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JC - Legal Updates - Significant Proposal by SEBI: Ensuring Fairness in AIF Investments

Legal Updates

31 May 2023

Significant Proposal by SEBI: Ensuring Fairness in AIF Investments

Overview:
 
The Securities and Exchange Board of India issued a consultation paper on the proposal with respect to pro-rata and pari-passu rights of investors of Alternative Investment Funds (AIFs).
 
The said consultation paper was published on 23rd May 2023 and is inviting comments till 04th June 2023 from market participants.
 
The following are the key highlights of the proposals:
 
Technical Details:
 
1.  Differential Treatment: SEBI proposes that AIF investors should not receive any differential treatment that negatively affects the economic rights of other investors. This is to ensure equal treatment and fairness among all participants. However, it's important to note that differential rights related to the hurdle rate of return, performance-linked fee/additional return, and management fee will not be impacted.
 
2.   Pro-Rata Rights: SEBI recommends maintaining the pro-rata rights of investors based on their commitment to the scheme during the investment process. Similarly, when distributing investment proceeds, the pro-rata principle should be upheld based on the investment made in the investee company. These measures enhance transparency and equality for all investors.
 
3.   Performance-Linked Fee: Managers will be allowed to charge a performance-linked fee as per the terms outlined in the contribution agreement with each investor. However, it is essential to ensure that the AIF's investment in the investee company is not utilized to repay any pending obligations to the manager/sponsor or their associates.
 
4.   Priority Distribution (PD) Model: SEBI expresses concerns regarding the potential misuse of AIFs with a priority distribution model, which may conceal true asset quality and lead to the ever-greening of problematic assets. As a result, SEBI explicitly prohibits AIFs from adopting this model to maintain the integrity of the investment vehicle.
 
5.  Existing Schemes: Existing AIF schemes that have already adopted the priority distribution model can continue with their current investments. However, they should refrain from accepting fresh commitments or making new investments in investee companies, in accordance with SEBI's directive.
 
JC Key Takeaways:
 
SEBI has proposed amendment to the AIF norms for safeguarding the interests and rights of the investors. Such proposal shall help in motivating more investments in the AIF space.
 
For further details, please see:
 
 
For any queries/clarifications, please feel free to ping us and we will be happy to chat:

●   Ms. Apurva Kanvinde (apurva.kanvinde@jclex.com)
●   Mr. Smit Parekh (smit.parekh@jclex.com)
●   Mr. Mannan Gala (mannan.gala@jclex.com)