Category-I and Category-II Alternate Investment Funds (AIFs) are not permitted to undertake any leverage (i.e. directly or indirectly borrow funds) other than to meet temporary funding requirements and day-to-day operational requirements for not more than 30 days, on not more than four occasions in a year and not more than 10% of investable funds.
On August 5, 2024, vide the Securities and Exchange Board of India (Alternative Investment Funds) (Fourth Amendment) Regulations, 2024 (Amendment Regulations), the Securities and Exchange Board of India (SEBI) has permitted both Category-I and Category-II AIFs to create encumbrances on equity investments made by them, respectively, in investee companies for the purposes of borrowings by such investee companies, provided investee companies are engaged in the business of development, operation or management of project in any infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure issued by the Central Government.
In its circular dated August 19, 2024 (SEBI Circular), SEBI has permitted Category-I AIFs and Category-II AIFs to borrow for the purposes of meeting shortfall in drawdown amounts, subject to the following conditions:
- placement memorandum should permit the AIF to borrow funds for meeting shortfall in drawdown amounts;
- borrowing can be undertaken only in case of emergency and as a last recourse, when the investment opportunity is imminent and drawdown amount has not been received from investors (despite best efforts from the manager);
- amount borrowed shall not exceed 20% of the investment proposed to be made in the investee company, or 10% of the investable funds of the scheme of an AIF, or the commitment pending to be drawn down from investors other than the investor(s) who has failed to provide the drawdown amount, whichever is lower;
- cost of such borrowing shall be charged only to investor(s) who has failed to provide the drawdown amount for making investments;
- borrowing flexibility cannot be used as a means to provide different drawdown timelines to investors;
- manager to disclose details of borrowings to AIF investors on a timely basis as per terms in the contribution agreement; and
- cooling off period (30 days) to be maintained between two periods of borrowings.
Large Value Funds (LVFs) which are intended for accredited investors were permitted to extend tenure of the fund beyond two years subject to terms of the contribution agreement and other fund documents.
However, pursuant to the Amendment Regulations, an LVF can extend its tenure up to five years subject to the approval of two-thirds unitholders by value of investment and shall be subject to further conditions specified by SEBI.
In terms of the SEBI Circular, (a) LVF schemes shall update their revised period of extension in tenure in the quarterly report submitted on the SEBI Intermediary Portal (SI Portal) for the quarter ending December 31, 2024 for those LVFs which have not disclosed definite period of extension in their tenure in the private placement memorandum (PPM) or whose extension is beyond the permissible tenure of five years (pursuant to alignment as per aforementioned requirements); and (b) LVF schemes shall submit an undertaking to SEBI on or before November 18, 2024, stating that consent of all the investors of the scheme has been obtained for revising the original tenure (original tenure may be revised pursuant to receipt of approval from all investors).
Conclusion
Overall, these regulatory changes provide much needed operational flexibility and impetus to Category-I and Category-II AIFs to meet temporary funding requirements and for LVFs to have the benefit of longer fund lives subject to receipt of investor consent.