Exploring the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2023

NOTIFICATION NO. SEBI/LAD-NRO/GN/2023/132 dated 15-06-2023

SEBI has released the SEBI (Alternative Investment Funds) (Amendment) Regulation, 2023, introducing significant changes to the existing framework. The key amendments encompass various aspects, such as the addition of a new category of Alternative Investment Funds (AIFs), modifications to the winding-up process and valuation norms, the compulsory appointment of a compliance officer, and the requirement of issuing units in dematerialized (demat) form. This write-up delves into the details of the amendments, providing a comprehensive analysis of their implications and effects on the AIF landscape.

1. SEBI notifies a new category of Alternative Investment Funds known as specified Alternative Investment Fund

Regulation 3(4) of SEBI (Alternative Investment Funds) Regulation, 2012. Alternative Investment Funds shall seek registration in one of the categories as specified in the regulation 3(4). Under the extant norms the three categories of the AIFs were specified

• Category I AIFs
• Category II AIFs
• Category III AIFs

Now, SEBI has specified a new registration category to be known as specified AIFs.

2. SEBI modifies the eligibility criteria of the key investment team of the Manager of the Alternative Investment Fund

Regulation 4 of the SEBI (Alternative Investment Funds) Regulation, 2012 prescribes the eligibility for grant of registration certificate to the applicant.

Under the extant norms, one of the requirements was that the ‘key investment team’ of the AIF Manager must have adequate experience, with at least one key personnel having not less than five years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets.

Now, the same has been modified, as per the amended norms, at least one key personnel with relevant certification as may be specified by the Board from time to time.

The requirement of having at least 5 years of experience for a member of ‘key investment team’ has been done away with.

3. Alternative Investment Funds shall issue units in dematerialised form for taking investments

A new clause has been inserted in Regulation 10(a) of SEBI (Alternative Investment Funds) Regulation, 2012. Accordingly, every AIF seeking to invest is required to issue its units in dematerialised form subject to the conditions specified by the Board from time to time.

This amendment takes place to fully realize the objective of ease of monitoring and administration by stakeholders and enhancing transparency. It further reduces operational and fraud risk such as fake certificates, delays, bad delivery, missing certificate, mutilation or theft. It also provides ease of transfer and transmission of securities and Reduction in paperwork for administrational aspects.

4. Change in the winding up process of the AIFs

Under the extant norms, in the absence of consent of unit holders, the Alternative Investment Fund is required to fully liquidate within 1 year following expiration of the fund tenure or extended tenure.

The amended norms provide that now the winding up would take place as per the procedure specified under regulation 29 of the AIFs regulations.

Amendments has been modified in regulation 29 also as per the amended norms the requirement of taking the approval of 75% unit holders for distribution of liquidation proceeds has been done away.

5. Approval of the unitholders shall be required for buying/selling investment from certain persons

Regulation 15 of the AIF regulations prescribes the general investment conditions. More stringent condition has been added.

The amended norms prescribes that the approval of 75% of the investors by value of their investment in the scheme of Alternative Investment Fund shall be required to buy or sell investments, from or to –

(a) associates; or

(b) schemes of Alternative Investment Funds managed or sponsored by its Manager, Sponsor or associates of its Manager or Sponsor; or

(c) an investor who has committed to invest at least fifty percent of the corpus of the scheme of Alternative Investment Fund:

Further, while obtaining approval of the investors, the investor specified under subclause (c) who has committed to invest at least 50% of the corpus of the scheme of Alternative Investment Fund and is buying or selling the investment, from or to, the Alternative Investment Fund, shall be excluded from the voting process.

6. Every AIF shall have a Compliance Officer who shall be responsible for monitoring compliance

Regulation 20 of SEBI (Alternative Investment Funds) Regulation, 2012 provides provisions related to general obligations and responsibilities and transparency.

As per the amended norms, every AIF shall have a compliance officer. Such Compliance Officer shall be responsible for monitoring compliance with the provisions of the Act, rules, regulations, notifications, circulars, guidelines, instructions or any other directives issued by the Board.

The Compliance officer shall satisfy the eligible criteria as specified by the board for his appointment.

Further, it is duty of the Compliance officer for immediately and independently report to the board about any non-compliance observed by him. He has to report such non-compliance not later than seven working days from the date of observing such non-compliance.

7. SEBI modifies the valuation procedure and of the methodology for valuing assets

Regulation 23 deals with the valuation of the AIF. As per the amended norms the Manager shall ensure that the Alternative Investment Fund appoints an independent valuer who satisfies the criteria specified by the Board from time to time.

The Manager and the key management personnel of the Manager shall ensure that the independent valuer computes and carries out valuation of the investments of the scheme of the Alternative Investment Fund in the manner specified by the Board from time to time.

The Manager shall be responsible for true and fair valuation of the investments of the scheme of the Alternative Investment Fund.

Further, in the established policies and procedures of valuation do not result in fair and appropriate valuation, the Manager shall deviate from the established policies and procedures in order to value the assets or securities at a fair value and document the rationale for such deviation.

However, such deviation and its rationale shall be reported to the trustee or the trustee company or the Board of Directors or designated partners of the Alternative Investment Fund and investors of the Alternative Investment Fund.

8. Introduction of ‘Corporate Debt Market Development Fund’

With the present amendment, the SEBI has notified chapter III-C i.e., Corporate Debt Market Development Fund, of the SEBI (Alternative Investment Funds) Regulations, 2012. Let’s decode the newly notified norms:

8.1. What is Corporate Debt Market Development Fund?

The Corporate Debt Market Development Fund (CDMDF) will be a backstop facility for the purchase of investment-grade corporate debt securities in times of stress or in case of market dislocation. The purpose of this fund is to bring about confidence in the corporate bond market and boost secondary market liquidity.

8.2. Registration of Corporate Debt Market Development Fund

The CDMDF shall be constituted in the form of a Trust and the instrument of Trust shall be in the form of a deed duly registered under the provisions of the Indian Registration Act, 1908. Further, it shall apply for registration as an Alternative Investment Fund.

8.3. CDMDF shall be a closed-ended fund

The CDMDF shall be a close ended fund, with a tenure of fifteen years from the date of its first closing. Further, the tenure may be extended with the prior approval of the Board. Also, the fund shall be wound up with the prior approval of the Board.

8.4. Investment in the Corporate Debt Market Development Fund to be made through ‘units’

The units of the CDMDF shall be offered to the AMCs as defined under the SEBI (Mutual Funds) Regulations, 1996 and the specified debt-oriented schemes of mutual funds.

Further, the investment by the AMCs and the specified debt-oriented schemes of the mutual funds shall also be in accordance with the SEBI (Mutual Funds) Regulations, 1996.

8.5. Manager or sponsor will have a continuing interest in CDMDF

The Manager or Sponsor shall have a continuing interest in the CDMDF of not less than five crore rupees in the form of investment in the fund but such continuing interest shall not be through the waiver of management fees.

8.6. Eligibility criteria for purchase of corporate debt securities by CDMDF during market dislocation

During periods of market dislocation, the CDMDF shall purchase corporate debt securities from the specified debt-oriented schemes of mutual funds which meet the following eligibility criteria:

(a) Corporate debt securities shall be listed and have an investment grade rating;

(b) The residual maturity of such securities shall not exceed five years on the date of purchase;

(c) Securities where there is no material possibility of default or adverse credit news or views.

8.7. Investments by CDMDF during other than market dislocation period

During the other than market dislocation period, the Corporate Debt Market Development Fund shall invest in liquid and low-risk debt instruments and undertake any other activity related to the corporate debt market.

Further, the CDMDF shall not invest in the securities of companies incorporated outside India. Also, investment in any one investee company shall not exceed 5 % of its fund capital at the time of investment.

8.8. Disclosure norms for CDMDF

The portfolio of the Corporate Debt Market Development Fund shall be disclosed to the unitholders on a fortnightly basis. Further, the Net Asset Value shall be disclosed to the unitholders on a daily basis.

8.9. Steps to be taken to comply with the governance mechanisms

• The CDMDF shall appoint a trustee company.
• The Board of directors of the trustee-company and the Manager of the CDMDF shall be appointed with the prior approval of the Board.
• The trustee company shall not engage in any activity other than acting as a trustee of the CDMDF, except with the prior written consent of the Board:
• Two-thirds of the members of the board of the trustee company shall be independent directors and shall not be associated with the Sponsor or the Manager.
• No person shall initially or any time thereafter be appointed as a director of the trustee company without the prior approval of the Board.
• An audit committee of the trustee company shall be constituted to review compliance with the provisions of placement memorandum.

8.10. Governance Committee of the CDMDF

• The manager of the CDMDF shall appoint a Governance Committee.
• The Governance Committee, jointly with the board of the Manager and trustee company, shall approve the policies of the CDMDF.
• The Governance Committee shall supervise the activities of the CDMDF, especially relating to management of conflict of interest.
• The Governance Committee shall have oversight on management of asset liability mismatches during times of market dislocation.

8.11. Impact of the CDMDF

One of the key impacts of the CDMDF is the boost in confidence it brings to the corporate bond market. By providing a mechanism to support the purchase of investment-grade corporate debt securities, the fund helps instill trust among investors, encouraging their participation in the market.

This increased confidence can lead to improved liquidity in the secondary market, as investors are more willing to buy and sell corporate debt securities. Further, the registration of the CDMDF as an Alternative Investment Fund in the form of a Trust ensures proper governance and regulatory oversight

Click Here To Read The Full Updates