SEBI Amends AIF Regulations to Boost Investor Protection and Flexibility

The Securities and Exchange Board of India (SEBI) notified significant amendments to the second, regulations, new SEBI Alternative Investment Funds Regulations 2012 on April 25, 2024, marking a major development for the rapidly growing Alternate Investment Funds (AIFs) industry in India. The amendments aim to provide greater flexibility to AIFs and their investors in dealing with unliquidated investments, while also strengthening investor protection measures and regulatory oversight.

Why this matters: The growth of AIFs in India has significant implications for the country's economic development, as it can attract more foreign investment and provide alternative sources of funding for Indian companies. A robust regulatory framework for AIFs is crucial to maintain investor trust and prevent potential risks to the financialsystem.

Under the new regulations, AIFs can now enter into a dissolution period, subject to certain conditions, and distribute unsold investments of a scheme in specie to the investors. However, the dissolution period cannot exceed the original tenure of the AIF scheme and is non-extendable. SEBI has also prohibited AIFs from launching new liquidation schemes from the date of notification of the articleamendments.

The amendments introduce enhanced due diligence obligations for AIFs, their managers, and key management personnel to prevent circumvention of laws. Category I and II AIFs are now permitted to create encumbrance on equity of investee companies in specified infrastructure sub-sectors, subject to conditions. SEBI has also clarified that certain AIFs with foreign investment or foreign sponsors/managers must comply with Indian exchange control regulations regarding the pledge of shares of Indian investee companies by non-residents.

The AIF industry in India has been growing at a compound annual growth rate of 24% and is expected to reach 20% of the country's entire Assets Under Management (AUM) by 2026. As of FY24, the market size of AIFs stands at Rs 13.74 lakh crore. While AIFs offer diversification and higher returns, they also pose challenges such as higher fees and complexity.

The recent amendments to the AIF regulations are part of SEBI's ongoing efforts to refine the regulatory framework for AIFs in India. In January 2024, SEBI issued a consultation paper on AIFs, seeking public comments on various proposals to enhance the industry's functioning. The final amendments, which came into effect on April 25, 2024, incorporate feedback from stakeholders and aim to strike a balance between investor protection and the need for flexibility in managing AIFs.

The amended regulations are expected to provide a boost to the AIF industry in India, which has emerged as an important avenue for alternative investments in recent years. With clearer guidelines and enhanced flexibility, AIFs can attract more investors and contribute to the growth of the Indian economy. However, as the industry expands, it will be crucial for SEBI to maintain a robust regulatory framework to ensure investor protection and market integrity.

Key Takeaways

• SEBI amends AIF Regulations 2012 to provide flexibility and strengthen investor protection.
• AIFs can now enter dissolution period and distribute unsold investments to investors.
• Enhanced due diligence obligations for AIFs, managers, and key personnel introduced.
• Category I and II AIFs can create encumbrance on equity of investee companies in specified sectors.
• AIF industry in India expected to reach 20% of entire AUM by 2026, with current market size at Rs 13.74 lakh crore.