SUMMARY
- Market regulator SEBI has issued fresh guidelines for borrowing by Category-I and Category-II alternative investment funds (AIFs).
- Under the new rules, AIFs will be permitted to take loans to cover temporary funding needs and day-to-day operational expenses for a period of up to 30 days.
- The guidelines state that the cost of borrowing will be borne by investors who fail to provide the drawdown amount for investment.
The Securities and Exchange Board of India (SEBI) has issued fresh guidelines for borrowing by Category-I and Category-II alternative investment funds (AIFs).
Under the new rules, AIFs will be permitted to take loans to cover temporary funding needs and day-to-day operational expenses for a period of up to 30 days. The regulations also limit the number of times AIFs can borrow in a year to four, with borrowing not exceeding 10% of their total investible funds.
The regulator has set a cap on borrowings to 10% of investible funds, or 20% of the drawdown value, which represents the amount investors have contributed for investments in investee companies. Furthermore, the market regulator has mandated that information regarding leveraging must be disclosed to AIF investors.
This move aims to provide operational flexibility to AIFs while streamlining the process of doing business.
The guidelines further mention, “The borrowing could be done only in case of emergency and as a last recourse, when the investment opportunity is imminent to be closed and the drawdown amount from investor(s) has not been received by the AIF before the date of investment, in spite of best efforts by manager to obtain the drawdown amount from the delaying investor(s).”
The market regulator has also clarified that the borrowed amount shall not exceed 20% of the proposed investment in the investee company, or 10% of the AIF’s investible funds, or the amount owed to investors from other parties, whichever is lower.
The guidelines state that the cost of borrowing will be borne by investors who fail to provide the drawdown amount for investment. Additionally, the flexibility to borrow for shortfall in drawdown amounts cannot be used to offer different drawdown timelines to investors.
AIF managers are required to disclose details regarding the borrowed amount, terms of borrowing, and repayment schedules to all investors of the scheme on a regular basis.
While acknowledging that all Category-I & II AIFs must maintain a 30-day “cooling-off” period between borrowing periods, SEBI has also announced that the maximum permissible limit for extending the tenure of large value funds (LVFs) can be extended up to five years, subject to the approval of two-thirds of the fund’s unit holders by value.
These new guidelines are expected to significantly impact Indian startups, as venture capital (VC) firms typically establish AIFs to invest in emerging technology companies.
An AIF is a fund established or incorporated in India that is a privately pooled investment vehicle that gathers funds from sophisticated investors to invest in line with a defined investment policy for the benefit of its investors.
AIFs are categorized into three types: Category-I includes venture capital SME funds, while the third category encompasses funds that employ complex investment strategies for both listed and unlisted derivatives. Category-II AIFs do not fall into either of the first two categories and include funds such as real estate funds, private equity funds, and funds for distressed assets.
The latest circular is anticipated to facilitate AIFs in streamlining their operations, potentially leading to a ripple effect that could encourage funding for local startups.
Over the past five years, the Indian AIF sector has experienced a surge of over 70%, surpassing the growth rates of mutual funds and portfolio management services.
