Amendments To The AIF Regulations- A New Way Ahead?

• Published date: 11 June 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Fund Management/ REITs, Compliance, Venture Capital, Corporate and Company Law, Directors and Officers, Securities
• Law Firm: Khaitan & Co
• Author: Khaitan & Co

Background:

The Securities and Exchange Board of India (SEBI) in its board meeting dated 25 March 2021 proposed certain amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations). In order to implement the proposed amendments, SEBI notified the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2021 (Amendment Regulations) on 5 May 2021. These amendments are far reaching with respect to the governance of alternative investment funds (AIFs) as an investment vehicle in India.

This ERGO summarises the key amendments introduced under the Amendment Regulations and its implications for AIFs.

A. CHANGES TO INVESTMENT CONDITIONS

• INVESTMENTS IN OTHER AIFS: The Amendment Regulations now explicitly permit all AIFs to make investments in other AIFs, subject to the following conditions:

a. Eligible Investors: AIFs, which are authorised to invest in other AIFs, cannot have investors that are AIFs as well, i.e., there cannot be more than two layer AIF structure that invests in the ultimate investee entity;

b. Calculation of Investment Limits: The maximum limit of investible funds that can be invested in a single entity by an AIF (25% in the case of Categories I and II, and 10% in the case of Category III), shall now include both its direct holdings as well as its indirect holdings, including through an investment in another AIF, in such entity.

c. Approval Requirements: Investment in another AIF, which is managed / sponsored by the same manager / sponsor or their respective associates, shall require an approval from 75% of the investors of the AIF, by value (akin to how investments in associates by AIFs require such approval);

Comment: This amendment permits an AIF to invest in both investee entities and AIFs, as opposed to exclusively in either, which has been a long-standing ask of the AIF industry and which will ensure that the spirit of the diversification restrictions under the AIF Regulations is retained.

• EXPANDING THE SCOPE OF 'VENTURE CAPITAL UNDERTAKING': A venture capital undertaking is of significance as all venture capital funds that are Category I AIFs are required to invest at least two-thirds of their investible funds in this category of entities. The term has now been defined to mean any company which is not listed on a stock exchange at the time of making the investment. This rejig of the definition removes the requirement of an entity to be engaged in the business of providing services, production or manufacture of article or things in order to qualify as a venture capital undertaking, and potentially permits most Category I AIFs to invest in NBFCs Additionally, it has also been clarified that angel funds may now invest in 'startups' alone and not venture capital undertakings.

Comment: This amendment has now opened up opportunities for Category I AIFs to also invest in NBFCs and VCs in the fintech space. With the fintech space booming with innovation and new tech focussed financing options and alternatives emerging on account of this boom, the proposed change is a step forward and would certainly prove to be a very helpful amendment for development of the fintech industry.

B. INVESTMENT COMMITTEE: SUB-SET OF THE MANAGER

While the AIF Regulations did not...