Sebi Issues Guidelines for Market Borrowing by Category I, II AIFs

On Monday, capital markets regulator Sebi introduced guidelines for borrowing by Category I and Category II Alternative Investment Funds (AIFs), alongside the maximum permissible limit for extending the tenure of Large Value Funds for Accredited Investors (LVFs).

Under the new rules, Category I and II AIFs are prohibited from borrowing or using leverage for investments, except in certain cases for temporary needs. These funds are allowed to borrow to address short-term funding needs or manage operational expenses, but with strict limitations. Borrowing is permitted for a maximum of 30 days, up to four times annually, and must not exceed 10% of the investable funds.

To enhance business flexibility, Sebi has allowed these AIFs to borrow for temporary shortfalls in the amount called from investors for making investments in investee companies (referred to as 'drawdown amount'), as per a circular. The guidelines state that borrowing must be disclosed in the scheme's Private Placement Memorandum (PPM) and is only allowed as a last resort in emergencies.

The borrowed amount must not exceed 20% of the investment, 10% of the fund's investable assets, or the pending commitments from other investors, whichever is lower. Borrowing costs are borne only by the investors who failed to provide their drawdown amounts. AIFs must maintain a 30-day gap between two borrowing periods, calculated from the repayment date of the previous borrowing.

Regarding the extension of tenure for LVFs, Sebi has allowed a tenure extension of up to five years with the approval of two-thirds of unit holders. LVFs without a disclosed extension period or those extending beyond five years must align with the five-year limit by November 18. They may revise their original tenure with unanimous investor consent and must submit an undertaking to Sebi by November 18. They are required to update their extension details in the quarterly report for the quarter ending December 31, 2024.

New Modalities for Venture Capital Funds to Migrate to AIF Rules

Sebi also provided guidelines for Venture Capital Funds (VCFs) transitioning to Alternative Investment Fund (AIF) regulations. VCFs registered before the introduction of AIF regulations are permitted to migrate to the current regulations by becoming 'migrated venture capital funds.' This option is available until July 19, 2025.

A 'Migrated VCF' is a VCF that transitions to a sub-category of VCF under Category I - AIF as per the AIF norms. VCFs wishing to migrate must submit their original registration certificate along with specific information required by Sebi. VCFs with active schemes can migrate while maintaining the scheme's original tenure or as approved by investors. If the liquidation period has expired, VCFs must resolve any outstanding investor complaints and will have until July 19, 2025, to liquidate.

Post-migration, existing investors, investments, and units will be transferred under the AIF Regulations without changes. VCFs that choose not to migrate will face stricter reporting requirements if they have active schemes, and those with expired schemes may face regulatory action. VCFs that have wound up all schemes or have not made any new investments must surrender their registration by March 31, 2025, according to Sebi's guidelines.

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