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In a recent circular, SEBI has clarified that investors who have defaulted or have excluded themselves from any drawdown request of AIFs will not be eligible for pro-rata rights i.e. return equivalent to their commitment in the scheme.
The regulator has also clarified that maintaining pro-rata rights will not be applicable to the extent of an investor sharing the profits with the AIF fund manager or sponsor.
In addition, to allow AIFs to be more flexible in raising funds from investors with low-risk appetite, the regulator has allowed AIF manager or sponsors, multilateral or bilateral financial institutions, state industrial development corporations and state or central government entities and foreign government entities to subscribe to junior units of the scheme where they accept lesser returns and share more losses than their contribution to the scheme.
SEBI has also asked the AIFs to ensure that if they subscribe to junior units of the scheme then their investment cannot be used by the investee company to repay obligations or liabilities to the fund managers or sponsors of the scheme.
Applicability to existing AIFs
The regulator has clarified that the existing schemes of AIFs that work on priority distribution model and issue different class of units and who do not have the investors mentioned above cannot accept any new commitment or make an investment.
Pari-passu rights of investors
When it comes to pari-passu rights of AIF investors, the regulator has specified that an AIF can offer differential rights to investors provided that such right is transparently declared in the scheme documents and does not transfer liabilities of other investors to the investor with differential right or give him control over the decision making of the scheme.
The implementation standards for this provision will be published by the Standard Setting Forum for AIFs (SFA) on the websites of industry associations before January 15, 2025.
Applicability to existing AIFs
The regulator has given a deadline to AIFs who are offering differential rights in their scheme in a manner different than the standard set by Standard Setting Forum for AIFs (SFA) to report the details of differential rights by February 25. If the differential rights provided by a scheme is affecting the rights of other investors, then they will have to terminate them.
Large Value Funds (LVFs) meant for accredited investors with over Rs. 70 crore investment are exempted from this rule after ensuring approval from each investor in the scheme. The fund managers of such funds will have to submit their compliance report.
This circular will come into effect immediately.