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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 21st June 2023 came pursuant to the amendment brought in by the AIF Regulation vide Notification dated 15th 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.
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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.
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.
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.
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