Sebi's new AIF rules ensure fair share of rewards and risks for investors
New Delhi, Nov 22, 2024
The new rules ensure that investors in AIFs receive returns and bear risks in proportion to their financial commitment to the scheme, making it a fairer system.
Market regulator Securities and Exchange Board of India (SEBI) has made amendments to the rules governing Alternative Investment Funds (AIFs), particularly focusing on ensuring fair and proportional treatment of investors in terms of their rights related to investments and the distribution of proceeds.
An AIF is a privately pooled investment vehicle, which means it is a fund that collects capital from a group of investors and invests that capital under a specific investment strategy. The goal is to generate returns for the benefit of its investors. These funds are typically less regulated than public funds and can involve complex investment strategies. They are similar to Mutual Funds, but these private funds do not come under the jurisdiction of any regulatory agency in India, as per the SEBI website.
The new rules ensure that investors in AIFs receive returns and bear risks in proportion to their financial commitment to the scheme, making it a fairer system.
Differential treatment for select investors is allowed, but only if it doesn't harm other investors' interests.
Large Value Funds can have different treatment, but only with explicit consent from each investor.
Proportional Rights of Investors:
The key amendment requires that investors' rights in an AIF (in terms of the investments and the distribution of proceeds) must be in proportion to their contribution or commitment to the fund. This means that if an investor has committed 10% of the total capital of the AIF, they should receive 10% of any proceeds or returns that come from investments made by the fund.
This rule ensures that risks (losses) and rewards (profits) from the fund's investments are shared based on the amount each investor has put in.
Clarification of the Regulatory Intent:
The rule amendment also aims to clarify the intent of AIFs being pooled investment vehicles. AIFs are designed to pool money from multiple investors and invest it in a common pool of assets (such as stocks, real estate, etc.). The amended rules emphasize that this pooled structure should guarantee equal and fair treatment of investors, ensuring that no investor is unfairly treated in terms of their rights or share of returns.
Pari-passu Rights:
The term pari-passu means that all investors in the same scheme have equal rights. The new rules state that the rights of investors within a scheme must be pari-passu, i.e., they should be treated equally in all aspects unless explicitly stated otherwise by SEBI.
However, the rules also provide that differential rights can be offered to select investors within the same AIF scheme if this is allowed by SEBI. These differential rights should not negatively impact the interests of other investors in the same scheme. This could mean that certain investors may receive more favorable terms (such as higher returns or different fees) but only if such terms do not harm the other investors' interests.
Exemption for Large Value Funds:
An exemption has been provided to Large Value Funds (those with large sums of capital or large individual investor commitments). These funds can waive the requirement for pari-passu treatment. Essentially, this means that investors in large value funds may not always have to share rights or distributions equally. However, for this exemption to apply, each investor must sign a waiver, agreeing to the different treatment of their investments.
[The Business Standard]
