SEBI proposes draft circular on rights of AIF investors

SEBI proposes draft circular on rights of AIF investors

It has sought public comments by 28 November

The Securities and Exchange Board of India (SEBI) has proposed a draft circular to clarify operational aspects of maintaining pro-rata and pari-passu rights of investors in alternative investment funds (AIFs).

(While pro-rata means investors share profits or returns in proportion to their investment, pari-passu means all investors are treated equally, with none getting special preference).

The market regulator stated that for closed-ended AIF schemes, investor rights should be based on either their total commitment or undrawn commitment while distributing investment proceeds.

SEBI’s draft circular read: "The investors of a scheme of an AIF shall have rights in distribution of proceeds of an investment pro-rata to their contribution to such investment; or pro-rata to their contribution to such investment on a time weighted pro-rata basis, as clearly disclosed upfront in the PPM of the scheme.”

It added that schemes should clearly disclose how pro-rata rights are calculated and the method cannot be changed during their tenure. Investors excluded from a specific investment cannot have their unused commitment used elsewhere. The methodology would prevent any investor from holding an excessive stake in an investee company beyond the prescribed concentration limits.

Meanwhile, existing AIF schemes can continue with their current method if compliant, but those using different systems should align with the new guidelines for future investments.

Open-ended Category III AIFs, where investors can enter or exit freely, will not be required to apply pro-rata drawdowns but should distribute proceeds in proportion to the units.

However, if such schemes invest in unlisted securities, they should follow the same rules as closed-ended schemes. For investments made before 13 December 2024, distributions will follow the existing terms disclosed to the investors.

The SEBI circular clarified that returns or profits shared by investors with fund managers, such as carried interest, will be exempt from the pro-rata norms.

The regulator directed that AIF managers maintain proper records showing compliance with pro-rata rights, and trustees should ensure that compliance reports reflect adherence to the provisions.

The proposal followed the November 2024 amendment to AIF regulations and a subsequent circular issued in December 2024.