AIFs can encumber equity holdings in investee companies
Brief Overview:
Category I AIFs and Category II AIFs have now been permitted to create encumbrances on their equity holdings in investee companies, engaged in the business of development, operation or management of projects in any of the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure issued by the Central Government.
The above change has been introduced by the Securities Exchange Board of India (“SEBI”) by way of notification of an amendment to the SEBI Alternative Investment Funds Regulations, 2012 (“SEBI AIF Regulations”)
Technical Details:
SEBI has stipulated that any encumbrances already created by a scheme of Category I or Category II AIF prior to April 25, 2024, on the securities of the investee company for the purpose of borrowing of such investee company, may continue if such encumbrances were created after making an explicit disclosure in the Private Placement Memorandum (PPM) of the scheme. In the event the encumbrances were created without disclosure, then such encumbrances can continue only with the consent of the investor by October 24, 2024, or the same must be removed.
Also, Category I or Category II AIFs are required to ensure that the borrowings made by the investee company against the equity investments encumbered by the AIFs are utilised only for the purpose of development, operation or management of the investee company and are not utilised for any other purpose, including to invest in another company
Further, the following amendments have also been notified pursuant to the amendment to the SEBI AIF Regulations:
1) AIFs, their investment managers and Key Management Personnel (“KMP”) are required to conduct specific due diligence concerning their investors and investments to prevent any attempts to circumvent pertinent laws (including Acts, Rules, Regulations, Guidelines or circulars administered by financial sector regulators, including SEBI).
2) A “dissolution period” to liquidate assets after the expiry of the liquidation period (being one year from end of tenure) by filing an “information memorandum” with SEBI through a merchant banker has been permitted. The dissolution period cannot be longer than the scheme’s original tenure or be extended.
JC takeaway:
The move will provide ease of doing business and flexibility to AIFs and will benefit the project finance industry as the same is required for the development of the infrastructure sector.
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