Sebi puts AIFs on alert over ‘closure’
After the ‘final closing’, money pools like private equity, venture capital, debt and infrastructure funds cannot accept fresh capital while a fund is required to exit its investments within the ‘end date’.
A fund achieves its ‘first close’, roughly within a year of its registration, after receiving a minimum commitment of ₹20 crore from investors. The final close is typically within two years of the first close.
But these are commercial deadlines – and not legally binding regulations – which may be pushed back to delay closing in anticipation of more inflows and extend a fund’s life, perhaps indefinitely, to look for more profitable opportunities to cash out.
The information collection by the Securities and Exchange Board of India (Sebi) could well be a precursor to an industry-wide rule, feel professionals.
“Several AIFs, particularly of 2012-2014 vintage, whose original term including the permitted extensions are coming to an end are facing a crunch situation as to how to dispose of the underlying illiquid securities without hurting the investor interest which otherwise can be caused by fire-sale of securities or an impractical in-specie distribution. The industry is also concerned in the wake of the recent order on Urban Infra AIF where Sebi imposed heavy sanctions against the manager, trustees and their boards for non-disposal of underlying securities within the permitted overall term,” said Tejesh Chitlangi, senior partner at IC Universal Legal.
Several AIFs have made representations to Sebi to permit extensions beyond the regulatory permitted period, but many in the industry perceive the regulator may not be in favour of granting a case-by-case exemption.
“The recent data collection exercise may, inter-alia, be to gauge the actual number of funds which may be impacted or soon get impacted because of the tenor expiry and illiquidity issues so that the regulator may consider notifying an industry-wide policy to tackle such situations whilst ensuring protection of investor interest,” said Chitlangi.
In its recent communique to AIFs, Sebi has specifically asked whether a scheme (under a fund) has been wound up; when the final closure was completed; and in case of a delay, the time set to complete closure as per the private placement memorandum (PPM) and other fund documents.
Many fund managers defer exits and closure due to a bad market, litigations, non-performance of portfolio companies, a dip in property prices, or delays in IPOs by investee companies, particularly start-ups. Funds are kept alive to fish for better deals, which managers claim is their fiduciary duty. ET had reported on November 23 that the stance taken by Sebi in the Urban Infra AIF order was a strong hint that the life of a fund can no longer be stretched indefinitely to avoid a fire sale of assets and securities.
This happens at a time Sebi is carrying out inspections of several AIFs, checking their compliance standards, and collecting a mountain of data on the funds.
“Sebi appears to be taking a close look at whether fund managers had good reasons to delay closure or postpone the end date of a scheme and how many in the industry could meet deadlines. The regulator may also be thinking of laying down rules that funds globally follow while sticking to the deadlines mentioned in offer documents,” said Richie Sancheti, founder of the law firm Richie Sancheti Associates. Prior to a recent circular, AIFs were required to map their fund tenure from the date of final close. “This is a ‘to be discovered’ date and commercially determined under the fund documents. Accordingly, it may have been difficult for the regulator to gauge the actual term of the funds. The current exercise seems to gather data to collate the tenure for AIFs. The issue is resolved for AIFs being launched, as the regulator now requires the tenure to be mapped to initial close,” said Sancheti.
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