SEBI Eases AIF Exit Rules And Introduces Inoperative Fund Framework

Market regulator SEBI has introduced a major overhaul of the winding-up process for Alternative Investment Funds (AIFs), allowing them to retain liquidation proceeds beyond their permissible fund life under specific circumstances.

This step is directed at solving the old and persistent problem of AIFs, which have finished their investment cycle but could not fully close due to pending litigation, regulatory notices, tax disputes or residual operational expenses.

What Is The New Framework?

According to the new framework, AIFs may continue to retain funds if they have received litigation notices or regulatory demands that could result in future liabilities. Also, if investors representing 75% of the value approve a proposal, the funds may reserve money against expected liabilities.

SEBI clarified that litigation-related communications may include notices from tax authorities, regulators, law enforcement agencies, courts, investors or counterparties, even if the liability has not yet materialised.

Why Has The 'Inoperative Fund' Been Introduced?

A major highlight of the reform is the concept of "Inoperative Fund" status. This new category will cover those AIFs that have disposed of all their investments but remain in existence because they are holding retained proceeds or dealing with pending legal and regulatory matters. Such funds will be barred from making new investments, introducing new schemes or charging management fees.

To ease the regulatory requirements, SEBI has granted exemptions to such funds from a number of regulatory requirements, including filing quarterly and annual activity reports, compliance test reports, performance benchmarking disclosures and certain audit-related obligations. However, they must continue to submit annual reports detailing retained funds and outstanding liabilities to both SEBI and investors within 30 days of the end of each financial year.

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Funds retaining money for operational expenses can do so for a maximum of three years beyond their permissible fund life. The Standard Setting Forum for AIFs (SFA) will develop implementation standards to define eligible operational expense categories in consultation with SEBI.

The framework comes into effect immediately and will also apply to Venture Capital Funds registered under the erstwhile SEBI Venture Capital Funds Regulations, 1996.

Sources:

Business Line