Regulatory clarity. SEBI directs AIFs to ring-fence assets and liabilities of each scheme

Market regulator, SEBI has mandated that assets and liabilities of each scheme of an Alternative Investment Fund (AIF) must be segregated and ring-fenced from other schemes of the Fund. 

Bank and securities accounts of each scheme should also be segregated and ring-fenced, SEBI said in its latest amendment to AIF Regulations. 

The latest SEBI move is music to the ears of the private equity-venture capital industry as it will allow AIF managers to launch multiple schemes and go to market quicker. 

A long-standing issue now stands resolved. SEBI has now mandated the segregation of schemes of AIF on the same lines as those already prescribed for mutual funds.

Till now, when a single scheme faced liability, the question was whether the assets of other schemes of an AIF could be used to discharge that liability. This ambiguity had created friction for investors and AIF managers.

Siddarth Pai, Founding Partner 3one4 Capital and Co-Chair of the Regulatory Affairs committee at IVCA, said that the new notification now states that the assets and liabilities of the schemes of an AIF need to be ring-fenced and segregated, allowing AIF managers to launch multiple schemes and go to market quicker. The industry welcomes this clarity and looks forward to any further operating guidelines that will elucidate the amendment, Pai added.

He said that the recent SEBI amendment has given regulatory cover for a long-standing practice of Indian AIFs and their schemes. 

Indian AIFs are allowed to launch multiple schemes as per the AIF Regulations. However, ambiguity existed due to the lack of language in the regulations about each scheme being ring-fenced and separate from each other. 

Thus, in the scenario that a single scheme of an AIF faced a liability, the question was whether the assets of the other schemes of the AIF could be used to discharge this liability.

This ambiguity created friction for investors and AIF managers, leading many AIF managers to launch new AIFs, instead of launching new schemes under the same AIF. 

This increased the complexity of compliance and costs for AIF managers, Pai said. 

Subramaniam Krishnan, Partner-Private Equity Tax, Ernst & Young LLP, said the industry was demanding an explicit provision that regulatorily distinct schemes of an AIF should be construed as ring-fenced investment vehicles where assets and liabilities of one scheme cannot benefit/ impact another scheme or its investors. 

“This has been critical for international investors and has resulted in AIFs raising substantial foreign capital to create new AIFs instead of launching multiple schemes. With the latest SEBI amendment, it would be interesting to see if it provides sufficient comfort to international investors.”, he added.

First close

Meanwhile, SEBI has now amended the AIF Regulations to introduce a timeline for the first close of an AIF scheme, which is now required to be declared within a year of the scheme being taken on record. This has also been extended to existing schemes, which have not yet declared their first close.

“While this amendment will provide clarity and consistency, given the challenges AIFs typically face to close commitments (including macro-level market changes, anchor investor delays, base commitments required by Indian Fund of Fund investors, deferring launch to obtain the critical mass of commitments, pre-launch diligence, etc), this could impact the industry, particularly first-time fund managers, who are yet to establish themselves in the market”, Krishnan said.

COMMENT NOW