Sebi allows alternative investment funds to pledge shares in invested companies in infra sector

To facilitate ease of doing business, markets regulator Sebi on Friday allowed AIFs (alternative investment funds) to pledge their shares in investee companies in the infrastructure sector.

The regulator has also provided additional flexibility to AIFs and their investors to deal with unliquidated investments of their schemes.

"Category I and Category II AIFs may create an encumbrance on equity of investee company, which is in the business of development, operation or management of projects in any of the infrastructure sub-sectors," Sebi said in a circular.

The move will provide ease of doing business and flexibility to such AIFs.

Experts believe that allowing AIFs to create an encumbrance on their equity investments in infrastructure sector companies for the purpose of project finance is essential for infrastructure development.

Earlier, pledging of securities held by an AIF in investee companies for loans availed of by the investee companies violates provisions of the AIF Regulations.

In its circular, Sebi said that existing schemes of category I and category II AIFs who have not on-boarded any investors prior to April 25, 2024, may create an encumbrance on the equity of the investee company for the purpose of borrowing of the investee company. This is subject to explicit disclosure with respect to the creation of such encumbrance in this regard and disclosure of associated risks in their private placement memorandums (PPMs).

If encumbrances were created without disclosure, then such encumbrances can continue only with investor consent by October 24, 2024, or must be removed.

The regulator said that borrowings must be used for the specified purposes, and the duration of encumbrances should not exceed the scheme's tenure.

Also, Sebi said that foreign-invested AIFs must comply with RBI regulations. In case of borrower default, AIFs are not liable beyond the encumbered equity. However, AIFs cannot offer guarantees for investee companies.

Moreover, AIFs have been prohibited from creating encumbrances on their investments in foreign investee companies.

The Standard Setting Forum for AIFs, along with Sebi, will create implementation standards to ensure that any encumbrances created on the equity of investee companies by these AIFs are only used for facilitating debt raising in the infrastructure sector.

In a separate circular, the regulator has provided more flexibility to AIFs and their investors to deal with unliquidated investments of their schemes.

During the liquidation phase of a scheme, an AIF can give unsold investments to investors or go into dissolution, but it needs approval from at least 75 per cent of investors by value. If investors don't agree, the regulator will take the call on the investments.

Before getting investor consent, the AIF/manager must arrange bids for at least 25 per cent of the unliquidated investments' value. The bid should cover all unliquidated investments of the scheme's portfolio and can involve multiple bidders. 

Also, they need to disclose details like the proposed dissolution period, information on unliquidated investments, and an estimated bid value range.

Further, two independent valuers should assess the unliquidated investments.

Before the liquidation period ends, the AIF/manager needs to inform Sebi about obtaining investor consent and their decision to enter the dissolution period.

"During the liquidation period, if the AIF fails to obtain requisite investor consent for entering into dissolution period or in-specie distribution, then the unliquidated investments shall be mandatorily distributed to investors in-specie, without the requirement of obtaining the consent of 75 per cent of investors by value of their investment in the scheme of the AIF," Sebi said.

The regulator has decided to provide a one-time flexibility to schemes of AIFs whose liquidation period has expired or will expire by July 24, 2024. Such schemes will get a new liquidation period until April 24, 2025.

However, this extension is only for schemes without any unresolved investor complaints regarding the non-receipt of funds or securities.