On April 25, 2024, the Securities and Exchange Board of India (SEBI) took a significant step by notifying the Alternative Investment Funds (AIF) Regulations Amendment 2024. This amendment aims to provide additional flexibility to AIFs and their investors in dealing with unliquidated investments of their schemes.
One of the key aspects introduced by the amendment is the concept of the “dissolution period.” This period comes into play following the expiry of the liquidation period of a scheme, specifically for the purpose of liquidating the unliquidated investments of the AIF. Regulation 29(9) of the AIF Regulations allows AIFs to distribute investments of a scheme in-specie to investors or enter the dissolution period with the consent of at least 75% of the investors by value.
However, entering the dissolution period is not a decision to be taken lightly. Several conditions must be met, ensuring transparency and investor protection. A crucial step is arranging a bid for a minimum of 25% of the value of unliquidated investments, which provides a fair valuation benchmark. Additionally, the AIF and its managers must disclose essential information to investors, including the proposed tenure of the dissolution period and details of unliquidated investments.
Prior to initiating the dissolution period, the AIF must intimate SEBI about obtaining investor consent. If the bid is successful, dissenting investors are offered an exit option, ensuring fairness in the process. Conversely, if the bid falls short, the AIF can still opt for the dissolution period with the requisite investor consent.
The calculation of the value of unliquidated investments during the dissolution period is critical for performance tracking. Depending on whether the bid is arranged, the valuation may vary, ensuring accurate reporting to Performance Benchmarking Agencies. Moreover, the performance of the manager during the dissolution period is separately captured and reported, reflecting the unique circumstances of this phase.
In cases where the unliquidated investments cannot be sold during the dissolution period, mandatory in-specie distribution to investors is enforced. This ensures that investors have recourse even in the absence of a successful liquidation. Notably, no further extension or liquidation period is available after the dissolution period expires, emphasizing the finality of this phase.
The amendment also provides one-time flexibility to schemes whose liquidation period has expired, granting them an additional liquidation period. This extension comes with conditions, ensuring fairness and compliance with regulatory norms.
Responsibility for compliance rests with the manager, trustee, and key management personnel of the AIF. Detailed reporting requirements ensure transparency and accountability throughout the process. Furthermore, the discontinuation of launching new liquidation schemes underscores the regulatory focus on managing existing schemes effectively.
