Sebi eases norms for Category II AIFs on debt securities investments

Category II AIFs can now invest in listed debt securities rated 'A' or below, offering more flexibility and investment opportunities

The Securities and Exchange Board of India (Sebi) has relaxed norms for Category II Alternative Investments Funds (AIFs), allowing them a wider investable universe and opportunities in the debt securities.

 

The new norms permit Cat II AIFs to invest in listed debt securities with a credit rating of 'A' or below.

 

The market regulator had proposed the changes in a consultation paper in February and brought the amendments through a notification dated May 21.

 

“The amendment provides greater flexibility to the investment managers to determine their investment strategy. The regulator has kept the basis of investments as the placement memorandum instead of just listed, unlisted, and rating classifications. It shows that they don’t want constraints till the time the investment strategy is mentioned in the PPM," said Nachiket Naik, head – Structured Credit at Axis AMC. 

 

 

"This increased flexibility demonstrates the maturity of the sector and the consequent growing confidence of the regulator,” he added. 

 

The AIF industry had sought relief after an earlier amendment to Listing Obligation and Disclosure Requirement Regulation (LODR), that could shrink the investment opportunities in unlisted debt securities for AIFs making fresh investments.

 

Following the LODR amendments, the entities that had issued listed non-convertible debentures (NCDs) on or before January 1, 2024 would not be eligible to issue any unlisted NCDs till even one listed NCD is live. However, Category II AIFs are mandated to invest primarily in unlisted securities.

 

Relaxing the norms for AIFs, the new notification states, “Category II Alternative Investment Fund shall invest primarily in unlisted securities and/or listed debt securities (including securitised debt instruments) which are rated ‘A’ or below by a credit rating agency registered with the Board, directly or through investment in units of other Alternative Investment Funds, in the manner as may be specified by the Board.”

 

Sebi’s consultation paper had noted that there were around 192 category II AIF schemes which had invested more than 50 per cent of their investments in unlisted debt.

 

By allowing investments in lower-credit paper, the regulatory framework will provide AIFs greater flexibility and diversification opportunities and also align with the high-risk appetite.