Material change and change in Sponsor or Manager of AIFs

Chapter 13 - Material change and change in Sponsor or Manager of AIFs

13.1. Procedure for ‘Material Change’ including change in control of manager/sponsor or change in manager/sponsor of AIFs

13.1.1.

• “Material changes” generally means changes to the fundamental attributes of the AIF/fund scheme.

• If a material change is likely to significantly influence an investor's decision to continue investing in the AIF, the prescribed process for material changes must be followed.

• Material changes include, but are not limited to, the following:

(a). Change in Sponsor/Manager

• A change in the Sponsor or Manager of the AIF is considered a material change.

• However, an internal restructuring within the same group is not treated as a change for this purpose.

(b). Change in Control

• A change in control of the Sponsor or Manager is considered a material change.

(c). Change in Fee Structure or Hurdle Rate

• A change in the fee structure or hurdle rate is a material change where it may result in higher fees being charged to unit holders.

Example:

• An AIF proposes to change its Manager to an unrelated entity.

• This would constitute a material change and the prescribed investor approval/disclosure process would apply.

• Similarly, if the AIF changes its fee structure in a manner that increases the fees payable by investors, it would constitute a material change.

The following process shall be followed by the AIF:

(i).

• Existing unit holders who do not wish to continue their investment after a material change must be provided an exit option.

• The AIF must give such unit holders at least 1 month to communicate their decision to dissent from the proposed change.

• Therefore, investors must be given sufficient time to decide whether they want to:

  1. Continue with the AIF after the material change or

  2. Exit the AIF.

(ii)

• In case of an open-ended AIF scheme, the exit option for dissenting unit holders may be provided in either of the following two ways:

A. Buying out of units by Manager/other person

• The Manager may buy the units of the dissenting investors itself.

  1. Alternatively, the Manager may arrange for any other person to buy the units.

  2. The valuation of the units shall be based on the market price of the underlying assets.

Example:

• Investor A does not agree with a material change in the AIF.

• The Manager arranges for Investor A's units to be purchased by another person.

• The value of the units is determined based on the market price of the underlying assets.

B. Redemption through sale of underlying assets

• The dissenting investor's units may be redeemed.

• For this purpose, the AIF may sell the underlying assets and use the proceeds to pay the investor.

(iii)

• In case of a close-ended AIF scheme, the exit option for dissenting unit holders shall be provided through buying out of their units.

A. Buying out of units

• The Manager may buy the units of the dissenting investors.

• Alternatively, the Manager may arrange for any other person to buy those units.

B. Valuation by two independent valuers

• Before the units are bought out, the units must be valued by two independent valuers.

• The exit price paid to the dissenting investor must not be less than the average of the two valuations.

Example:

• Investor A disagrees with a material change in a close-ended AIF scheme.

• The units are valued by two independent valuers:

  1. Valuer 1: ₹10 crore

  2. Valuer 2: ₹12 crore

• Average valuation = ₹11 crore.

• The Manager or another person arranged by the Manager must buy Investor A's units for at least ₹11 crore.

(iv)

• The Manager shall be responsible for providing an exit option to the dissenting investors.

• The expenses involved in the entire exit process shall be borne by:

  1. The Manager.

  2. The Sponsor.

  3. The proposed new Manager or

  4. The proposed new Sponsor.

• These expenses cannot be charged to the unit holders.

Example:

• An AIF undergoes a material change and Investor A chooses to exit.

  1. The Manager must arrange Investor A's exit.

  2. Any expenses relating to the exit process must be paid by the Manager, Sponsor, proposed new Manager or proposed new Sponsor.

• Investor A and other unit holders cannot be made to bear these expenses.

(v)

• The entire exit process for dissenting investors must be completed within 3 months.

• The 3-month period starts from the date on which the last date for expressing dissent expires.

• Therefore, the Manager must complete all steps necessary to provide the exit to dissenting investors within this 3-month period.

Example:

• The AIF gives investors until 30 September 2026 to express their dissent.

  1. 30 September 2026 is the last date for expressing dissent.

  2. The entire exit process for dissenting investors must be completed by 31 December 2026.

(vi).

• The Trustee of the AIF shall be responsible for overseeing the exit process where the AIF is structured as a trust.

  1. In case of any other form of AIF, the Sponsor shall be responsible for overseeing the process.

  2. The Trustee or Sponsor must ensure that the entire exit process is carried out in compliance with the applicable requirements.

• They must also regularly update SEBI regarding the developments in the exit process.

Example:

• An AIF is structured as a trust and certain investors dissent from a material change.

• The Trustee must:

  1. Oversee the exit process.

  2. Ensure compliance with the applicable requirements and

  3. Regularly update SEBI on the progress.

• If the AIF is structured in another form, these responsibilities will be performed by the Sponsor.

13.1.2.

• The exit process prescribed under Para 13.1.1 shall not apply in certain cases where the AIF obtains the required approval from its unit holders.

• The AIF must obtain approval from at least 75% of the unit holders by value of their investment in the AIF.

• This exemption applies specifically to the material changes covered under:

  • (a). Change in Sponsor/Manager; and

  • (b). Change in control of Sponsor/Manager.

Example:

• An AIF proposes to change its Manager.

  1. The AIF obtains approval from unit holders representing 80% of the total value of investments in the AIF.

  2. Since the approval exceeds the required 75% by value, the prescribed exit process for dissenting investors under Para 13.1.1 does not apply.

13.2. Fee for change in control of manager/sponsor or change in manager/sponsor of AIFs

• Under Regulation 20(13) of the AIF Regulations, an AIF must obtain prior approval from SEBI in case of:

  1. Change in Sponsor.

  2. Change in Manager.

  3. Change in control of the AIF.

  4. Change in control of the Sponsor.

  5. Change in control of the Manager.

• The prior approval is subject to:

  1. Payment of the applicable fee.

  2. Compliance with any other conditions specified by SEBI.

• Therefore, such changes cannot be implemented without obtaining the required prior approval from SEBI.

Example:

• An AIF proposes to replace its existing Manager with a new Manager.

  1. Before implementing the change, the AIF must obtain prior approval from SEBI.

  2. The AIF must also pay the applicable fee and satisfy any conditions prescribed by SEBI.

13.2.1.

• A fee equal to the registration fee applicable to the relevant category/sub-category of the AIF shall be charged in case of:

  1. Change in control of the Manager.

  2. Change in control of the Sponsor.

  3. Change in Manager.

  4. Change in Sponsor.

• The fee shall be paid by the Manager or Sponsor, as applicable.

• The cost of this fee cannot be passed on to the investors of the AIF in any manner.

Example:

• A Category II AIF has a registration fee of ₹5 lakh.

  1. The AIF changes its Manager.

  2. A fee of ₹5 lakh shall be payable for the change.

  3. The Manager/Sponsor must bear this cost.

• The AIF cannot recover the ₹5 lakh from its investors by charging it as a fund expense.

13.2.2.

• If a change in control/change of Manager and a change in control/change of Sponsor are proposed at the same time, only one registration fee shall be charged.

• The fee will be equivalent to the registration fee applicable to the relevant category/sub-category of the AIF.

• Therefore, the fee is not charged separately for each change when both changes are proposed simultaneously.

Example:

• An AIF proposes to:

  1. Change its Manager.

  2. Change its Sponsor

• Both changes are proposed simultaneously.

• Even though there are two changes, the AIF will be required to pay only one registration fee applicable to its category/sub-category.

13.2.3.

• The fee specified under Para 13.2.1 shall not be levied in the following cases involving a change in Sponsor or change in control of Sponsor:

(i). Manager acquiring control/replacing Sponsor

• Where the Manager acquires control over the Sponsor, the fee shall not be levied.

• The exemption also applies where the Manager replaces the existing Sponsor.

Example:

• AIF has Sponsor A and Manager B.

• Manager B acquires control over Sponsor A or replaces Sponsor A.

• The fee for the change in Sponsor/control of Sponsor shall not be levied.

(ii) Exit of Sponsor in case of multiple Sponsors

• Where an AIF has multiple Sponsors, the fee shall not be levied when one or more Sponsors exit.

Example:

• An AIF has three Sponsors: A, B and C.

• Sponsor B exits the AIF.

• Since the AIF has multiple Sponsors, the fee shall not be levied for this exit.

13.2.4.

• The applicable fee for a change in Manager/Sponsor or change in control of Manager/Sponsor must be paid within 15 days of the change taking effect.

• The 15-day period starts from the date on which the proposed change in:

  1. Manager.

  2. Sponsor.

  3. Control of Manager.

  4. Control of Sponsor.

• actually takes effect.

13.2.5.

• The prior approval granted by SEBI for the proposed change shall remain valid for 6 months.

  1. The 6-month period is calculated from the date of SEBI's communication granting the approval.

  2. The proposed change must therefore be implemented within this 6-month validity period.

Example:

• SEBI communicates its approval on 1 September 2026.

  1. The approval will remain valid for 6 months.

  2. The proposed change must be effected within this validity period.

13.3. Change in control of Sponsor and/or Manager of AIF involving scheme of arrangement under Companies Act, 2013

13.3.

• SEBI has laid down a process to simplify approval for changes in control of an AIF's Sponsor or Manager where the change is being carried out through a Scheme of Arrangement.

• This applies where the Scheme of Arrangement requires approval from the National Company Law Tribunal (NCLT) under the Companies Act, 2013.

• So, if a restructuring involves an NCLT-approved Scheme of Arrangement and results in a change in control of the Sponsor or Manager:

• The AIF must follow the SEBI approval process prescribed for such restructuring.

Example:

• A Sponsor is being restructured through a Scheme of Arrangement.

• The restructuring results in a change in control of the Sponsor.

• Since the Scheme also requires NCLT approval, the AIF must follow the prescribed SEBI process for obtaining approval for the change in control.

13.3.1.

• The AIF must first file its application with SEBI seeking approval for the proposed change in control of the Sponsor and/or Manager.

• This application must be filed before filing the Scheme of Arrangement application with the NCLT.

• Therefore, the sequence is:

  1. Apply to SEBI for approval.

  2. Obtain the required SEBI approval.

  3. Then file the application with NCLT.

13.3.2.

• SEBI will examine the application and check whether the applicable regulatory requirements have been complied with.

• If SEBI is satisfied with the compliance, it will grant an in-principle approval for the proposed change in control.

• So , SEBI gives its initial approval, allowing the proposed restructuring to proceed to the next stage.

Example:

• An AIF applies to SEBI for a change in control of its Sponsor before approaching the NCLT.

  1. SEBI reviews the application and finds that the required regulatory conditions have been met.

  2. SEBI then grants in-principle approval.

• The AIF can proceed with the next steps of the Scheme of Arrangement, including the NCLT process.

13.3.3.

• The in-principle approval granted by SEBI will remain valid for 3 months from the date it is issued.

• Within these 3 months, the AIF must file the relevant application with the NCLT.

• If the NCLT application is not filed within this 3-month period, the in-principle approval will no longer remain valid.

Example:

• SEBI grants in-principle approval on 1 September 2026.

  1. The approval will be valid for 3 months.

  2. The AIF must file the relevant application with the NCLT within this period.

13.3.4.

• After receiving the NCLT order, the applicant must approach SEBI for final approval.

• The required documents must be submitted to SEBI within 15 days from the date of the NCLT order.

• The applicant must submit:

(i). Final approval application - An application requesting final approval from SEBI.

(ii). NCLT Order - A copy of the NCLT order approving the Scheme of Arrangement.

(iii). Approved Scheme - A copy of the final Scheme of Arrangement approved by the NCLT.

(iv). Changes from the draft scheme

• A statement explaining:

  1. Any changes made to the draft scheme.

  2. The reasons for those changes.

(v). Compliance with SEBI's in-principle approval

• Details showing how the applicant has complied with the conditions and observations mentioned by SEBI in its in-principle approval.

Example:

• NCLT approves the Scheme of Arrangement on 1 September 2026.

• The applicant must submit the required documents to SEBI within 15 days of that date.

• SEBI will then consider the application for final approval.