Sebi clarifies 'exclusions' from pro-rata distribution mandate for AIFs

Sebi has also allowed managers or sponsors of fund, development financial institutions, or government-owned entities to accept lower returns or share losses beyond their pro-rata rights in investments

The Securities and Exchange Board of India (Sebi) on Friday clarified ‘exclusions’ from the pro-rata distribution mandate for alternative investment funds (AIFs). This mandate ensures benefits are distributed proportionally to investors' commitments in the AIF scheme.

 

Sebi in November notified the changes in AIF regulations to provide investors rights and distribution of proceeds in proportion (pro-rata) to their commitments in the scheme.

 

In a circular issued on Friday, Sebi said that the mandate will not be applicable if an investor has been excused or excluded from participating in an investment or if the investor has defaulted in providing the contribution.

 

Limited parties (LPs) or investors can excuse themselves from certain deals based on the opinion of a legal advisor that their participation would be a violation of a law or regulation. Some LPs don’t allow investments in liquor-related companies, gaming companies, and sometimes even NBFCs due to internal restrictions.

 

Sebi has also allowed managers or sponsors of the fund, development financial institutions, or government-owned entities to accept returns lesser or share losses more than their pro-rata rights in the investments.

 

It has asked AIFs to ensure that if the sponsors subscribe to a junior class of units (lower rights) in AIFs, the amount invested should not be used by an investee company to repay any liability to the sponsor or associates.

 

The market regulator has directed an industry body of the AIFs to formulate a list of specific differential rights that may be offered by AIFs based on the principles set by Sebi.

 

"On pari-passu rights, the industry has been hoping for a principle-based approach, avoiding positive list of differential rights which are then required to be revisited time and again. While SEBI has provided the guiding principles, the industry remains in a 'wait-and-watch' mode until the SFA (standard setting forum) releases implementation standards by January 15, 2025. Additionally, AIFs that have granted differential rights via side letters (except those part of the SFA list) are required to report those to Sebi by February 28, 2025 and terminate differential rights deemed to affect the rights of other investors. It remains to be seen how Sebi addresses those rights that GPs (general partners) argue are not adverse to other investors but are perceived otherwise by Sebi," said Sanchit Kapoor, Partner, IC Universal Legal. 

 

Analysis in Brief 

    - Sebi notified pro-rata distribution norms for AIFs in November

  - Norms to mandate distribution of proceeds from an AIF scheme in ratio to the commitments made by investors

  - In a circular on Friday, the regulator said that norms will not be applicable in certain cases

  - These are instances where an investor has been excused or excluded from participating in an investment

  - Sponsors, managers, and certain other entities allowed to accept returns lesser than their pro-rata rights