AIFs can’t prolong fund life to keep away from hearth sale

Personal fairness homes, enterprise capitalists, actual property and debt fund managers can not indefinitely stretch the lives of their funds to keep away from a fireplace sale of belongings and securities.

The Indian capital markets regulator has made it unambiguously clear that funds have to shut and liquidate throughout the specified interval even when a predominant variety of traders who’ve contributed to a fund pool give their consent to increase the tenure of the fund.

Could Knock on Sebi Door

Fund managers typically postponed exits and closure attributable to a slew of things like a nasty market, litigations, non-performance of portfolio corporations, a dip in property costs, or delays in IPOs by investee corporations, notably startups. Claiming to fulfil their fiduciary function, the managers saved funds alive for longer intervals to fetch a greater deal for traders.

Nevertheless, the regulatory stance, spelt out in an October 31 order of the Securities & Trade Board of India (Sebi), has shaken the fund trade which until now was below the impression that the regulator’s silence on the topic together with traders’ concurrence allowed them to increase the time period of a fund.

Business officers worry that many funds may now be pushed to undertake misery sale of belongings to fall in keeping with Sebi’s remark that “maintaining a fund alive till a worthwhile exit is achieved would set a mistaken precedent and would have an antagonistic impression on the target and growth of the securities market”.

Such different funding funds (AIFs) sometimes have a lifetime of 7 to 10 years. Sebi AIF Laws stipulate that the tenure of a closed-ended AIF can solely be prolonged as much as a most two years with the approval of two-thirds of the traders by worth.

“Apparently, the erstwhile Sebi VCF Laws didn’t include such a proper cap and left it to funding supervisor and traders to contractually decide the identical in fund paperwork together with the location memorandum. Nevertheless, the Sebi order which has been issued within the context of erstwhile VCF Laws has acknowledged that when the interval of maturity has been mounted within the placement memorandum, it’s not open for the trustee or the funding supervisor to additional prolong the identical even with the consent of the traders. This doesn’t augur effectively for quite a few VCFs nonetheless ruled below previous Sebi VCF regime in addition to AIFs ruled below the Sebi AIF regime (which can additionally take a cue from this Sebi order), who’re exceeding their authentic time period and permitted extensions, attributable to a number of sensible challenges arising out of underlying litigations, illiquid investments, Covid-impacted portfolio entities, and many others,” mentioned Tejesh Chitlangi, Senior Accomplice at IC Common Authorized, who feels Sebi has come out with a versatile regulatory coverage to handle real circumstances.

In line with Richie Sancheti, founding father of the legislation agency Richie Sancheti Associates, “A view from the regulator appears to be that investor approvals can’t be relied upon to increase the time period of a fund to perpetuity, which in any other case would render redundant a few of the elementary tenets of the rules. The regulator’s seriousness may be gauged from a current round issued in context of AIFs and the minutes summarised within the board memorandum proposing the amendments. On the one hand, the trade might want to guarantee tighter alignment between the fund time period and the asset class focused, as unduly longer phrases will not be acceptable to non-institutional traders. Then again, along with promoting portfolio to different GPs, a fund sponsor might contemplate continuation autos working with their present investor base, or LP secondaries so as to add to the liquidity dynamics for the fund.”

A GP, or a common associate, is a PE agency whereas traders within the fund are LPs or restricted companions.

Since in lots of circumstances Sebi didn’t reply to purposes from funds for tenure extension, the managers felt the regulator was not in opposition to the proposal. The current order has unsettled their plans.

A number of sources within the fund trade mentioned that the difficulty can be taken up with Sebi which has not factored within the financial hardships confronted by many funds and investee corporations.

“Additionally, since Sebi in its order (regarding a realty fund UIVCF) has not solely debarred the funding supervisor, trustees but in addition their administrators for not securing well timed portfolio exits throughout the authentic time period and permitting unauthorised extensions, it might increase issues for the non-executive and unbiased administrators on the boards of non-compliant managers and trustees,” mentioned Chitlangi.