SEBI has introduced flexibility in pro-rata rights for AIF investors

To increase flexibility, market regulator Sebi on Friday introduced an exemption on the requirement to maintain pro-rata rights in investments and distribution of income under Alternative Investment Funds (AIF) rules. Hereunder, pro-rata rights shall not apply in cases where investors are exempted or excluded from certain investments; They fail to meet their contribution obligations or share profits (such as carried interest) with fund managers or sponsors, Sebi said in a circular.

In addition, specialized institutions, including government-backed institutions and development financial institutions, may choose junior or subordinated units, accepting lower returns or higher risk than other investors.

To prevent misappropriation of funds in such circumstances, safeguards have also been introduced to ensure strong protection to investors.

These measures are aimed at ensuring fairness, transparency and flexibility in the functioning of AIFs, meeting the needs of various investors while protecting the rights of investors.

The regulator, on November 18, amended the rules governing AIFs to ensure preservation of pro-rata and pari-passu rights for investors.

As per the amendment, investors in an AIF scheme should have rights proportionate to their investment (commitment) in terms of investment participation and income distribution.

In its circular, SEBI has clarified that “the requirement of investors to maintain pro-rata for their commitment to the scheme shall not apply to the investment of the scheme and the distribution of investment income to the extent that the investor has been waived. has defaulted to pay his/her pro-rata contribution”.

“Furthermore, the requirement to maintain pro-rata rights of investors in the distribution of investment income of the scheme does not apply to returns or profits on investment shared by the investor with the manager or sponsor of the AIF. The terms of the contribution agreement were executed between them,” it added.

Sebi said certain entities such as fund managers, sponsors and government-backed entities may accept lower returns or higher losses through junior/ordinate entities.

This should be transparently disclosed in the fund’s Private Placement Memorandum (PPM).

AIFs with priority distribution model (senior/junior units) issued before the reform cannot accept new commitments or make new investments unless exempted.

Additionally, breaches of investment limits due to compliance will not be considered violations but must be documented in compliance reports.

In a separate circular, SEBI has clarified that Corporate Debt Market Development Fund falls under Category I AIF.

This came after the regulator received a submission to provide clarification on the classification of CDMDF under one of the categories set out under the AIF Regulation.

The Corporate Debt Market Development Fund acts as a backstop facility for the purchase of investment-grade corporate debt securities to instill confidence among participants in the corporate debt market in times of stress and generally to enhance secondary market liquidity by creating a stable institutional structure. Activation during times of market stress.