Sebi lets AIFs float new scheme to liquidate their illiquid assets

The new rule allows such investments to be either sold to a new scheme of the same AIF – liquidation scheme or distributed in-specie to the investors of the original AIF. An in-specie distribution involves the distribution of the investments such as shares or other securities of the AIF to its investors, instead of returning their capital in the form of cash.

“There is a lack of clarity on whether AIFs which have already exhausted their liquidation period of one year after the end of their tenure will be able to benefit from the new rules or not,” said Vivaik Sharma, partner at Cyril Amarchand Mangaldas.

The regulator said to set up a liquidation scheme, the AIF needs the approval of at least 75% of its investors by the value of their investments.

In addition to this 75% consent, the AIF needs to obtain a bid for at least 25% of the value of the unliquidated investments.

Before obtaining 75% consent, the AIF has to disclose the value of the bid received, as well as the value of the unliquidated investments, as valued by two independent valuers, to all the investors of the original scheme.

The dissenting investors have to be offered an option to fully exit the original scheme out of the 25% bid arranged by the AIF.”In case the requisite super-majority investor approval cannot be obtained which is a pre-requisite for the launch of a liquidation scheme and transfer of unsold illiquid securities to it, the fund manager may have to write off the securities or make a fire sale or do an in-kind distribution of unliquidated underlying securities to investors of the scheme being wound up,” said Tejesh Chitlangi, senior partner at IC Universal Legal.

“This in both the scenarios, where 75% approval for in-specie is obtained or not obtained but in kind distribution is forcefully done, then in the absence of minimum 25% bids for illiquid investments, the same will then be valued at one rupee for the purposes of calculating and disclosing manager’s performance benchmarking and track record.”