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SEBI has barred a few AIFs from raising fresh commitment or make investment in a new investee company for not distributing income on proportionate basis. The regulator clarified that such AIFs will be barred till further notice.
This has come after SEBI noticed that a few AIFs followed ‘priority distribution model’ to pass on losses to their investors. A few AIFs follow ‘priority distribution model’ through which they distribute income disproportionately to a particular set of investors. For instance, if an AIF has two class of investors - type A and type B and it gives more priority to type A then whenever it receives a cash flow, it would distribute the cash flow to type A before distributing the remaining amount to type B.
SEBI said, “While it has not been explicitly restricted in AIF Regulations that the sharing of loss by a class of investors shall not be less than pro rata to their holding in the AIF vis-à-vis other classes of investors/unit holders, it has been brought to SEBI’s attention that certain schemes of AIFs have adopted a distribution waterfall in such a way that one class of investors (other than sponsor/manager) share loss more than pro rata to their holding in the AIF vis-à-vis other classes of investors/unit holders, since the latter has priority in distribution over former (‘priority distribution model’).”
Further, SEBI said, “The matter is being examined by SEBI in consultation with Alternative Investment Policy Advisory Committee, AIF industry associations and other stakeholders. Meanwhile, it has been decided that schemes of AIFs which have adopted aforesaid priority distribution model, shall not accept any fresh commitment or make investment in a new investee company, till a view is taken by SEBI in this regard.”
This has come into effect with immediate effect.
