Rephrase the title:Sebi mulls flexibility for AIF, VCFs to deal with unliquidated investments beyond tenure expiry

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New Delhi, Capital markets regulator Sebi on Monday proposed to provide flexibility to Alternative Investment Funds (AIFs), Venture Capital Funds (VCFs) and their investors to deal with unliquidated investments of their schemes beyond expiry of tenure. In its consultation paper, the regulator suggested that instead of launching a new liquidation scheme AIFs, the same scheme itself can be allowed to continue with the unliquidated investments beyond their tenure for a certain period or dissolution period for fully liquidating their unliquidated investments.

Additionally, the regulator proposed extending flexibility of the dissolution process to venture capital funds through migration to the AIF regime.

At present, the option to launch liquidation scheme is available only to those schemes of AIFs which are under ‘Liquidation Period’– the period of one year following the expiry of tenure of the scheme for fully liquidating the scheme and not available to VCFs, irrespective of whether their tenure has expired or not.

The Securities and Exchange Board of India (Sebi) has sought public comments till February 2 on the proposal.

The proposal came after Sebi received representations from participants in the AIF industry highlighting certain tax related issues. They also highlighted that setting up a liquidation scheme and winding up the original AIF scheme is a process involving time, cost, and efforts, which directly or indirectly, would ultimately be paid investors.

In the consultation paper, the regulator suggested that during the liquidation period of an AIF scheme, if the AIF decides to opt for dissolution period, then AIF should obtain positive consent of 75 per cent of investors value of their investment in the scheme.

After obtaining the consent, the AIF should arrange bids for a minimum of 25 per cent of the value of the unliquidated investments.

The bids should be arranged for units representing consolidated value of all unliquidated investments of the scheme’s investment portfolio.

Sebi suggested that investor approval and bid should be obtained the AIF before the expiry of the Liquidation Period of the scheme.

“Liquidation schemes that have already been launched AIFs shall be grand-fathered,” Sebi said.

The regulator also suggested one-time flexibility to AIF schemes, whose Liquidation Period has expired or would be expiring within one month from the date of notification in this regard, to deal with unliquidated investment.

Also, it has recommended extending flexibility of the dissolution process to venture capital funds through migration to the AIF regime. It further suggested that such migration should be smooth and cost effective.

Under the VCF Regulations, VCFs are required to liquidate their investments within three months from the expiry of their tenure, whereas AIF Regulations provide AIFs a Liquidation Period of 12 months for the said purpose.

There is no provision in VCF Regulations for extension of tenure of VCF scheme. Therefore, any VCF operating beyond their tenure specified in the Private Placement Memorandum (PPM) is in violation of the VCF rules.

Accordingly, Sebi suggested a new framework to facilitate VCFs to migrate to AIF Regulations, so that the proposed flexibility of Liquidation Period and the flexibility of dealing with unliquidated investments opting for dissolution period / process, can be availed VCFs.

Under the proposed regulatory framework for migration of VCFs to AIF Regulations, a sub-category should be created under Category I – VCFs called Migrated VCFs. Such VCFs can migrate themselves within 6 months of the date of Sebi’s notification in this regard.

Sebi suggested that certain flexibilities under VCF rules should continue to be availed migrated VCFs and accordingly the migrated VCFs should be exempted from the requirements of minimum investment requirement in AIF, minimum corpus size, maximum number of investors in a scheme, manner of calculation of tenure and audit of terms of PPM.

Moreover, certain benefits of AIF Regulations that are not available under VCF rule should be extended to migrated VCFs.

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