Liquidation Scheme and In-Specie Distribution of Investments of AIFs

Ankita Tiwari

24 May, 2024

The Securities Exchange Board of India (SEBI) has issued a new circular for Alternative Investment Funds (AIFs) to transfer assets unsold during the winding-up process to a new liquidation scheme or to distribute such unliquidated investments in-specie subject to the approval of investors by the value of up to 75%. Circular No. SEBI/HO/AFD/PoD-I/P/CIR/2023/098 dated 21^st June 2023 came pursuant to the amendment brought in by the AIF Regulation vide Notification dated 15^th June 2023.

The SEBI Circular is divided into two categories: Liquidation Scheme and In-specie Distribution of investments. As per the Liquidation Scheme, a new scheme is launched to liquidate the unliquidated investments of an original scheme undergoing winding up whereas the in-specie distribution enables AIFs to distribute unsold investments to investors directly. Both categories require approval from the majority of investors i.e., 75% by value of their investment in the original scheme. The approval ensures investor’s interest is protected. If the AIF fails to obtain the investor’s consent, then the circular provides an option for mandatory in-specie distribution of unliquidated investments. These guidelines are important for managers to remain compliant with these guidelines and to effectively navigate through these new processes.

Liquidation Scheme

1. At the time of liquidation of a scheme of AIF (Original Scheme), if the AIF decides that it will launch a Liquidation Scheme, then the consent of at least 75% of the investors by the value of their investment in the Original Scheme is required.
2. If such a scheme is launched by the AIF then it shall contain the words ‘Liquidation Scheme’ in its name.
3. On obtaining the investor’s consent for Liquidation Scheme, the AIF has to arrange a bid for a minimum of 25% of the value of unliquidated investments. The bid shall represent a consolidated value of each unliquidated investment of Original Scheme’s investment portfolio. 
4. The bid value along with the valuation of unliquidated investments shall be disclosed by the AIF to all the investors of the Original Scheme.
5. An option to fully exit the Original is granted to the dissenting investors of the Original Scheme. Any remaining or unsubscribed portion of the bid shall be used to provide a pro-rata exit to non-dissenting investors.
6. If the bidder or its related parties are investors in the Original scheme then they shall not be allowed to exit from the Original Scheme out of the bid.
7. The unliquidated investments of the Original Scheme are sold to the Liquidation Scheme. The value of such a sale shall be:
8. Bid value if the AIF or the manager arranges a bid for a minimum of 25% of the value of unliquidated investments of the Original Scheme.
9. Rs. 1, if the AIF or the manager fails to arrange a bid for a minimum of 25% of the value of the unliquidated investments of the Original Scheme.
10. For purchasing investments from Original Scheme in the manner specified above, the liquidation scheme shall be allotted to the units of the Original Scheme.
11. After receiving the units of the Liquidation Scheme, the Original Scheme shall mandatorily distribute the units of the Liquidation Scheme in-specie in lieu of its units issued to investors.
12. After the launch of the Liquidation Scheme and before the expiry of the Liquidation Period of the Original Scheme, the Original Scheme shall be wound up.
13. An exemption has been provided to Liquidation Scheme from the requirement of obtaining SEBI’s comments on the PPM. The tenure of liquidation shall be calculated from the date of filing of PPM with the SEBI and the tenure shall not be more than the tenure of the Original Scheme excluding any permissible extension.
14. No Liquidation Scheme can extend beyond its tenure or sell its investments to another Liquidation Scheme.
15. If an AIF has invested in another AIF, and the investee AIF has launched a Liquidation Scheme, then the investor AIF on the expiry of its tenure or extended tenure shall mandatorily distribute the units of Liquidation Scheme in-specie to its investors. 
16. As per SEBI Circular No. SEBI/HO/IMD/DF6/CIR/P/2020 dated 5^th February 2020 ¹, the performance of the Liquidation Scheme shall be reported to Performance Benchmarking Agencies.  
17. While obtaining investor consent, the manager should disclose to the investor value of unliquidated investments sold to the Liquidation Scheme.

In-Specie Distribution of Unliquidated Investments

1. If the AIF decides to distribute unliquidated investments in-specie at the time of the Liquidation Period of the Original Scheme, the AIF shall obtain the consent of 75% of investors by the value of their investment in the Original Scheme.
2. A bid for a minimum of 25% of the value of the unliquidated investments shall be arranged for units representing the consolidated value of each unliquidated investment of the Original Scheme’s investment portfolio.
3. The valuation of unliquidated investments carried out by the two independent valuers should be disclosed by the AIF to all the investors of the original scheme.
4. An option to exit the in-specie distribution shall be offered to the dissenting investors of the original scheme. After exercising the exit option, any unsubscribed portion of the bid shall be used to provide a pro-rata exit to non-dissenting investors.
5. If the bidder or its related parties are investors in the Original scheme then they shall not be allowed to exit from the Original Scheme out of the bid.
6. The unliquidated investments shall be distributed in-specie and the value of such in-specie distribution shall be:
7. Bid Value if the AIF or the manager arranges a bid for a minimum of 25% of the value of the unliquidated investments of the Original Scheme.
8. Rs. 1/- if the AIF or the manager fails to arrange a bid for a minimum of 25% of the value of the unliquidated investments of the Original Scheme.
9. The in-specie distribution shall be carried out after the Original Scheme had wound up but prior to the expiry of the Liquidation period of the Original Scheme.
10. While obtaining investor consent, the manager should disclose to the investor value of unliquidated investments sold to the Liquidation Scheme.

Mandatory In-Specie Distribution of Unliquidated Investments

The unliquidated investment will be mandatorily distributed to the investors’ in-specie if the AIF fails to obtain requisite investor consent for the launch of the Liquidation Scheme or in-specie distribution of unliquidated investments. For capturing the track record of the manager or for the purpose of reporting to Performance Benchmarking Agencies, the value of investments distributed in-specie shall be considered as Rs. 1/-. Such investments shall be written off if the investor is not willing to take the in-specie distribution of unliquidated investments.

Responsibility of Compliance

The Manager of the AIF has to submit a report on compliance with the provisions of the given circular after exercising the options mentioned above. In the report, the manager should mention the value of the sale of unliquidated investments or the distribution of unliquidated investments in-specie. The manager should also make disclosures regarding the same in PPMs of subsequent schemes. A ‘Compliance Test Report’ shall be prepared by the manager in compliance with the provisions of this circular.  It is the responsibility of the manager, the trustee and the key management personnel of AIF to ensure compliance with the above procedure.

Conclusion

In summation, it can be said that SEBI is undertaking steps to make winding up of AIF convenient. It is taking steps to ensure investor’s interest is protected. This circular makes the process of winding up more flexible for the AIFs to deal with their scheme’s investments that remain unsold due to a lack of liquidity. Most importantly, it provides a standard methodology for the valuation of AIFs.

Read Our Article: Alternative Investment Funds Registration

1. https://www.sebi.gov.in/legal/circulars