SEBI Eases Borrowing Rules for AIFs to Address Drawdown Shortfalls and Issues Guidelines for Maximum Permissible Limit on LVF Tenure Extensions

𝘎𝘶𝘪𝘥𝘦𝘭𝘪𝘯𝘦𝘴 𝘧𝘰𝘳 𝘣𝘰𝘳𝘳𝘰𝘸𝘪𝘯𝘨 𝘣𝘺 𝘊𝘢𝘵𝘦𝘨𝘰𝘳𝘺 𝘐 𝘢𝘯𝘥 𝘊𝘢𝘵𝘦𝘨𝘰𝘳𝘺 𝘐𝘐 𝘈𝘐𝘍𝘴

The Securities and Exchange Board of India (SEBI) has recently issued new guidelines, permitting Category I and II Alternative Investment Funds (AIFs) to borrow funds to cover shortfalls in drawdown amounts from investors. Previously, AIFs could only borrow for temporary funding and operational expenses. Now, borrowing is permitted in emergencies where imminent investment opportunities arise but investor contributions are delayed.

Key points:
𝐃𝐢𝐬𝐜𝐥𝐨𝐬𝐮𝐫𝐞 𝐨𝐟 𝐁𝐨𝐫𝐫𝐨𝐰𝐢𝐧𝐠: If an AIF plans to borrow funds to cover a shortfall in the drawdown amount, the same must be disclosed in the PPM.
𝐄𝐦𝐞𝐫𝐠𝐞𝐧𝐜𝐲 𝐁𝐨𝐫𝐫𝐨𝐰𝐢𝐧𝐠: Borrowing is allowed only when investment opportunities are imminent, and investor drawdowns have not been received despite best efforts.
𝐁𝐨𝐫𝐫𝐨𝐰𝐢𝐧𝐠 𝐋𝐢𝐦𝐢𝐭𝐬: Borrowing cannot exceed 20% of the investment, 10% of investable funds, or the undrawn commitment from non-delinquent investors, whichever is lower.
𝐂𝐨𝐬𝐭 𝐀𝐥𝐥𝐨𝐜𝐚𝐭𝐢𝐨𝐧: Borrowing costs are charged to delinquent investors, ensuring compliant investors are not penalized.

𝘛𝘦𝘯𝘶𝘳𝘦 𝘌𝘹𝘵𝘦𝘯𝘴𝘪𝘰𝘯𝘴 𝘧𝘰𝘳 𝘓𝘢𝘳𝘨𝘦 𝘝𝘢𝘭𝘶𝘦 𝘍𝘶𝘯𝘥𝘴

Under Regulation 13(5) of the AIF Regulations, a Large Value Funds (LVF) can extend its tenure by up to five years, provided it receives approval from two-thirds of the unit holders, based on the value of their investments in the LVF. For the above, SEBI has prescribed the following conditions:

𝐀𝐥𝐢𝐠𝐧𝐦𝐞𝐧𝐭 𝐚𝐧𝐝 𝐑𝐞𝐩𝐨𝐫𝐭𝐢𝐧𝐠: LVF schemes that either haven’t specified an extension period in their PPM or have an extension exceeding 5 years must align with the new requirements by November 18, 2024 and must update their revised extension period in the quarterly report submitted for the quarter ending December 31, 2024.
𝐑𝐞𝐯𝐢𝐬𝐢𝐨𝐧 𝐨𝐟 𝐓𝐞𝐧𝐮𝐫𝐞: When adjusting the extension period, schemes may revise their original tenure, provided they obtain consent from all investors and by November 18, 2024, LVF schemes must submit an undertaking to SEBI confirming that they have obtained consent from all investors for the revised tenure.

A copy of the said SEBI Guideline is enclosed.

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