Sebi proposes AIF consent rule changes, aligns 'related party' definition

Sebi has proposed stricter AIF rules, including 75% investor approval for related-party transactions and a shift from 'associate' to 'related party' norms

The Securities and Exchange Board of India (Sebi) has proposed a broad set of changes to the Alternative Investment Fund (AIF) regulations, including revised investor consent thresholds for key decisions and a shift from the concept of 'associate' to 'related party' across the regulatory framework.

 

Sebi has proposed introducing a more uniform investor consent framework across AIF activities, replacing the current fragmented approach. The regulator has mapped specific decisions to clearly defined approval thresholds, with most material actions requiring the consent of at least 75 per cent of investors by value.

 

The regulator has also proposed changes to the methodologies through which consent is obtained, to provide flexibility and protect investors' interests.

 

Under the proposed changes, AIFs would require investor approval before investing in or transacting with 'related parties' of the manager or sponsor, instead of 'associates' as currently prescribed. This would apply to key provisions such as investments in affiliated entities and transactions involving schemes managed or sponsored by related parties.

 

With the change, any such transaction with a related party will require the consent of 75 per cent of the investors by value.

 

The change will harmonise Sebi regulations with the Companies Act, 2013.

 

"The intent of these provisions is to ensure that transactions involving heightened conflict potential are undertaken with appropriate transparency and investor awareness, without unduly constraining legitimate commercial activity," Sebi noted.

 

At present, due to the narrow definition of 'associate', certain transactions where there may be a risk of conflict do not trigger the investor consent requirement.

 

These transactions could include investment in a company whose director is a director of the AIF's manager, investment in a company where the controlling stake is held by an immediate relative of the AIF manager, or investment in a company whose major shareholder also owns a majority stake in the AIF.

 

The changes would also extend to specific fund categories. Angel funds and special situation funds would be barred from investing in related parties of their managers or sponsors, replacing the existing restrictions on associates.

 

Further, disclosure requirements would be updated to mandate reporting of fees charged by related parties, and offering documents would need to capture investments involving such entities.