SEBI Issues Guidelines for Borrowings by Category I and Category II Alternative Investment Funds

Circular No. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/112; Dated: 19.08.2024

SEBI has issued guidelines for borrowing by Category I and II Alternative Investment Funds (AIFs). As per the new norms, Category I and II AIFs are allowed to borrow to meet a temporary shortfall in the amount called from investors for making investments in investee companies (‘drawdown amount’).

Such borrowing must be done only in case of emergency and as a last recourse when the investment opportunity is about to close, and AIF has not received the drawdown amount from investors before the date of investment.

The amount borrowed must not exceed 20% of the investment proposed to be made in the investee company or 10% of the investable funds of the scheme of AIF or the commitment pending to be drawn down from investors other than the investors who have failed to provide the drawdown amount, whichever is lower.

Further, the cost of borrowing must be charged only to investors who fail to provide the drawdown amount for making investments. The manager must disclose the details regarding the amount borrowed, terms of borrowing, and repayment to all investors of the AIF/scheme on a periodic basis as per the terms of the agreement with the investors of the AIF.

All Category I and II AIFs must maintain a 30-day cooling-off period between borrowing periods, as permitted under the AIF Regulations. The cooling-off period of 30 days must be calculated from the date of repayment of previous borrowing.

Also, Large Value Funds for Accredited Investors (LVFs) may extend their tenure up to 5 years subject to the approval of 2/3rd of the unit holders by the value of their investment in the LVFs. An extension in the tenure of any existing LVF scheme must be subject to conditions specified by SEBI. The circular shall be effective immediately.

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