AIF industry seeks clarity on liquidation scheme for unsold investments

Industry feels there's ambiguity over applicability for funds which have exhausted the one-year period

The alternative investment funds (AIF) industry is seeking more clarity from the Securities and Exchange Board of India (Sebi) on the new norms around liquidation of schemes which provides them with a framework to deal with investments not sold due to lack of liquidity during the winding up process of a scheme. 

The markets regulator has allowed AIFs to transfer such unliquidated investments to a new close-ended scheme called ‘liquidation scheme’ by the same AIF upon approval of 75 per cent of the investors, by value, from the original scheme. 

This AIF will have a period of one year available to them after the expiry or extended tenure of the original fund to shift to liquidation while the final tenure of the new liquidation scheme can be the same as the original fund.

However, whether AIFs which have surpassed the time window of one year will be provided the benefit or not, remains to be cleared. 

“There is lack of clarity on whether AIFs which have already exhausted their liquidation period of one year after the end of their tenure will be able to benefit from the circular or not,” said Vivaik Sharma, partner, Cyril Amarchand Mangaldas. 

AIFs which do not get the approval from investors for going ahead with the liquidation scheme will have to mandatorily distribute such unliquidated investments in specie to the investors. 

Experts said that removing the subjectivity on whether it will be applicable to schemes which have crossed the period -- or extending the benefit for such schemes -- will benefit the industry. 

"Current AIFs that have already exhausted their liquidation period should be allowed this benefit otherwise they will be forced to do in specie distribution of the investments which are unliquidated,” said Venkatesh Prabhu, co-founder, Mitcon Credentia Trusteeship Services.

At present, the tenure of an AIF is extendable up to two years on receiving investors' consent. If there are unliquidated investments, then the fund manager will now be able to shift it to the new liquidation scheme after the expiry of the original fund's tenure. 

Upon obtaining the investor consent for launching the liquidation scheme, the AIF will be required to arrange a bid for a minimum of 25 per cent of the value of the unliquidated investments. 

The investors, who did not consent to sell the unliquidated investments, will be offered an option to fully exit the scheme from this 25 per cent bid arranged by the manager. 

Sebi has also asked AIFs to disclose the bid value, along with the valuation of the unliquidated investments, which is to be carried by two independent valuers.

“For the fund manager, the eventual outcome is reportable and would reflect in its track record through performance benchmarking reports,” added Sharma.