Sebi clarifies 'excused investor' norms for AIF pro-rata distribution

Mumbai, Dec 13, 2024

Sebi has also allowed managers or sponsors of fund, development financial institutions, or government-owned entities to accept lower returns or share losses beyond their pro-rata rights in investments

The Securities and Exchange Board of India (Sebi) on Friday clarified ‘exclusions’ from the pro-rata distribution mandate for alternative investment funds (AIFs). This mandate ensures benefits are distributed proportionally to investors' commitments in the AIF scheme.

Sebi had, in November, notified the changes in AIF regulations to provide investors with rights and the distribution of proceeds in proportion (pro-rata) to their commitments in the scheme.

In a circular issued on Friday, Sebi said the mandate will not be applicable if an investor has been excused or excluded from participating in the said investment or if the investor has defaulted in providing the contribution.

Limited partners (LPs), or the investors, can excuse themselves from certain deals based on the opinion of a legal adviser confirming that their participation would be a violation of a law or regulation. Certain LPs do not allow investments in liquor-related companies, gaming companies, and sometimes even non-banking financial companies (NBFCs) due to internal restrictions.

Further, Sebi has also allowed managers or sponsors of the fund, development financial institutions, or government-owned entities to accept lower returns or share losses beyond their pro-rata rights in the investments.

Sebi has also asked AIFs to ensure that if sponsors subscribe to the junior class of units (lower rights) in AIFs, the amount invested should not be used by an investee company to repay any liability to the sponsor or its associates.

The market regulator has also directed an industry body of the AIFs to formulate a list of specific differential rights that may be offered by AIFs based on the principles set by Sebi.

[The Business Standard]