Sebi engages with venture capital funds directly to smoothen transition to AIF

Sebi Extends Deadline for Older Venture Capital Funds

The Securities and Exchange Board of India (Sebi) has granted a one-year extension to older Venture Capital Funds (VCFs) facing a looming deadline for winding up expired schemes. This decision follows extensive engagement with the industry, aiming to facilitate a smoother transition to the modern Alternative Investment Fund (AIF) framework.

Key Highlights:

• Extension Granted: VCFs now have until July 19, 2025, to complete liquidation.
• Migration Mandate Remains: Funds must still apply for migration to the AIF framework by July 19, 2025.
• Sebi's Proactive Approach: Direct outreach to VCFs and industry associations like the Indian Venture and Alternate Capital Association (IVCA) and the Private Equity and Venture Capital Chief Financial Officer Association (PEVCCFO) played a crucial role in addressing industry challenges.
• Clean-up Operation: The extension allows VCFs to address outstanding issues, including asset liquidation and compliance requirements, before migrating.

The extension addresses concerns stemming from a sluggish response to Sebi's 2024 circular encouraging VCF migration. Many VCFs, some operating beyond their authorized lifespans, hadn't initiated the transition process.

Rahul Shah, executive vice president at IVCA, explained that Sebi's engagement helped clarify issues, revealing that funds were aiming to liquidate investments before migrating or even considering liquidation instead of migration entirely.

Navigating the Transition:

The move reflects Sebi's broader strategy to consolidate private investment vehicles under the AIF Regulations (2012), replacing the older VCF structure (1996). Under the AIF framework, VCFs are categorized as Category I AIFs.

Industry feedback highlighted challenges including outdated contact information and confusion surrounding the regulatory overhaul. Sebi collaborated with IVCA and PEVCCFO to improve communication and address these issues. Even after migration, asset liquidation remains a significant undertaking, as noted by both industry experts and Sebi.

Mixed Reactions:

While the extension is largely welcomed, providing crucial time for orderly asset liquidation and preventing potentially adverse impacts on fund performance, concerns remain. Shruthi Cauvery of VAIA, a firm advising VCFs, noted that the extended timeline might inadvertently lead to further delays unless strict timelines are enforced, particularly concerning the complexities of AIF reporting and compliance.

Some VCF managers have questioned the necessity of migration in specific situations, such as funds with a single investor or where promoter details are missing. However, the prevailing view is that this move aims to bring all pooled investment vehicles under a unified regulatory umbrella.

Strict Compliance Required:

Only VCFs with clean records and no pending investor complaints are eligible for migration. Venkatesh Chitla of SBI-SG Global Securities Services Pvt. Ltd. highlighted common disqualifiers including ineligible investors, incomplete KYC or AML checks, preferential terms, and investment condition breaches. The extension presents a strategic opportunity for compliant funds to align with global best practices and continue raising capital.

Legal experts have also voiced their support for the extension, highlighting the improved clarity and flexibility it offers for orderly asset liquidation and investor protection.

The Future of VCFs:

While the extension offers a reprieve, the message from Sebi is clear: the VCF regime is being phased out. Only those adopting the AIF framework will be able to continue operations after the migration period.