The Securities and Exchange Board of India (SEBI) has issued new guidelines for Category I and II Alternative Investment Funds (AIFs), focusing on borrowing practices and tenure extensions. These regulations permit borrowing only under stringent conditions, such as short-term operational needs, with a cap at 10% of investable assets and a 30-day limit. Additionally, funds must maintain a 30-day gap between borrowings. The guidelines also allow Large Value Funds for Accredited Investors to extend their tenure by up to five years with unit holder approval, ensuring a balance between operational flexibility and investor protection.
The Securities and Exchange Board of India (SEBI) has announced new guidelines for Category I and II Alternative Investment Funds (AIFs) regarding borrowing practices and extending tenures. This decision aims to enhance operational flexibility while ensuring that these funds maintain responsible management of their finances.
The new regulations state that Category I and II AIFs can borrow money only under specific conditions, mainly to meet short-term needs. For instance, if an AIF faces a temporary cash shortfall, it can borrow to cover daily operational costs or shortfalls in drawdown amounts from investors. However, this borrowing must be temporary, limited to a maximum of 30 days, and can occur only four times in a calendar year. Furthermore, the borrowing should not exceed 10% of the fund's total investable assets.
In exceptional cases, borrowing can also be permitted for emergencies, which must be clearly noted in the Private Placement Memorandum (PPM) of the fund. Importantly, the borrowed amount cannot exceed the lower of 20% of the investment, 10% of the fund's investable assets, or pending commitments from investors. All costs associated with borrowing will fall on investors who have not provided their drawdown amounts on time.
The guidelines also emphasize transparency. Funds are required to disclose any borrowing and repayment activities to all investors. Additionally, there must be a mandatory 30-day gap between borrowing instances, counted from the repayment date of the previous loan. This requirement is aimed at preventing excessive reliance on borrowed funds and ensuring prudent financial practices.
SEBI has also addressed the tenure extension for Large Value Fund for Accredited Investors (LVFs). Funds that need to extend their tenure can do so for up to five years, contingent upon approval from at least two-thirds of their unit holders. For those LVFs that either do not have a specified extension period or currently exceed the five-year limit, they must comply with the new regulation by November 18. Any adjustments to their original tenure must also be supported by agreement from all investors, alongside a formal undertaking submitted to SEBI.
The emphasis on responsible borrowing practices comes at a pivotal time when investors seek greater protection and clarity in their investments. SEBI's guidelines aim to balance the needs of alternative investment funds with the financial safety of their investors. As the investment landscape evolves, these measures are intended to foster a more stable and transparent framework for fund operations.
These changes reflect SEBI's commitment to maintaining a robust regulatory environment while ensuring that alternative investment funds can operate efficiently. Investors and fund managers alike will need to adapt to these guidelines, ensuring they understand the implications of borrowing practices and tenure extensions as they navigate this evolving landscape.
Overall, these new regulations mark a significant step towards enhancing the governance of alternative investment funds, aiming to safeguard investor interests while allowing funds the necessary tools to operate effectively.
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