The Securities and Exchange Board of India (SEBI) in its Board Meeting has approved amendments to the regulations governing Alternative Investment Funds (AIFs) in an effort to promote transparency, consistency, and investor protection. The changes will impact various aspects of AIF operations, including valuation of investments, dematerialization of units, certification requirements for key employees, transactions with associates, and liquidation options.
Valuation of Investment Portfolio
One of the key changes is the requirement for AIFs to carry out valuation of their investment portfolios in a consistent and standardized manner. SEBI shall specify the framework for AIFs to follow while valuing their portfolios and the independent valuer must meet certain eligibility criteria. In addition, managers of AIFs will be responsible for ensuring that their portfolios are valued in a true and fair manner.
Dematerialization of units
To promote ease of monitoring and administration by stakeholders and to protect investors against operational and fraud risks, SEBI has decided that all new schemes going forward and existing schemes of AIFs with corpus more than Rs. 500 Crore shall dematerialize their units by October 31, 2023. Existing schemes of AIFs with corpus less than Rs. 500 Crore shall dematerialize their units by April 30, 2024. This will make it easier to track AIF investments and prevent fraudulent activities.
Certification of Fund Managers
SEBI has also introduced a comprehensive certification requirement for the key investment team of the Manager of the AIF, replacing the previous minimum experience requirement. This certification will also be mandatory for the compliance officer of the fund. This change will facilitate skill-based approvals and ensure objectivity in ascertaining eligibility for registration of AIFs.
Investor Super Majority required
To improve governance and transparency to investors with respect to transactions involving conflicts of interest, SEBI has mandated obtaining approval of 75% of investors by value for buying or selling of investments potentially involving conflicts of interest. The provision would cover transactions by an AIF, from or to, associates of AIF, or schemes of AIFs managed or sponsored by the manager or sponsor or their associates, or an investor who has commitment to the extent of more than 50% of the corpus of the scheme of AIF.
Unliquidated Investments
Finally, to provide flexibility to AIFs to deal with investments which are not sold due to lack of liquidity during the winding-up process, SEBI has allowed AIFs to either sell such investments to a new scheme of the same AIF or distribute such unliquidated investments in-specie, in the prescribed manner and subject to approval of 75% investors by value. In the absence of investor consent for the aforesaid options during the liquidation period, the unliquidated investments shall be mandatorily distributed in-specie to investors. In case an investor is not willing to take in-specie distribution, such investment shall be written off.
In conclusion, SEBI's amendments to AIF regulations are expected to promote transparency, consistency, and investor protection in the AIF industry. AIFs will need to adapt to these changes and ensure compliance with the new regulations to maintain investor trust and confidence.
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