SEBI Allows AIFs To Retain Proceeds Beyond Fund Life For Litigation, Tax Demands, Other Liabilities

The Securities and Exchange Board of India (SEBI) on Tuesday issued fresh guidelines governing the winding up of Alternative Investment Funds (AIFs), including the retention of proceeds beyond the permissible fund life and the introduction of an "Inoperative Fund" framework.

The circular permits AIFs to retain liquidation proceeds beyond their permissible fund life to meet liabilities arising from pending litigation, tax or regulatory demands, anticipated liabilities arising from possible litigation or tax demands, and residual winding-up and operational expenses.

Where monies are retained for anticipated liabilities, consent of investors holding at least 75% of the investment value in the scheme is required.

The circular further provides that amounts retained towards residual winding-up and operational expenses cannot be held for more than three years after the end of the permissible fund life.

It also requires all retained monies to be invested in accordance with Regulation 15(1)(f) of the AIF Regulations.

The circular also creates an "Inoperative Fund" category, enabling AIFs to retain their registration where monies are retained under the framework or where they wish to continue registration solely in anticipation of a favourable outcome in pending litigation.

An AIF tagged as an "Inoperative Fund" will not be permitted to launch new schemes, and no management fee can be charged in respect of its schemes.

The circular further mandates annual reporting to SEBI and investors on retained monies and outstanding liabilities.

An Inoperative Fund may surrender its registration only after all liabilities are satisfied and the retained monies are distributed to investors in all its schemes.

The framework will also apply to Venture Capital Funds registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996.

The circular comes into force with immediate effect.