments.

How has SEBI streamlined the process of providing approval to the change in control of the Sponsor and/or Manager?

SEBI vide its circular No. SEBI/HO/IMD-1/DF9/CIR/2022/032 dated 23^rd March 2022 has streamlined the process of providing approval to the change in control of the Sponsor &/or Manager of the AIF involving scheme of arrangement requiring sanction from NCLT as per the provisions of the Companies Act, 2013^[1]. The circular shall apply to any application for change in control of the sponsor and/or manager of the AIF made to the NCLT on or after 1^st April 2022. In the circular, the following has been decided:

1. An application under Regulation 20(13) of the SEBI (AIF) Regulations, 2012 seeking approval for the proposed change in control of the sponsor and/or manager of the AIF shall be filed first with SEBI and thereafter with the NCLT.
2. SEBI will grant approval for the change in control only after being satisfied that compliance with the applicable regulatory requirements has been duly fulfilled.
3. The in-principle approval shall be valid for 3 (three) months from the date of issuance. Application to NCLT shall be made within these 3 (three) months.
4. Once the NCLT passes the order approving the change in control, the applicant/AIF has to submit the following documents to SEBI for its final approval. The following vital documents are required to be submitted to SEBI for obtaining final approval:
5. The application seeking final approval;
6. Copy of the NCLT order approving the scheme;
7. Copy of the approved scheme;
8. Statements explaining modifications if any, in the approved scheme vis-a-vis the draft scheme and the reasons for such modifications; and
9. Compliance details with the conditions/observations mentioned in the in-principle approval provided by SEBI.

The aforementioned documents have to be submitted before the SEBI within 15 (fifteen) days from the date of order of NCLT.

Conclusion

In summation, it can be said that the SEBI circular has streamlined the approval process for Sponsors and Managers. The circular has mandated approval from NCLT after seeking approval from SEBI. The in-principle approval will be granted by SEBI after it is satisfied with the compliance with the applicable regulatory requirements. Within 3 months from the date of issuance of in-principle approval, relevant applications should be made to the NCLT. Thereafter, within 15 (fifteen) days from the date of the NCLT order, the AIF should submit the required documents to the SEBI for final approval. This circular shall apply to all applications on and after 1^st April 2022.