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Alternative Investment Fund (AIF) is a fund established or incorporated under the SEBI (Alternative Investment Fund) Regulations, 2012 (SEBI AIF Regulations), 2012) in the form of a company, LLP, trust or a body corporate. As per the AIF Regulations, AIF means an investment vehicle which privately pools the funds collected from Indian as well as foreign investors to invest it in accordance with the specified investment policy for the benefit of its investors. AIF is covered only under the AIF Regulations and is outside the ambit of SEBI (Mutual Funds) Regulations of 1996, SEBI (Collective Investment Schemes) Regulations of 1999[1] or any other regulation issued by the SEBI.The AIF Regulations provide detail procedure for setting up an AIF however when it comes to the procedure for winding up of an AIF it is very basic.
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Regulation 29 of the AIF Regulations provide for winding up of AIFs. Regulation 29(1) prescribes how an AIF set up as a trust is to be wound up. Similarly, Regulation 29 (2), (3) and (4) prescribe the process of winding up of an AIF set up as LLP, Company and a Body Corporate respectively. Regulation 29 (2), (3) and (4) states that the AIFs set up as LLP, Company and a Body Corporate shall be wound up under the provisions of respective Acts under which they are formed.
Regulation 29(1) provides that a trust may be wound up on following grounds:
Similar grounds are provided under regulation 29(2) for winding up of an AIF as LLP. Except that in regulation 29(2) three grounds are provided instead of four. The ground missing under regulation 29(2) but available under regulation 29(1) is the one which allows the trustees to wind up the AIF if they mutually decide that it would be in the interest of the AIF. As AIFs set up as LLPs do not have trustees or any equivalent body, it makes sense as to why this ground has been omitted under regulation 29(2).
Regulation 29(3) and 29(4) which provides for the winding up of a company and body corporate respectively, as prescribed by the provisions of the Act under which they are set up.
The AIF Regulations fail to provide that the board of directors (BOD) of an AIF set up as a Company may wind up an AIF if they are of an opinion that would be in the interest of the investors, even though the BOD have a fiduciary duty towards the company and its shareholders and are comparable to trustees of a trust.
One challenge arises at the time of winding up an AIF is that a provisions is to be made for liabilities which arise after liquidation of AIF and returning proceeds to its investors. Few liabilities which arise post the winding up are tax liabilities and indemnity claims from entities that acquired assets from the AIF before it was wound-up. In addition to this, it common for AIFs to have a share purchase agreement or other similar contracts to dispose of or exit from portfolio investments. These agreements require the seller to give representations and warranties to the buyer relating to the portfolio company along with its assets and may also offer indemnities to protect such breach of representation and warranties. The indemnity may arise under SPAs after winding up of the AIF. Further, a notice for escaping assessment may be issued by the Income Tax Department under section 148 of the Income Tax Act, 1961 within 10 years from the end of the relevant assessment year. So an AIF’s trustee may receive a tax notice under this section within 10 years after the exit or distribution of exit proceeds to its investors.
Winding up of an AIF is an integral part of the life cycle of an AIF just like the formation of AIF. Once the decision to terminate an AIF is taken, the liquidator proceeds for the liquidation of the assets of AIF within the prescribed time frame. Upon liquidation, the distribution of assets is made as per the distribution mechanism set out in the PPM.
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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