The Indian capital market regulator has clearly made it clear that the fund will have to be closed and liquidated within the specified period even if a major number of investors contributing to the fund pool give their consent to extend the tenure of the fund.
may knock SEBI door
Fund managers often postpone exits and closures due to a variety of factors such as bad markets, lawsuits, non-performance of portfolio companies, fall in asset prices, or investment delays. IPO By investee companies, especially startups. Claiming to fulfill their fiduciary role, the managers kept the funds alive for longer periods in order to fetch better deals for investors.
However, the regulatory stance outlined in the Securities and Exchange Board of India’s (SEBI) October 31 order has spooked the fund industry, which was till now under the impression that the regulator’s silence on the subject was permitted with the consent of investors. . them to extend the tenure of a fund.
Industry executives fear that many funds may now be prompted to undertake distress sale of assets to fall in line with SEBI’s observation that “keeping a fund alive till a profitable exit is achieved would set a wrong precedent and defeat the objective”. will adversely affect the growth and development of the securities market”.
The life of this type of Alternative Investment Fund (AIF) is usually 7 to 10 years. SEBI AIF regulations stipulate that the tenure of a close-ended AIF can be extended only with the approval of two-thirds of the investors in value, up to a maximum of two years.
“Interestingly, the erstwhile SEBI VCF regulations did not have such a formal limit and it was left to the investment manager and investors to contractually stipulate the same in the fund documents including the placement memorandum. However, the SEBI order which has been issued in terms of the former. The VCF Regulations state that once the period of maturity is fixed in the placement memorandum, it shall not be open to the trustee or the investment manager to extend the same even with the consent of the investors. This does not bode well for many VCFs. AIFs still governed under the old SEBI VCF regime as well as the SEBI AIF regime (which may also take cues from this SEBI order), face several practical challenges arising from underlying litigations. beyond their original tenure and permitted extensions, illiquid investments, Covid-affected portfolio entities, etc,” said Tejesh Chitlangi, senior partner, IC Universal Legal, who feels SEBI has come out to take care of genuine cases. With a flexible regulatory policy.
According to Richie Sacchetti, founder of the law firm Ricchi Sacchetti Associates, “The regulator’s view appears to be that investor approval cannot be relied upon to permanently extend the duration of a fund that would otherwise violate certain fundamental principles.” Redundancy. The seriousness of the regulator can be gauged from the minutes summarized in a recent circular issued in the context of AIFs and the board memorandum proposing the amendments. asset class targeting, as unreasonably long terms may not be acceptable to non-institutional investors. On the other hand, in addition to selling portfolios to other GPs, a fund sponsor may be able to engage with its current investor base, or LP secondary May consider working continuity vehicles. Add to the liquidity dynamics for the fund.”
A GP, or a general partner, is a PE firm while the investors in the fund are LPs, or limited partners.
Since in many cases SEBI did not respond to the fund’s applications for extension, the managers felt that the regulator was not averse to the proposal. The recent order has thrown water on their plans.
Multiple sources in the fund industry said the issue would be taken up with Sebi, which has not taken note of the economic difficulties faced by many funds and investee companies.
“Further, since SEBI in its order (relating to UIVCF, a realty fund) has prohibited not only the investment manager, the trustees but also their directors for timely exit of the portfolio within the original period and not allowing unauthorized expansion, Given this, it may raise concerns about non-compliant managers and non-executive and independent directors on the board of trustees,” Chitlangi said.