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The Securities and Exchange Board of India (Sebi) has issued a new framework allowing Alternative Investment Funds (AIFs) to retain liquidation proceeds beyond their prescribed fund life under specific circumstances, including pending litigation, regulatory demands and residual operational obligations. The regulator has also introduced an ‘Inoperative Fund’ category for AIFs that have liquidated all investments but continue to hold retained funds or remain registered due to unresolved liabilities. The measures follow regulatory amendments notified in April and are intended to provide operational flexibility during the winding-up process. The framework imposes investor approval requirements, restrictions on fund activities and annual reporting obligations, while also extending similar provisions to Venture Capital Funds registered under earlier regulations.
The Securities and Exchange Board of India (Sebi) has issued detailed guidelines permitting Alternative Investment Funds (AIFs) to retain liquidation proceeds beyond their permissible fund life in specified situations, while also creating a new ‘Inoperative Fund’ framework for funds that have completed investment liquidation but continue to face residual obligations.
The measures, announced on Tuesday, follow amendments to the Sebi (Alternative Investment Funds) Regulations notified earlier this year and are aimed at providing operational flexibility to AIFs during the winding-up process and surrender of registration.
Under the revised framework, AIFs or their schemes will be allowed to retain liquidation proceeds beyond the prescribed liquidation or dissolution period if they have received litigation notices or regulatory demands, secured investor approval to retain funds against anticipated liabilities, or require funds to meet residual operational expenses associated with winding up the scheme.
According to Sebi, litigation-related communications may include notices issued by tax authorities, regulators, law enforcement agencies, courts, investors or counterparties that indicate possible tax, legal or regulatory liabilities, irrespective of whether such liabilities have formally crystallised.
In cases where fund managers seek to retain money for anticipated liabilities, they must obtain approval from at least 75 per cent of investors by value. Managers will also be required to disclose the amount proposed to be retained and the expected duration of retention while seeking investor consent.
Where funds are retained to meet residual operational expenses linked to winding-up activities, Sebi has stipulated that the retention period cannot exceed three years from the expiry of the permissible fund life.
To support implementation, the regulator has directed the Standard Setting Forum for AIFs (SFA) to develop detailed standards for eligible operational expense categories in consultation with Sebi.
As part of the reforms, Sebi has introduced an ‘Inoperative Fund’ status for AIFs that have liquidated all their investments but continue to hold retained monies or remain registered because of ongoing litigation or unresolved liabilities. The regulator stated that AIFs with one or more schemes holding retained funds and intending to surrender their registration may apply for classification as an Inoperative Fund.
Funds granted this status will face operational restrictions. They will not be permitted to make new investments, launch additional schemes or charge management fees. Any retained monies may only be invested in instruments permitted under the AIF Regulations.
At the same time, Sebi has provided regulatory relief by exempting Inoperative Funds from several compliance requirements. These include quarterly and annual activity reports, compliance test reports, performance benchmarking disclosures, audits relating to private placement memorandum terms, and certain certification requirements applicable to key investment personnel.
The regulator has also mandated annual reporting for both AIFs retaining liquidation proceeds and those categorised as Inoperative Funds. These entities must submit details of retained monies and outstanding liabilities to Sebi and investors within 30 days of the end of each financial year.
The framework has come into effect immediately and has also been extended to Venture Capital Funds registered under the erstwhile Sebi (Venture Capital Funds) Regulations, 1996.
Source - PTI
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