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SEBI enhances AIF operational flexibility with updated lending regulations

Posted on by darion

The Securities and Exchange Board of India (SEBI) recently issued new guidelines to enhance operational flexibility for Category I and II Alternative Investment Funds (AIFs). These updated regulations, announced on August 19, 2024, mark a significant change in the regulatory landscape by allowing AIFs to borrow funds under certain conditions to meet shortfalls in distribution amounts.

Historically, Category I and Category II AIFs have faced severe borrowing restrictions, limited to meeting temporary funding requirements and day-to-day operations. However, the new guidelines allow these AIFs to borrow to cover shortfalls in investor distributions, particularly when an investment opportunity is imminent and investor contributions have been delayed.

Key provisions of the guidelines include:

  1. Emergency loans: AIFs may only resort to borrowing in emergency situations, for example when an investment opportunity is about to close and, despite all reasonable efforts, the required distribution amounts have not been received from investors on time.

  2. Borrowing restrictions: The amount borrowed should not exceed 20% of the proposed investment, 10% of the investable funds or the pending commitment of investors excluding delinquent investors, whichever is lower.

  3. Cost allocation: The costs associated with these types of loans will be borne solely by those investors who fail to provide the required payout amounts, ensuring that investors who comply with the rules are not penalized.

  4. Grace period: Investment mutual funds must maintain a 30-day grace period between two loan cycles, counted from the repayment date of the previous loan.

Apart from the guidelines on loans, SEBI has also clarified the maximum permissible extension of the tenure for Large Value Funds (LVFs) catering to accredited investors. LVFs can now extend the tenure by a maximum of five years, subject to the consent of two-thirds of the unitholders in the value. Existing LVFs that have not yet defined the tenure extension period will have to comply with the new requirements by November 18, 2024.

These regulatory updates are part of SEBI’s broader efforts to streamline AIF operations while protecting investor interests and promoting the development of the securities market. The new guidelines provide AIFs with greater flexibility in managing investment opportunities while maintaining strict oversight and ensuring accountability in the fund management process.