5 big changes in SEBI's AIF winding-up rules explained

Capital market regulator SEBI has announced new guidelines for winding up alternative investment funds (AIFs), offering more flexibility to such funds in terms of retention of proceeds after a scheme's permissible fund life, obtaining 'inoperative fund' status and surrendering registration. Until now, funds were expected to distribute all proceeds and wind up within a fixed timeline. However, under the new rules, AIFs will be able to retain some money beyond their permissible life under certain conditions.

The changes are aimed at ensuring smoother fund closures while protecting investors and promoting transparency around retained money and liabilities.

What are alternative investment funds? Who uses them?

They are private investment pools where money is collected and put into assets other than regular shares or mutual funds, such as private companies, startup funding, infrastructure or hedge-style strategies. Normally they are used by investors with a higher appetite for risk and a longer timeframe -- because the money is not easy to liquidate quickly.

Here are five things to know about these changes, as per the SEBI circular dated June 16:

AIFs will be able to retain proceeds beyond fund life

Under specific conditions, AIFs will be allowed to retain liquidation proceeds beyond the permissible fund life in cases involving conditions like:

• Litigation notices
• Tax demands
• Regulatory communications
• Investigation summons

Funds will also be able to retain proceeds for anticipated litigation or tax-related liabilities with the approval of investors holding at least 75 per cent of the investment value. Retention for residual winding-up expenses will be allowed if backed by invoices, documents, or records of comparable expenses.

'Inoperative fund' status

Funds with retained money looking to surrender registration will be able to apply for an 'inoperative fund' status -- an option introduced by the regulator. Funds awaiting the outcome of pending litigation will also be able to ask for this status even if no money has been retained. They will have to submit their applications in this regard in a prescribed format.

Registration can be surrendered only after all liabilities are settled and retained money is distributed.

Rules for inoperative funds

SEBI has indicated the following rules in this regard:

• Retained money will be required to be invested as per regulatory requirements
• No new schemes will be allowed to be rolled out once a fund obtains the inoperative fund status
• No management fees will be allowed to be charged on any scheme once a fund receives the status
• Certain regulatory requirements will not apply to such funds

"An AIF may be tagged as an inoperative fund, in such manner and subject to conditions as may be specified by SEBI from time to time," according to SEBI.

Reporting requirements and applicability

It will be mandatory for AIFs retaining money and those with the inoperative fund status to file their annual reports on retained funds and outstanding liabilities with the regulator. These reports will also have to be shared with investors within 30 days from the end of March every financial year.

This framework will also apply to registered venture capital funds (VCFs).

Disclosure, timelines and distribution requirements

While seeking investor approval, it will be mandatory for fund managers of such AIFs to disclose the amount proposed to be retained along with the expected retention period. Any money retained for winding-up expenses will not be allowed to be held for more than three years beyond the permissible fund life. Also, any retained funds will be required to be invested in accordance with existing AIF investment regulations.

Schemes will have to formally wind up once liabilities are settled and retained money is distributed to investors.