Sebi proposes exit flexibility for alternative investment funds

Sebi proposes easing exit norms for AIFs, allowing limited retention of liquidation proceeds and introducing a lighter compliance regime for inoperative funds

The Securities and Exchange Board of India (Sebi) has proposed easing norms governing the winding up of alternative investment fund (AIF) schemes and surrender of registrations, including allowing funds to retain a portion of liquidation proceeds beyond their permissible fund life under specified conditions.

 

In a consultation paper, Sebi said the proposals are aimed at streamlining exit processes for AIFs and providing regulatory clarity and operational certainty for funds seeking to discontinue operations.

 

Under the current framework, AIF schemes are required to liquidate assets and distribute all proceeds to investors within one year of expiry of scheme tenure, after settling liabilities.

 

 

However, Sebi noted that several AIFs continue to retain funds beyond this period due to pending or anticipated litigation, tax demands or residual operational expenses, preventing them from surrendering their registrations.

 

The regulator has proposed permitting AIF schemes to retain funds beyond the permissible fund life where monies are held back due to ongoing litigation or tax demands, subject to the fund demonstrating receipt of a formal notice from tax authorities, regulators or law enforcement agencies. In cases where funds are retained for anticipated liabilities, Sebi has proposed that such retention be allowed only with the consent of at least 75 per cent of investors by value.

 

The regulator has also proposed allowing limited retention of funds to meet residual operational expenses, such as legal or professional fees, subject to substantiation through invoices or comparable historical expenses, and capped at a maximum period of three years.

 

To reduce compliance burden, Sebi has proposed introducing a framework to classify such entities as “inoperative AIFs”, under which regulatory requirements would be significantly rationalised.

 

Inoperative AIFs would be exempt from quarterly reporting, PPM audit reports and compliance test reports, but would be required to submit an annual status report to Sebi and investors. These funds would also be barred from launching new schemes or charging management fees.

 

Sebi further proposed extending the inoperative status to AIFs that do not retain any funds but continue to exist solely in anticipation of favourable litigation outcomes.