Executive Summary:
This circular, effective immediately, outlines the modalities for launching Liquidation Schemes and distributing Alternative Investment Funds (AIFs) investments in-specie, following amendments to SEBI AIF Regulations on June 15, 2023. It allows AIFs to manage unliquidated investments during winding up either through a Liquidation Scheme or in-specie distribution, subject to investor consent. The circular specifies procedures for both options, including bid arrangements, valuation disclosures, and reporting requirements.
Key Points / Main Content:
* **Liquidation Scheme:**
* AIFs can launch a Liquidation Scheme to sell unliquidated investments from the Original Scheme.
* Requires 75% investor consent (by value) in the Original Scheme.
* The scheme's name must include "Liquidation Scheme."
* AIF must arrange a bid for a minimum of 25% of the unliquidated investments' value.
* Bid value and independent valuations must be disclosed to Original Scheme investors.
* Dissenting investors have an exit option from the 25% bid.
* Units of the Liquidation Scheme are allotted to the Original Scheme, then distributed in-specie to investors.
* The Liquidation Scheme must be launched and the Original Scheme wound up before the Original Scheme's Liquidation Period expires.
* Liquidation Scheme tenure is calculated from PPM filing and cannot exceed the Original Scheme's tenure.
* The Liquidation Scheme cannot extend its tenure or sell investments to another Liquidation Scheme and is not eligible for a Liquidation Period.
* If an AIF (A1) invests in another AIF (A2)'s units and A2 launches a Liquidation Scheme, A1 must distribute the Liquidation Scheme units in-specie to its investors upon expiry of its tenure.
* Performance of the Liquidation Scheme must be reported to Performance Benchmarking Agencies.
* The value of unliquidated investments sold to the Liquidation Scheme, for tracking and reporting, will be the bid value if a bid for 25% of the value was arranged; otherwise, it will be One Rupee.
* **In-specie Distribution of Unliquidated Investments:**
* AIFs can distribute unliquidated investments in-specie to investors.
* Requires 75% investor consent (by value) in the Original Scheme.
* AIF must arrange a bid for a minimum of 25% of the unliquidated investments' value.
* Bid value and independent valuations must be disclosed to Original Scheme investors.
* Dissenting investors have an exit option from the 25% bid.
* The in-specie distribution must be carried out and the Original Scheme wound up before the Original Scheme's Liquidation Period expires.
* The value of unliquidated investments distributed in-specie, for tracking and reporting, will be the bid value if a bid for 25% of the value was arranged; otherwise, it will be One Rupee.
* **Mandatory In-specie Distribution:**
* If requisite investor consent is not obtained for either a Liquidation Scheme or in-specie distribution, the unliquidated investments must be distributed in-specie to investors without requiring 75% consent.
* The value of such in-specie distributions will be recognized at One Rupee for tracking and reporting.
* Investors unwilling to take in-specie distribution will have their investments written off.
* **Compliance and Reporting:**
* AIF manager, trustee, and key management personnel are responsible for compliance.
* The AIF manager must submit a compliance report on the SEBI Intermediary Portal.
* The AIF manager must report the value of sales to Liquidation Schemes or in-specie distributions to Performance Benchmarking Agencies.
* The trustee/sponsor must ensure the Compliance Test Report includes compliance with this circular.
Impact Analysis:
* **Alternative Investment Funds (AIFs):**
* Impact: Must comply with new regulations regarding Liquidation Schemes and in-specie distributions.
* Action Required: Establish procedures for obtaining investor consent, arranging bids, disclosing valuations, and reporting to SEBI and Performance Benchmarking Agencies.
* **Investors in AIFs:**
* Impact: Have the option to consent to Liquidation Schemes or in-specie distributions; dissenting investors are provided an exit option.
* Action Required: Evaluate proposals for Liquidation Schemes or in-specie distributions and exercise consent or exit options.
* **AIF Managers, Trustees, and Key Management Personnel:**
* Impact: Responsible for ensuring compliance with the circular's provisions.
* Action Required: Implement processes for compliance, reporting, and disclosure, and ensure that compliance is included in the Compliance Test Report.
* **Performance Benchmarking Agencies:**
* Impact: Must incorporate data related to Liquidation Schemes and in-specie distributions in their performance benchmarking activities.
* Action Required: Update methodologies to reflect the valuation and reporting guidelines specified in the circular.
Key Entities Referenced
Alternative Investment Funds: A type of investment fund that typically invests in less traditional assets.
SEBI Alternative Investment Funds Regulations, 2012: Regulations by the Securities and Exchange Board of India governing Alternative Investment Funds.
Liquidation Scheme: A close-ended scheme launched by an Alternative Investment Fund to liquidate unliquidated investments from its original scheme.
Securities and Exchange Board of India: A regulatory body for the securities market in India.
SEBI Listing Obligations and Disclosure Requirements Regulations, 2015: Regulations pertaining to listing obligations and disclosure requirements for companies listed on Indian stock exchanges, issued by SEBI.
Performance Benchmarking Agencies: Agencies that benchmark the performance of investment funds.
SEBI Intermediary Portal: Online portal used for submitting reports to SEBI.
SEBI Circular No. CIRIMDDF142014 dated June 19, 2014: SEBI circular related to Compliance Test Report prepared by the manager
CIRCULAR
SEBI/HO/AFD/PoD-I/P/CIR/2023/098 June 21, 2023
To,
All Alternative Investment Funds
Sir/Madam,
Sub: Modalities for launching Liquidation Scheme and for distributing the
investments of Alternative Investment Funds (AIFs) in-specie
1. SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”), have
been amended and notified on June 15, 2023, inter alia, to provide flexibility to
AIFs to deal with investments of their schemes which are not sold due to lack
of liquidity during the winding up process, by either selling such investments to a
new scheme of the same AIF (‘Liquidation Scheme’) or distributing such
unliquidated investments in-specie. Copy of the notification is available at link,
wherein, inter alia, the following new regulations have been inserted in AIF
Regulations –
1.1. Regulation 2(1)(pb): “‘liquidation period’ means a period of one year
following the expiry of tenure or extended tenure of the scheme for fully
liquidating the scheme of an Alternative Investment Fund.”
1.2. Regulation 2(1)(pc): “‘Liquidation scheme’ means a close ended scheme
launched by an Alternative Investment Fund only for the purpose of
liquidating the unliquidated investments purchased from its scheme, whose
tenure has expired.”
1.3. Regulation 29(9): “Notwithstanding anything contained in sub-regulation (7),
during liquidation period of a scheme, an Alternative Investment Fund may
distribute investments of a scheme which are not sold due to lack of liquidity,
in-specie to the investors or sell such investments to a liquidation scheme,
after obtaining approval of at least seventy five percent of the investors by
value of their investment in the scheme of the Alternative Investment Fund,
in the manner and subject to conditions specified by the Board from time to
time.
Provided that in the absence of consent of unit holders for exercising the
options under sub-regulation (9) during liquidation period, such investments
of the scheme of the Alternative Investment Fund shall be dealt with in the
manner as may be specified by the Board from time to time.”
2. In this regard, the following is specified –
2.1. Liquidation Scheme:
[
(i) During the Liquidation Period of a scheme of an AIF (‘Original Scheme’), if
the AIF decides to launch Liquidation Scheme, the AIF shall obtain
consent of 75% of investors by value of their investment in the Original
Scheme.
Page 1 of 5(ii) The scheme launched by the AIF for this purpose shall contain the words
‘Liquidation Scheme’ in its name.
(iii) Upon obtaining the requisite investor consent for launching Liquidation
Scheme, the AIF shall arrange bid for a minimum of 25% of the value of
the unliquidated investments. The bid shall be arranged for units
representing consolidated value of each unliquidated investment of the
Original Scheme’s investment portfolio.
(iv) The AIF shall disclose the bid value, along with the valuation of the
unliquidated investments carried out by two independent valuers, to all
the investors of the Original Scheme.
(v) The dissenting investors of the Original Scheme who did not consent to
sell the unliquidated investments to the Liquidation Scheme, shall be
offered an option to fully exit the Original Scheme out of the 25% bid
arranged by the AIF/ manager. After exercising the exit option by
aforesaid dissenting investors, any unsubscribed portion of the bid shall
be used to provide pro-rata exit to non-dissenting investors.
(vi) If the bidder or its related parties are investors in the Original Scheme,
they shall not be provided exit from the Original Scheme out of the bid.
[Related party shall have same meaning as provided in SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015.]
(vii) Subsequently, the unliquidated investments of the Original Scheme shall
be sold to the Liquidation Scheme. For capturing in the track record of the
manager and for reporting to Performance Benchmarking Agencies, the
value of such sale shall be –
a. Bid value, if the AIF/ manager arranges bid for a minimum of 25% of
the value of unliquidated investments of the Original Scheme.
b. One Rupee, if the AIF/ manager fails to arrange bid for a minimum of
25% of the value of unliquidated investments of the Original Scheme.
(viii) Liquidation Scheme shall allot its units to the Original Scheme for
purchasing investments from Original Scheme in the manner specified
above.
(ix) Upon receipt of units of Liquidation Scheme, the Original Scheme shall
mandatorily distribute such units of Liquidation Scheme in-specie in lieu
of its units issued to investors.
(x) The Liquidation Scheme shall be launched and Original Scheme shall be
wound up, prior to the expiry of the Liquidation Period of the Original
Scheme.
(xi) In terms of Regulation 29A(2), Liquidation Scheme has been provided
exemption, inter alia, from the requirement of obtaining SEBI’s comments
on the PPM. Accordingly, the tenure of the Liquidation Scheme shall be
calculated from the date of filing of PPM with SEBI and such tenure shall
Page 2 of 5not be more than the tenure of the Original Scheme excluding any
permissible extension.
(xii) Liquidation Scheme shall not extend its tenure or sell its investments to
another Liquidation Scheme. Further, Liquidation Period, as defined in
Regulation 2(1)(pb), shall not be available to Liquidation Scheme.
(xiii) If an AIF (viz. A1) has invested in units of another AIF (viz. A2) and the
investee AIF (i.e. A2) has launched a Liquidation Scheme, then the
investor AIF (i.e. A1) upon expiry of its tenure or extended tenure, shall
mandatorily distribute the units of Liquidation Scheme held by it, in-
specie to its investors (i.e. investors of A1).
(xiv) Performance of Liquidation Scheme shall also be reported to
Performance Benchmarking Agencies, in terms of SEBI Circular No.
SEBI/HO/IMD/DF6/CIR/P/2020/24 dated February 05, 2020.
(xv) While obtaining the requisite investor consent, manager shall disclose to
the investors that the value of the unliquidated investments sold to the
Liquidation Scheme shall be in the manner given at para 2.1(vii) above,
for capturing in the track record of the manager and for reporting to
Performance Benchmarking Agencies.
2.2. In specie distribution of unliquidated investments of a scheme:
(i) During the Liquidation Period of an Original Scheme of an AIF, if the AIF
decides to distribute unliquidated investments in-specie, the AIF shall
obtain consent of 75% of investors by value of their investment in the
Original Scheme.
(ii) Upon obtaining the requisite investor consent for in-specie distribution of
unliquidated investments, the AIF shall arrange bid for a minimum of 25%
of the value of the unliquidated investments. The bid shall be arranged
for units representing consolidated value of each unliquidated investment
of the Original Scheme’s investment portfolio.
(iii) The AIF shall disclose the bid value along with the valuation of the
unliquidated investments carried out by two independent valuers to all
the investors of the Original Scheme.
(iv) The dissenting investors of the Original Scheme who did not consent to
in-specie distribution, shall be offered an option to fully exit the Original
Scheme out of the 25% bid arranged by the AIF/ manager. After exercise
of the exit option by aforesaid dissenting investors, any unsubscribed
portion of the bid shall be used to provide pro-rata exit to non- dissenting
investors.
(v) If the bidder or its related parties are investors in the Original Scheme,
they shall not be provided exit from the Original Scheme out of the bid.
[Related party shall have same meaning as provided in SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015.]
Page 3 of 5(vi) Subsequently, the unliquidated investments shall be distributed in-specie.
For capturing in the track record of the manager and for reporting to
Performance Benchmarking Agencies, the value of such in-specie
distribution shall be –
a. Bid value, if the AIF/ manager arranges bid for a minimum of 25% of
the value of unliquidated investments of the Original Scheme.
b. One Rupee, if the AIF/ manager fails to arrange bid for a minimum of
25% of the value of unliquidated investments of the Original Scheme.
(vii) The in-specie distribution shall be carried out and Original Scheme shall
be wound up, prior to the expiry of the Liquidation Period of the Original
Scheme.
(viii) While obtaining the requisite investor consent, manager shall disclose to
the investors that the value of the unliquidated investments distributed
in-specie shall be in the manner given at para 2.2(vi) above, for capturing
in the track record of the manager and for reporting to Performance
Benchmarking Agencies.
2.3. Mandatory in-specie distribution of unliquidated investments:
If the AIF fails to obtain requisite investor consent for launch of Liquidation
Scheme or in-specie distribution of unliquidated investments, then the
unliquidated investments shall be mandatorily distributed to investors in-
specie, without requirement of obtaining consent of 75% of investors by
value of their investment in the scheme of the AIF. The value of such
investments distributed in-specie shall be recognised at One Rupee for
capturing in the track record of the manager and for reporting to
Performance Benchmarking Agencies. In case any investor not willing to take
the in specie distribution of unliquidated investments, such investments
shall be written off.
2.4. Responsibility for compliance:
(i) The manager, trustee and key management personnel of AIF and
manager shall be responsible for compliance with the procedure
prescribed above.
(ii) The manager of AIF, upon exercising any of the options mentioned above,
shall submit report on compliance with the provisions of this circular on
SEBI Intermediary Portal (www.siportal.seb.gov.in) in the format as
specified therein.
(iii) The manager of AIF shall report the value, as specified above, with regard
to sale of unliquidated investments to Liquidation Scheme or distribution
of unliquidated investments in-specie, to Performance Benchmarking
Agencies in a timely manner for the purpose of performance
benchmarking. The manager shall also make suitable disclosure with
regard to the same in the PPMs of subsequent schemes.
Page 4 of 5(iv) The trustee/ sponsor of AIF, as the case may be, shall ensure that the
‘Compliance Test Report’ prepared by the manager in terms of SEBI Circular
No. CIR/IMD/DF/14/2014 dated June 19, 2014, includes compliance with
the provisions of this circular.
3. This circular shall come into force with immediate effect.
4. This circular is issued with the approval of the competent authority.
5. This circular is issued in exercise of powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act, 1992 to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market.
6. The circular is available on SEBI website at www.sebi.gov.in under the categories
"Legal framework - Circulars" and "Info for - Alternative Investment Funds”.
Yours faithfully,
Sanjay Singh Bhati
Deputy General Manager
Tel no.: +91-22-26449222
ssbhati@sebi.gov.in
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