SEBI Issues Proposal: New Framework for AIFs To Strengthen Corporate Governance Rules

SEBI Issues Proposal: New Framework for AIFs To Strengthen Corporate Governance Rules

The Securities and Exchange Board of India (SEBI) has proposed to amend the current rules that govern Alternative Investment Funds (AIFs).

As per the proposal, Category I and Category II AIFs should not borrow funds directly or indirectly or engage in leverage for the purpose of making investments.

Subject to certain conditions, these AIFs can borrow in order to meet the shortfall in drawdown while making an investment in an investee company.

The terms stated that such borrowing by these AIFs should only be done in an emergency and as a last resort, that the amount borrowed should not exceed 10% of the investment proposed to be made in the investee company and that the cost of such borrowing should only borne by the investor who delayed or defaulted on drawdown payment.

Category I and Category II AIFs should maintain 30 days cooling off period between two periods of permissible leverage.

SEBI stated, “The regulatory intent behind permitting borrowing for Category I and II AIFs is that the funds borrowed shall be utilized for meeting operational requirements of the AIF, and not for the purpose of making investment.”

Further, the security exchange regulator proposed to mandate that AIFs should hold the instruments or securities of their investments only in dematerialised form.

Moreover, it has been recommended that the requirement of mandatory appointment of a custodian for safekeeping of securities for AIFs with corpus of over Rs. 500 crores, should be extended to AIFs with corpus of less than Rs. 500 crores as well.

Large Value Funds for accredited investors (LVFs) shall be authorised to extend their term by up to four years with the consent of two-thirds of the LVF’s unit holders, measured by the value of their investment in the LVF.

According to SEBI, many AIFs are still holding their certificate of registration despite having no fundraising or investment activity in their schemes for several years. Resultantly, SEBI recommended that an AIF’s manager should ensure that the AIF pays renewal fee equal to 50% of its applicable registration fee for the subsequent block of five years from the date of grant of registration, within three months before expiry of the said block period.

In addition, current AIFs that have reached the five-year mark since the date the certificate of registration was granted, must pay a renewal charge equal to 50% of the appropriate registration fee.

Thus, SEBI has sought comments on the proposal till 31st May.