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July 18, 2024
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Alternative Investments

Ensure Investors, Investments Do Not Circumvent Any Financial Regulations: SEBI To AIFs

The SEBI board on Friday approved a proposal under which it will be mandatory for alternative investment funds (AIF) managers to ensure that their investments do not circumvent any financial regulations.

The AIF, its manager and key management personnel, will be mandated to carry out ‘specific due diligence’ of their investors and investments so that ‘AIFs do not facilitate circumvention of specified regulations administered by financial sector regulators’.

‘…verifiable compliance with such due-diligence requirements would provide the regulatory comfort necessary for the introduction of other Ease of Doing Business (EoDB) proposals/ measures relating to AIFs, to facilitate sustained capital formation,’ an official statement from the capital markets regulator said.

It can be noted that the Reserve Bank has been concerned with AIFs being used for the evergreening of loans.

The AIF industry had voiced concerns about the impact of any regulatory actions like the one taken today on their business when they were being discussed.

The specific implementation standards for verifiable due diligence to be conducted on investors and investments of AIFs shall be formulated by the pilot Industry Standards Forum for AIFs, in consultation with Sebi, the statement added.

Meanwhile, to relax the challenges faced by the infra sector AIFs, the Sebi board approved a proposal to create an encumbrance on the equity of its investee companies in the infrastructure sector.

This is aimed at facilitating borrowing by such companies and comes with conditions, including compliance with RBI regulations, it said.

The Sebi board also approved a proposal to allow AIFs to deal with unliquidated investments, which are not sold due to lack of liquidity during the winding-up process, by continuing to hold such investments in the same scheme of the AIF and entering into a dissolution period, rather than the present option of launching a new scheme.

The of such investments carried forward into the dissolution period shall be recognised as per norms for capturing in the track record of the manager and for reporting to performance benchmarking agencies, the Sebi said.

It also approved a proposal to provide a one-year additional ‘liquidation period’ to schemes of AIFs to deal with unliquidated investments whose liquidation period had expired in the past or shall expire within three months from the date of notification of amendment to AIF Regulations.

The Sebi board also approved amendments to provide a framework for the issuance of subordinate units by privately placed InvITs (infrastructure investment trusts).

‘The objective of the framework for issuance of subordinate units is to enable usage of subordinate units to bridge the valuation gaps that may arise as a result of the difference in the valuation of an asset assessed by the Sponsor (in its capacity of the asset seller) and the InvIT (in the capacity of the asset buyer),’ the statement said.

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