AIF Registration

SEBI Scheme of AIF for Priority Distribution among Investors

The AIF or Alternative Investment Fund is a privately pooled instrument vehicle which obtains funds from the investors. The AIF protects the interests of the investor by investing their funds in accordance with the pre-defined investment policy. The profit earned on the said funds shall be distributed among the investor in proportionate to their investment similarly, the losses incurred will be suffered in proportion to their investment. However, in a scheme of AIF for priority distribution, it is observed that one class of investors are sharing more losses than the other class of investor due to holding of priority interest in the distribution. Therefore, to provide relief, the SEBI issued the circular on “Schemes of AIFs which have adopted priority in distribution among investors” on 23^rd November 2022, which is discussed in this article briefly.

What is Clause 3(c) of SEBI Guidelines on Disclosures, Reporting and Clarifications under AIF Regulations?

The SEBI guidelines on Disclosures, Reporting and Clarifications issued on 19^th June 2014 were issued to provide clarification on the amended AIF regulations, increase transparency to the investors and provide reporting requirements for Alternative Investment Funds. The said guidelines have mandated the AIF to report and meet specific requirements such as submission of information to SEB I Under Regulation 3(1) of the AIF Regulations, Disclosures in the placement Memorandum, fees, charges, litigation and compliance Test Report.

As per the present guidelines, the SEBI for the scheme of AIF for priority distribution has made specific reference to Clause 3 (C) of the guidelines issued on 19^th June 2014. The clause 3(C) of the said guidelines states that with respect to the investment by the sponsor or manager in the Alternative Investment Funds, the sharing of loss between the sponsor or manager should not be less than the pro rata to their holding in AIF as compared to other unit holders.

What is the basis for issuance of the present circular?

The circular on the Scheme of AIF for priority Distribution issued by SEBI with the primary purpose of stopping the usage of the sharing of loss on a pro-rata basis. SEBI has observed that whilst it has not been expressly mentioned in the AIF regulation, sharing of loss by a class of investors shall not be less than pro rata compared to the other class of investors or unit holders. However, still, it is being noticed by the SEBI that certain scheme of AIFs has adopted a distribution waterfall in such a way that one class of investors (not including sponsor or manager) shares loss more than pro rata to their holding in the AIF in comparison with the other class of investor or unit holders because the later has priority in distribution over former. The SEBI refers to this scheme of priority distributions as the Priority Distribution Model.

What changes are brought by the guidelines?

The SEBI, in consultation with the AIF industry associations, Alternative Investment Policy Advisory Committee & other related stakeholders and the reason discussed above ordered that the scheme of AIF for the priority distribution model shall not accept any fresh commitment or make any investment in a new investee company until further order or till a view is taken by the SEBI in this regard.

What is the applicability date of the current circular?

The circular of SEBI on the scheme of AIF for priority distribution is issued with the competent authority’s approval and shall become valid with immediate effect.

Conclusion

The SEBI issued the present circular on the scheme of AIF for priority distribution in the exercise of powers granted under Section 11(1) of the SEBI Act 1992^[1] and with the aim to protect the interests of the investors and to promote the development and regulation of the securities market. The present circular aims to protect the interests of investors by making an investment in the AIF for the purpose of eliminating the difference between the classes of investors or unit holders of the AIF. Therefore, with immediate effect, the SEBI has ordered that the Scheme of AIF, which has adopted priority distribution, shall stop accepting any fresh commitment.

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