Consultation paper for seeking public comments and to provide clarity with respect to pro-rata and pari-passu rights of investors of Alternative Investment Funds (AIFs)


Securities and Exchange Board of India (SEBI) on 23rd May, 2023 issued consultation paper for seeking public comments and to provide clarity with respect to pro-rata and pari-passu rights of investors of Alternative Investment Funds (AIFs).

The comments shall be sent latest by June 04, 2023 preferably by email to with a copy to Ms Padma Bharathi S, Manager ( ) or by post in the address given in the notice.

It was also brought to SEBI’s attention that, AIFs with PD model may be structured to take advantage of regulatory arbitrage with respect to compliance with other regulatory requirements. It was given to understand that such structuring may be established with the intent to facilitate probable ever-greening of loans extended by certain regulated lenders, in the following manner:

  1. The regulated lender which intends to remove loans given to certain companies (which may be in default or expected to default in near future)from its books/loan portfolio, subscribes to the junior class units of an AIF/scheme set up for this purpose.
  2. The AIF also on-boards other willing investor(s) who prefer to subscribe to Senior class of units to get protection on their investment, to the extent of securing priority of return over Junior class investors.
  3. The expected loss on the loan portfolio at the time of structuring (haircut) appears to be used to determine the size of investment by the regulated lender in the AIF, as a Junior class investor. The investor(s) of the Senior class invest to the extent of perceived fair market value of the assets acquired by AIF from the regulated lender.
  4. The AIF invests in NCDs of the borrower companies with the understanding that funds so received by them shall be used to repay the loans extended to them by the regulated lender.
  5. The loan portfolio is replaced in the books of the regulated lender, with the amount repaid by the borrower investee company and investment in units (junior class) of AIF.
  6. It is pertinent to note that the regulated lender’s investment in AIF units, which appear to represent the haircut in the loan portfolio, may be shown in its books of accounts at value at par with Senior class units. This may facilitate the regulated lender in avoiding the classification, provisioning and other applicable compliance requirements with respect to the loans in or expected to be in default. Further, the probable loss in loan repayment, if any, may reflect as loss in investment in AIF, in future.
  7. In this arrangement, the recognition of deteriorating creditworthiness of the investee company may also get deferred.

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