General Obligations Part 2
Section 22. Transparency
22.
(a).
Every AIF must periodically disclose financial, risk management, operational, portfolio, and transactional information relating to its investments to investors.
Financial information enables investors to monitor the fund's financial performance and position.
Risk management information explains the key risks faced by the fund and how those risks are managed.
Operational information provides updates on the functioning and administration of the fund.
Portfolio information gives investors details of the fund's investments, including changes in the investment portfolio.
Transactional information covers significant investment activities, such as acquisitions, exits, and other transactions undertaken by the fund.
(b).
Every AIF must periodically disclose all fees payable to the Manager or Sponsor, as well as any fees charged by their associates to the AIF or its investee companies.
Investors must be informed of all fees earned by the Manager or Sponsor for managing the fund.
The disclosure also covers fees charged by any associate of the Manager or Sponsor to the AIF.
If an investee company pays any fee to an associate of the Manager or Sponsor, that fee must also be disclosed.
Periodic disclosure helps investors understand the total cost of managing the fund and identify any related-party transactions.
Investors can assess whether the fees charged are reasonable and in line with the fund's interests.
(c).
Every AIF must disclose any inquiries or legal actions initiated by legal or regulatory authorities in any jurisdiction as and when they occur.
The disclosure applies to regulatory inquiries, investigations, enforcement actions, or legal proceedings involving the AIF.
It covers actions initiated by authorities in India as well as in foreign jurisdictions, where applicable.
Information must be disclosed promptly after the inquiry or legal action occurs, rather than waiting for the next periodic report.
Timely disclosure enables investors to assess the potential legal, regulatory, and reputational risks affecting the fund.
(d).
Every AIF must disclose any material liability that arises during the tenure of the fund as and when it occurs.
A material liability is a significant financial or legal obligation that could affect the fund or its investors.
The disclosure must be made promptly when the liability arises, rather than waiting for the next periodic report.
Material liabilities may include major legal claims, tax liabilities, penalties, indemnity obligations, or other significant financial commitments.
(e).
Every AIF must disclose any breach of the Placement Memorandum, investor agreements, or any other fund documents as and when it occurs.
The disclosure applies to any violation of the commitments, terms, or obligations contained in the fund documents.
It covers breaches of the Placement Memorandum, agreements entered into with investors, and any other governing documents of the fund.
The breach must be disclosed promptly when it occurs, without waiting for the next periodic disclosure.
(f).
Every AIF must disclose any change in the control of the Sponsor, Manager, or an Investee Company to its investors.
A change in control may occur through a change in ownership, management, or the ability to influence the entity's decisions.
The disclosure requirement applies to changes involving the Sponsor, the Manager, or any Investee Company of the AIF.
Investors must be informed as soon as the change in control occurs, in accordance with SEBI's disclosure requirements.
Such changes may affect the management, governance, investment strategy, or performance of the fund or its portfolio companies.
(g).
Every AIF must provide investors with an annual report within 180 days from the end of each financial year.
The report must contain information relevant to the AIF and its portfolio, to the extent applicable.
A. Financial Information of Investee Companies
The report must include financial information of the investee companies, enabling investors to assess the performance and financial health of the portfolio.
B. Material Risks and Their Management
The report must explain the material risks faced by the AIF and how they are managed, including:
(i). Concentration Risk at Fund Level - The risk arising from a large portion of the fund's investments being concentrated in a single sector, company, or asset class.
(ii). Foreign Exchange Risk at Fund Level - The risk that changes in exchange rates may affect the value of foreign investments or returns.
(iii). Leverage Risk at Fund and Investee Company Levels - The risk resulting from the use of borrowed funds, which can magnify both profits and losses.
(iv). Realization Risk at Fund and Investee Company Levels - The risk that changes in market conditions may delay or reduce the value of exits from investments.
(v). Strategy Risk at Investee Company Level - The risk arising from a change in, or deviation from, the investee company's business strategy, which may affect its performance.
(vi). Reputation Risk at Investee Company Level - The risk that negative publicity, regulatory issues, or misconduct may damage the reputation and value of an investee company.
(vii). Extra-Financial Risks at Fund & Investee Company Levels - Risks relating to ESG factors, including environmental impact, labour practices, corporate governance, and regulatory compliance.
(h).
A Category III AIF must provide investors with a quarterly report on any change in the control of the Sponsor, Manager, or Investee Company.
The report must be submitted within 60 days from the end of each quarter.
The disclosure relates to the information required under clause (g), i.e., changes in the control of the Sponsor, Manager, or Investee Company.
Even if a change occurs during the quarter, it must be included in the quarterly report provided to investors.
(i).
Every AIF must inform all investors of any significant change in its key investment team.
The disclosure applies whenever there is a material change in the personnel responsible for making or managing the fund's investment decisions.
Significant changes may include the resignation, replacement, appointment, or departure of key investment professionals.
Investors must be informed promptly after the change occurs.
Such changes may affect the fund's investment strategy, decision-making, and overall performance.
(j).
Every AIF must provide information to SEBI for systemic risk purposes whenever required by the Board.
SEBI may require information to identify, analyse, and mitigate risks that could affect the overall financial system.
The Manager must furnish the requested information in the form, manner, and timeline specified by SEBI.
The information may relate to the fund's investments, leverage, exposures, liquidity, or other risk-related matters.
Providing such information enables SEBI to monitor emerging risks across the AIF industry.
Section 23. Valuation
23(1).
An Alternative Investment Fund (AIF) must value its investments in the manner specified by SEBI from time to time.
The valuation must be carried out using the methodology, standards, and procedures prescribed by SEBI, ensuring consistency across the fund.
The AIF must provide its investors with a clear description of its valuation procedure.
It must also disclose the methodology used to value different assets and investments, enabling investors to understand how the fund's value is determined.
Transparent valuation helps investors assess the fair value of the fund's portfolio and make informed investment decisions.
Any changes in SEBI's valuation requirements must be adopted by the AIF to ensure continued regulatory compliance.
23(2).
Category I and Category II Alternative Investment Funds (AIFs) must value their investments at least once every six months.
The valuation must be carried out by an independent valuer appointed by the AIF.
An independent valuer ensures that the valuation is objective, unbiased, and free from conflicts of interest.
The requirement of a minimum half-yearly valuation keeps the value of the fund's investments current and reliable.
Regular independent valuations help determine the fair value of the portfolio, particularly for investments that are not frequently traded.
The valuation reports support accurate investor reporting, transparency, regulatory compliance, and informed decision-making.
The AIF is responsible for appointing a qualified independent valuer and ensuring that the valuation is completed within the prescribed timeline.
Extension of Valuation Period with Investor Approval
The valuation interval for Category I and Category II AIFs may be extended from six months to one year.
This extension is permitted only with the approval of at least 75% of the investors by the value of their investment in the AIF.
The approval is based on the value of investments held by investors, not merely the number of investors.
Until the required approval is obtained, the AIF must continue to carry out valuations at least once every six months.
23(3).
Independent NAV Calculation and Periodic Disclosure for Category III AIFs
Category III Alternative Investment Funds (AIFs) must ensure that the calculation of Net Asset Value (NAV) is independent of the fund management function.
Keeping the NAV calculation separate from the fund management team helps ensure that valuations remain objective, accurate, and free from conflicts of interest.
The NAV must be disclosed to investors regularly so they are informed about the current value of their investment.
For close-ended Category III AIFs, the NAV must be disclosed at least once every quarter.
For open-ended Category III AIFs, the NAV must be disclosed at least once every month, reflecting the greater liquidity available to investors.
Example:
A Category III Hedge Fund actively trades equities and derivatives throughout the year.
The investment manager decides which securities to buy and sell.
An independent fund administrator calculates the NAV, ensuring that the investment team cannot influence the valuation.
If the fund is close-ended, the NAV is disclosed to investors at least once every quarter.
If the fund is open-ended, the NAV is disclosed at least once every month, allowing investors to make informed investment or redemption decisions based on the latest value of the fund.
Independent Valuation of Unlisted Securities and Listed Debt Securities
Category III Alternative Investment Funds (AIFs) must obtain an independent valuation of their unlisted securities and listed debt securities for calculating the Net Asset Value (NAV).
The valuation must be carried out by an independent valuer, ensuring that the valuation process is objective and free from conflicts of interest.
Unlisted securities require independent valuation because they do not have readily available market prices.
Listed debt securities must also be independently valued to ensure that the NAV reflects their fair value, rather than relying solely on market quotations.
The independently determined values must be used while calculating the NAV of the Category III AIF.
Independent valuation also reduces the risk of overvaluation or undervaluation and enhances investor confidence in the fund's reported NAV.
Example:
A Category III AIF holds unlisted shares and listed corporate bonds.
Before calculating its monthly NAV, it appoints an independent valuer to determine the fair value of these investments, and the resulting valuations are used for the NAV calculation.
23(4).
The Manager must ensure that the Alternative Investment Fund (AIF) appoints an independent valuer for carrying out valuations.
The independent valuer must satisfy the eligibility criteria specified by SEBI from time to time.
The responsibility for appointing a qualified and eligible valuer rests with the Manager, even though the appointment is made by the AIF.
The valuer must be independent of the AIF and its Manager, ensuring that valuations are objective and free from conflicts of interest.
If SEBI updates the eligibility criteria, the Manager must ensure that the appointed valuer continues to meet the revised requirements.
Appointing an eligible independent valuer promotes accurate valuations, transparency, consistency, and investor confidence.
Failure to appoint a valuer meeting SEBI's prescribed criteria may result in non-compliance with the AIF Regulations.
23(5).
The Manager and the (KMP) of the Manager must ensure that the independent valuer values the scheme's investments in the manner specified by SEBI from time to time.
They are responsible for ensuring that the independent valuer follows the valuation methodology, standards, and procedures prescribed by SEBI.
The Manager and KMP must oversee the valuation process to ensure that it is accurate, consistent, objective, and compliant with regulatory requirements.
Although the valuation is performed by an independent valuer, the Manager and its KMP remain responsible for ensuring that the valuation complies with SEBI's prescribed framework.
If SEBI revises its valuation methodology or guidelines, the Manager and KMP must ensure that the independent valuer adopts the updated requirements.
Failure to ensure that valuations are carried out in accordance with SEBI's prescribed manner may result in regulatory non-compliance and inaccurate reporting of the fund's value.
23(6).
The Manager is responsible for ensuring the true and fair valuation of the investments of every scheme of the Alternative Investment Fund (AIF).
The Manager must ensure that all investments are valued accurately, fairly, and in accordance with the valuation framework prescribed by SEBI.
Even where the valuation is carried out by an independent valuer, the ultimate responsibility for the correctness and fairness of the valuation remains with the Manager.
The Manager must ensure that the valuation reflects the actual economic value of the investments and is not influenced by bias or conflicts of interest.
True and fair valuation forms the basis for accurate Net Asset Value (NAV), investor reporting, and fund performance measurement.
The Manager must maintain adequate oversight, internal controls, and review mechanisms to ensure that valuations remain reliable and compliant.
Failure to ensure a true and fair valuation may result in misstated NAV, misleading investor disclosures, and regulatory action by SEBI.
Deviation from Valuation Policies for Fair Value
The Manager must deviate from the established valuation policies and procedures if they do not result in a fair and appropriate valuation of the assets or securities.
The deviation is permitted only when following the existing valuation policy would produce an inaccurate or unfair valuation.
The Manager must ensure that the assets or securities are ultimately valued at their fair value, even if this requires departing from the standard methodology.
Any deviation from the established valuation policies must be supported by a valid justification and should not be made arbitrarily.
The Manager is required to document the rationale for the deviation, creating a clear record of why the standard policy was not followed.
Reporting of Valuation Deviations and Rationale
Any deviation from the established valuation policies and procedures, along with the reasons for the deviation, must be reported to the governing body of the AIF) and its investors.
The Manager must report the deviation and its documented rationale to the Trustee, Trustee Company, Board of Directors, or Designated Partners, depending on the legal structure of the AIF.
The same information must also be disclosed to the investors of the AIF, ensuring that they are informed of the change in valuation approach.
Reporting the deviation promotes transparency and accountability by allowing the governing body and investors to understand why the standard valuation policy was not followed.
The requirement applies whenever the Manager departs from the established valuation policy to arrive at a fair value.
Section 24. Obligations of Manager
24(1).
The Manager shall be obliged to:
(a) . Address all investor complaints.
(b). Provide to the Board any information sought by Board.
(c). Maintain all records as may be specified by the Board.
(d). Take all steps to address conflict of interest as specified in these regulations.
(e). Ensure transparency and disclosure as specified in the regulations
Section 24A. Grievance Addressal Mechanism
24A(1).
The Manager must resolve investor grievances promptly and, in any case, within 21 calendar days from the date the grievance is received.
The 21-day period starts from the date the Manager receives the grievance.
The Manager is expected to address complaints as quickly as possible, without waiting until the last day.
All investor grievances must be handled in the manner specified by SEBI.
The Manager must have an effective grievance redressal mechanism to ensure timely resolution.
24A(2).
SEBI may recognise a body corporate to handle and monitor the investor grievance redressal process.
The recognised body corporate assists in managing and overseeing the resolution of investor grievances.
It helps monitor whether grievances are resolved within the prescribed timelines.
The body corporate performs its functions in the manner specified by SEBI.
SEBI may also prescribe the timelines, procedures, and responsibilities for the grievance redressal process.
The recognised body supports efficient, transparent, and consistent handling of investor complaints.
Section 25. Dispute Resolution
Dispute Resolution Mechanism for AIF-Related Disputes
Any claim, difference, or dispute between the investors and the Alternative Investment Fund (AIF) or its Manager must be referred to the dispute resolution mechanism specified by SEBI.
The provision applies to disputes arising out of or relating to the activities of the AIF or the Manager in the securities market.
The dispute resolution mechanism may include mediation, conciliation, arbitration, or a combination of these methods, as specified by SEBI.
The parties must follow the procedure prescribed by SEBI while resolving such disputes.
These alternative dispute resolution methods provide a faster, more efficient, and less expensive process than traditional court proceedings.
Trust Property Cannot Be Used to Cover Manager's Liabilities
Where an AIF is established as a trust, the trust property cannot be used to pay for any loss, damage, or expenses incurred by the Manager or the Manager's officers.
The restriction applies to all losses, damages, and expenses that are personal to the Manager or its officers.
It also includes expenses incurred in resolving claims or disputes brought by investors against the Manager or its officers.
The Manager and its officers must bear these costs themselves and cannot recover them from the assets of the trust.
The trust property must be used solely for the benefit of the AIF and its investors, and not to protect the Manager from personal liabilities.
The restriction applies only where the AIF is constituted as a trust.
Section 26. Power to call for Information
26(1).
SEBI may, at any time, require an Alternative Investment Fund (AIF), its Manager, Sponsor, Trustee, or any investor to provide information relating to the AIF's activities.
The power may be exercised at any stage, without being limited to inspections or investigations.
SEBI may seek information from the AIF, its Manager, Sponsor, Trustee, or even an investor, depending on the nature of the matter.
The information requested must relate to the activities of the AIF, including its operations, investments, compliance, governance, or other regulatory matters.
SEBI may also call for information to assess systemic risk, enabling it to identify risks that could affect the stability of the securities market.
Information may also be sought for the prevention, detection, or investigation of fraud and other regulatory violations.
26(2).
Any information requested by SEBI under 26(1) must be furnished within the time period specified by the Board.
The obligation applies to all persons from whom SEBI has sought information, including the AIF, its Manager, Sponsor, Trustee, or an investor.
The information must be complete, accurate, and submitted before the deadline prescribed by SEBI.
The time limit is determined by SEBI based on the nature and urgency of the information requested.
Timely submission enables SEBI to effectively monitor AIF activities, assess systemic risks, and investigate potential regulatory violations or fraud.
Failure to furnish the information within the specified time may result in regulatory action or other consequences under the SEBI Act and the AIF Regulations.
Section 27. Maintenance of Records
27(1).
The Manager or Sponsor shall be required to maintain following records describing:
(a). The assets under the scheme/fund.
(b). Valuation policies and practices.
(c). Investment strategies.
(d). Particulars of investors and their contribution.
(e). Rationale for investments made
27(2).
The records under 27(1) shall be maintained for a period of five years after the winding up of the fund.
Section 28. Submissions of Report to the Board
SEBI may, at any time, require an Alternative Investment Fund (AIF) to submit reports relating to its activities.
SEBI has the discretion to decide the nature, scope, and contents of the reports that the AIF must furnish.
The reports may cover any activity carried on by the AIF, including its investments, operations, compliance, governance, risk management, or other regulatory matters.
This power enables SEBI to continuously monitor the functioning and regulatory compliance of AIFs.
The AIF must prepare and submit the reports in the manner and within the timeline specified by SEBI.
The information contained in the reports helps SEBI supervise the AIF, assess market risks, protect investors, and ensure compliance with the AIF Regulations.
Failure to submit the required reports may lead to regulatory action under the SEBI Act and the AIF Regulations.
Section 29. Winding
29(1).
An AIF that is set up as a trust shall be wound in the following events:
(a).
An AIF established as a trust must be wound up when its tenure, or the tenure of all its schemes, as specified in the Placement Memorandum, comes to an end.
The Placement Memorandum specifies the duration for which the AIF or each scheme will remain in operation.
Once the specified tenure expires, the AIF or the relevant schemes must begin the winding-up process, unless an extension is permitted under the AIF Regulations.
Winding up involves realising the fund's investments, settling liabilities, and distributing the remaining proceeds to investors.
Investors are informed of the expected life of the fund at the time of investment, providing certainty regarding the investment horizon.
(b).
An AIF established as a trust may be wound up if the Trustees or the Trustee Company are of the opinion that doing so is in the best interests of the investors.
The decision is based on the judgment of the Trustees or the Trustee Company, after considering the interests of the unitholders.
Winding up may be considered when continuing the AIF is no longer beneficial or may adversely affect investors.
The Trustees or Trustee Company must act independently and in a fiduciary capacity, placing the interests of investors above all other considerations.
The decision does not require the expiry of the AIF's tenure and may be taken whenever circumstances justify an early winding up.
(c).
An AIF established as a trust may be wound up if investors holding at least 75% of the value of investments pass a resolution at a meeting of unitholders.
The approval requirement is based on the value of the investors' investments, and not the number of investors.
The resolution must be passed at a meeting of the unitholders convened for this purpose.
Once the required 75% approval by value is obtained, the AIF must commence the winding-up process in accordance with the AIF Regulations.
The voting threshold ensures that only a substantial majority of investors by investment value can decide to wind up the fund.
(d).
An Alternative Investment Fund (AIF) established as a trust must be wound up if SEBI directs it to do so in the interests of investors.
SEBI may issue such a direction whenever it considers that winding up is necessary to protect investors.
The direction is issued based on SEBI's regulatory assessment and is binding on the AIF.
SEBI may exercise this power where continuation of the AIF could adversely affect investors or compromise their interests.
Once SEBI issues the direction, the AIF must commence the winding-up process in accordance with the AIF Regulations.
29(2).
An Alternative Investment Fund (AIF) established as a Limited Liability Partnership (LLP) must be wound up in accordance with the provisions of the Limited Liability Partnership Act, 2008.
The Limited Liability Partnership Act, 2008 governs the legal procedure for winding up and dissolving the LLP.
The AIF must comply with the requirements, procedures, and timelines prescribed under the LLP Act during the winding-up process.
The winding-up process includes realising the LLP's assets, settling its liabilities, and distributing the remaining assets in accordance with the LLP Act.
The AIF must continue to comply with applicable SEBI regulations until the winding-up process is completed.
The LLP is legally dissolved only after all statutory requirements under the LLP Act have been fulfilled.
(a).
An AIF must be wound up when the tenure of the AIF, or the tenure of all its schemes, as specified in the Placement Memorandum, comes to an end.
The Placement Memorandum specifies the duration for which the AIF or each scheme will operate.
Once the prescribed tenure expires, the AIF cannot continue its operations unless permitted under the applicable regulations.
The winding-up process begins with realising the investments, settling liabilities, and preparing the remaining assets for distribution.
Closing the AIF at the end of its tenure provides certainty to investors and ensures an orderly exit from the fund.
(b).
An Alternative Investment Fund (AIF) must be wound up if investors holding at least 75% of the value of investments pass a resolution at a meeting of unitholders.
The 75% threshold is calculated based on the value of investments, not the number of investors.
The decision must be approved through a resolution passed at a meeting of the unitholders.
Once the required majority approves the resolution, the AIF must commence the winding-up process.
The Manager must then realise the assets, settle liabilities, and distribute the remaining proceeds in accordance with the applicable regulations.
Example:
An AIF has a corpus of ₹200 crore.
Investors holding ₹155 crore (77.5%) of the investment value vote in favour of winding up at a unitholders' meeting.
Since the required 75% by value threshold is met, the AIF must begin the winding-up process.
(c).
An Alternative Investment Fund (AIF) must be wound up if the Board directs so in the interests of investors.
SEBI may issue a binding direction requiring the AIF to wind up when it considers such action necessary to protect investors.
The direction may be issued even if the AIF's tenure has not expired and investors have not passed a winding-up resolution.
Once SEBI issues the direction, the AIF must commence the winding-up process in accordance with the applicable regulations.
The Manager must realise the assets, settle liabilities, and distribute the remaining proceeds to investors in an orderly manner.
29(3).
An AIF established as a company must be wound up in accordance with the provisions of the Companies Act, 2013.
The winding-up process is governed by the Companies Act, 2013, rather than the trust-specific provisions of the AIF Regulations.
The AIF must follow the statutory procedures, requirements, and timelines prescribed under the Companies Act for its dissolution.
The process includes settling liabilities, realising the company's assets, and distributing the remaining assets to eligible stakeholders in accordance with applicable law.
The AIF must continue to comply with both the Companies Act, 2013 and the applicable SEBI regulations during the winding-up process.
Winding up results in the legal dissolution of the company, after completion of all statutory formalities.
29(4).
An AIF established as a body corporate must be wound up in accordance with the statute under which it is constituted.
The winding-up process is governed by the specific law that created or regulates the body corporate, rather than the Companies Act, 2013 or the trust provisions of the AIF Regulations.
The AIF must comply with the procedures, requirements, and timelines prescribed under the applicable statute.
During the winding-up process, the AIF must settle its liabilities, realise its assets, and distribute the remaining assets as required under the governing law.
The AIF must also continue to comply with applicable SEBI regulations until the winding-up process is completed.
29(5).
The trustees, trustee company, Board of Directors, or designated partners of the AIF, as applicable, must:
Inform SEBI and the investors about the circumstances leading to the winding up of the AIF.
The responsibility to provide this intimation depends on the legal structure of the AIF (trust, company, LLP, etc.).
Both SEBI and all investors must be notified promptly once the decision to wind up is taken.
The intimation should clearly explain the reasons and circumstances that have resulted in the winding up.
29(6).
From the date the winding-up intimation is sent under Regulation 29(5), the AIF must not make any further investments.
The restriction takes effect immediately from the date of intimation to SEBI and the investors.
The AIF can no longer deploy capital into new investment opportunities.
The Manager must focus on realising existing investments, settling liabilities, and completing the winding-up process.
This prevents the AIF from taking on new investment risks after the decision to wind up has been communicated.
Example:
On 1 September, an AIF informs SEBI and its investors that it is being wound up.
From that date onwards, the fund cannot invest in any new portfolio company.
It must instead realise its existing investments and complete the winding-up process.
29(7).
Within the prescribed liquidation period, the assets of the AIF or its scheme must be liquidated and the proceeds distributed to investors after satisfying all liabilities.
The AIF must complete the liquidation of its assets within the specified liquidation period.
Before any distribution is made, the AIF must pay all outstanding liabilities and obligations.
After settling liabilities, the remaining proceeds must be distributed to the investors of the AIF or the relevant scheme.
The liquidation and distribution process must be carried out in accordance with any conditions specified by SEBI from time to time.
Example:
An AIF completes the sale of all its investments during the liquidation period.
It first pays outstanding taxes, professional fees, and other liabilities.
Thereafter , distributes the remaining proceeds among its investors in accordance with the applicable SEBI requirements.
29(8).
An AIF may distribute assets in specie (instead of cash) to investors, subject to the:
Placement memorandum.
Contribution agreement.
Subscription agreement and any conditions specified by SEBI.
In-specie distribution means investors receive the actual underlying assets, such as shares or securities, instead of cash proceeds.
Such distributions may be made at any time, including during the winding up of a scheme.
The distribution must be consistent with the terms of the placement memorandum, contribution agreement, or subscription agreement, as applicable.
The AIF should make the distribution according to the preference of the investors, wherever permitted.
The distribution must also comply with any conditions specified by SEBI from time to time.
Example:
During the winding up of a Category II AIF:
Some investors choose to receive shares of an unlisted portfolio company instead of waiting for the Manager to sell them.
Since the fund documents permit in-specie distribution and the applicable SEBI conditions are satisfied, the AIF transfers the shares directly to those investors.
29(9).
During the liquidation period:
If certain investments cannot be sold due to lack of liquidity, the AIF may distribute them in specie to investors or enter the dissolution period.
The rule applies only to investments that remain unsold because there is insufficient market liquidity.
Instead of delaying the winding-up process indefinitely, the AIF may transfer the unsold investments directly to the investors (in specie).
Alternatively, the AIF may enter the dissolution period, in accordance with the conditions specified by SEBI.
Either option requires the approval of at least 75% of the investors by the value of their investment in the scheme.
The distribution or transition to the dissolution period must be carried out in the manner and subject to the conditions specified by SEBI from time to time.
Example:
A Category I AIF is unable to sell its stake in an unlisted start-up before the liquidation period ends because there are no buyers.
Investors holding 80% of the investment value approve an in-specie distribution, and the shares are transferred directly to the investors instead of being sold.
No Investor Approval for Available Options
If the required approval of the unitholders is not obtained during the liquidation period:
The unsold investments must be dealt with in the manner specified by SEBI from time to time.
The rule applies when investors do not consent to either an in-specie distribution or the scheme entering the dissolution period.
In the absence of the required approval, the AIF cannot proceed with those options on its own.
Instead, the remaining unsold investments must be handled according to the procedure prescribed by SEBI.
The Manager must comply with SEBI's directions or prescribed framework for dealing with such investments.
29(9A).
A scheme may be granted an additional liquidation period if:
The scheme belongs to an Alternative Investment Fund (AIF).
Its liquidation period has already expired, or
Its liquidation period is due to expire within three months from the date of notification of the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2024.
The additional liquidation period is not automatic and may be granted only by SEBI.
The scheme must satisfy the conditions specified by SEBI.
The extension must be obtained in the manner prescribed by SEBI.
Regulatory Powers Remain Unaffected
Granting an additional liquidation period does not restrict SEBI from exercising its regulatory powers under the SEBI Act and the regulations.
An additional liquidation period does not provide immunity from regulatory action.
SEBI may still issue directions or take appropriate measures if it considers them necessary.
The AIF must continue to comply with the SEBI Act and all applicable regulations during the additional liquidation period.
The extension is only intended to provide more time to complete liquidation and does not waive any legal or regulatory obligations.
Example:
An AIF receives an additional liquidation period to dispose of its remaining assets.
During this period, SEBI discovers a regulatory violation and issues directions under the SEBI Act.
The AIF must comply, as the extension does not affect SEBI's regulatory powers.
29(10).
Mandatory In-Specie Distribution After Dissolution Period
If the dissolution period ends and the scheme still holds unsold investments, those investments must be mandatorily distributed in specie to the investors.
This rule applies after the scheme has entered the dissolution period under Regulation 29B.
It covers investments that remain unliquidated even after the dissolution period expires.
The AIF cannot continue holding the unsold investments indefinitely after the dissolution period ends.
Instead, the remaining investments must be transferred directly to the investors (in specie).
The in-specie distribution must be carried out in the manner specified by SEBI from time to time.
29(10A).
An Alternative Investment Fund (AIF) may be tagged as an inoperative fund in the manner and subject to the conditions specified by SEBI from time to time.
An inoperative fund is an AIF that is designated as such under the framework prescribed by SEBI.
The tagging of an AIF as an inoperative fund is governed by the conditions and procedure specified by SEBI..
The Manager must comply with the applicable SEBI framework for obtaining or maintaining the inoperative fund status.
29(11).
Upon the winding up of an Alternative Investment Fund (AIF), its certificate of registration must be surrendered to SEBI.
The certificate must be returned only after the AIF has completed the winding-up process.
Surrendering the certificate signifies that the AIF has ceased to exist as a registered fund.
After the certificate is surrendered, the AIF can no longer operate or undertake activities as a registered Alternative Investment Fund.
The surrender enables SEBI to update its records and formally recognise the closure of the AIF.
Section 29A. Liquidation Scheme
29A(1).
An Alternative Investment Fund (AIF) may launch a liquidation scheme after filing its placement memorandum with SEBI.
A liquidation scheme is a scheme established to facilitate the liquidation of investments in accordance with the applicable regulatory framework.
Before launching the scheme, the AIF must file the placement memorandum with SEBI.
The placement memorandum provides details of the liquidation scheme and its terms to SEBI and prospective investors.
Filing the placement memorandum promotes regulatory oversight and transparency before the scheme is launched.
The AIF must comply with the applicable SEBI requirements governing the liquidation scheme.
29A(2).
A liquidation scheme is exempt from complying with certain provisions of the AIF Regulations.
The exemptions apply only to liquidation schemes and not to regular AIF schemes.
The exempted provisions include specified requirements relating to registration, investment conditions, operational requirements, governance, and liquidation.
The following regulations do not apply to a liquidation scheme of an Alternative Investment Fund (AIF):
Regulation 10(b)
Regulation 10(c)
Regulation 12
Regulation 13(1)
Regulation 13(2)
Regulation 13(4)
Regulation 13(5)
Regulation 15
Regulation 16
Regulation 17
Regulation 18
Regulation 19L(1)
Regulation 19L(2)
Regulation 19M
Regulation 29(7)
Regulation 29(9)
Although these provisions do not apply, the liquidation scheme must continue to comply with all other applicable provisions of the AIF Regulations and any conditions specified by SEBI.
These exemptions recognise that a liquidation scheme is created solely to realise and distribute assets, rather than to make fresh investments like a regular AIF scheme.
29A(3).
The placement memorandum of a liquidation scheme must be filed with SEBI through a merchant banker.
The AIF cannot file the placement memorandum directly and must route the filing through a merchant banker.
The filing must be accompanied by the prescribed fee specified in the Second Schedule to the AIF Regulations.
The merchant banker facilitates the submission of the placement memorandum to SEBI in accordance with the regulatory requirements.
Filing the placement memorandum enables SEBI to review the liquidation scheme before it is launched.
29A(4).
The tenure of a liquidation scheme must be determined at the time the placement memorandum is filed with SEBI.
The AIF must specify the tenure of the liquidation scheme before it is launched.
The tenure is determined when the placement memorandum is submitted to SEBI.
The tenure must be fixed in the manner specified by SEBI.
The liquidation scheme must also comply with any conditions prescribed by SEBI regarding its tenure.
Determining the tenure in advance provides clarity to SEBI and investors on the expected duration of the liquidation scheme.
29A(5).
The tenure of a liquidation scheme cannot be extended once it has been determined.
The liquidation scheme must complete its activities within the tenure specified at the time of filing the placement memorandum.
The AIF cannot seek or grant an extension of the scheme's tenure after it has commenced.
The Manager must plan and complete the liquidation of investments within the prescribed timeframe.
Investors have certainty regarding the maximum duration of the liquidation scheme.
Example:
A liquidation scheme is launched with a 12-month tenure.
Even if a few investments remain unsold at the end of the 12 months:
The tenure cannot be extended, and the AIF must deal with the remaining investments in accordance with the applicable SEBI framework.
29A(6).
A liquidation scheme must not accept any fresh commitment from investors or make any new investment.
The liquidation scheme cannot raise additional capital from existing or new investors.
Investors cannot make fresh commitments after the liquidation scheme has been launched.
The scheme is prohibited from investing in new portfolio companies or assets.
The Manager must focus solely on realising the existing investments and distributing the proceeds to investors.
29A(7).
If the liquidation scheme is unable to sell certain investments due to lack of liquidity by the end of its tenure, those investments must be dealt with in the manner specified by SEBI.
The rule applies to investments that remain unsold because there are no buyers or sufficient market liquidity.
The liquidation scheme cannot continue indefinitely merely because some investments remain unliquidated.
At the end of its tenure, the remaining investments must be handled in accordance with the framework prescribed by SEBI.
The Manager must comply with the procedure and conditions specified by SEBI for dealing with such investments.
29A(8).
No Alternative Investment Fund (AIF) can launch a new liquidation scheme after the notification of the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2024.
This prohibition applies from the date the 2024 Amendment Regulations were notified.
Any liquidation scheme launched after that date is not permitted under this regulation.
The restriction applies to all Alternative Investment Funds.
Existing liquidation schemes that were launched before the notification are not affected by this provision and continue to be governed by the applicable regulations.
AIFs must follow the revised framework introduced by the 2024 Amendment Regulations for the liquidation of investments.
Existing Liquidation Schemes Continue Under the Old Framework
Any liquidation scheme launched before the notification of the SEBI (AIF) (2nd Amendment) Regulations, 2024 will continue to be governed by:
Regulation 29A the other applicable provisions until it is wound up.
This provision protects liquidation schemes already in existence.
The prohibition on launching new liquidation schemes does not affect schemes launched before the 2024 Amendment.
Existing liquidation schemes will continue to operate under Regulation 29A and the other relevant provisions of the AIF Regulations.
These schemes will remain under the earlier regulatory framework until the winding-up process is completed.
The applicable regulations continue to apply throughout the life of the liquidation scheme, even after the 2024 Amendment comes into force.
Section 29B. Dissolution Period
29B(1).
A scheme of an Alternative Investment Fund (AIF) may enter into a dissolution period in the manner and subject to the conditions specified by SEBI.
A scheme may enter the dissolution period when it satisfies the requirements prescribed by SEBI.
The procedure for entering the dissolution period is determined by SEBI.
The scheme must comply with all conditions specified by SEBI before entering the dissolution period.
The dissolution period provides a regulatory framework for dealing with investments that remain after the liquidation period.
The Manager must follow the manner and conditions prescribed by SEBI throughout the dissolution period.
29B(2).
A scheme entering the dissolution period must file an Information Memorandum with SEBI through a Merchant Banker.
The Information Memorandum must be submitted before or upon entering the dissolution period, as specified by SEBI.
The filing must be made through a Merchant Banker, who acts as the intermediary for the submission.
The Information Memorandum provides SEBI with details of the scheme and the remaining investments to be dealt with during the dissolution period.
The Manager must follow the manner and procedure prescribed by SEBI while filing the Information Memorandum.
29B(3).
The dissolution period of an AIF scheme cannot exceed the original tenure of the scheme.
The maximum duration of the dissolution period is limited to the scheme's original tenure.
The dissolution period cannot be extended under any circumstances after it expires.
The Manager must complete all activities relating to the dissolution period within the permitted timeframe.
Example:
A Category II AIF had an original tenure of eight years.
After entering the dissolution period, the scheme cannot remain in dissolution for more than eight years, & no extension can be granted once that period expires.
29B(4)
An AIF scheme in the dissolution period cannot accept any fresh commitment from investors or make any new investment.
The scheme cannot raise additional capital from existing or new investors during the dissolution period.
Investors cannot make fresh commitments once the scheme has entered the dissolution period.
The Manager is prohibited from investing in new portfolio companies or assets.
During the dissolution period, the Manager must focus only on dealing with the remaining investments and completing the winding-up process.
Example:
The AIF scheme has entered the dissolution period.
It still holds a few unlisted investments that need to be sold or otherwise realized.
During the dissolution period, the scheme cannot accept any additional capital commitments from existing or new investors.
It cannot make any new investments, such as investing in a new start-up.
Its only objective is to:
Dispose of (sell or realize) the remaining investments.
Recover and distribute the proceeds to investors.
Complete all formalities required for the winding up of the scheme.
