CIRCULAR
SEBI/HO/AFD/PoD1/CIR/2024/027 April 26, 2024
To,
All Alternative Investment Funds
Sir / Madam,
Sub: Framework for Category I and II Alternative Investment Funds (AIFs) to
create encumbrance on their holding of equity of investee companies
1. To provide ease of doing business and flexibility to Category I and II AIFs to create
encumbrance on their holding of equity in investee companies to facilitate raising
of debt by such investee companies, SEBI (Alternative Investment Funds)
Regulations, 2012 (“AIF Regulations”) have been amended and notified on April
25, 2024. Copy of the notification is available at link.
2. Accordingly, in terms of provisos to Regulation 16(1)(c) and 17(c) of AIF
Regulations, Category I and Category II AIFs may create encumbrance on equity
of investee company, which is in the business of development, operation or
management of projects in any of the infrastructure sub-sectors listed in the
Harmonised Master List of Infrastructure issued by the Central Government, only
for the purpose of borrowing by such investee company and subject to such
conditions as may be specified by the Board from time to time.
3. In this regard, the following conditions are specified:
3.1. Existing schemes of Category I or Category II AIFs who have not on-boarded
any investors prior to April 25, 2024, may create encumbrance on equity of
investee company for the purpose of borrowing of the said investee company
as specified in para 2 above, subject to explicit disclosure with respect to
creation of such encumbrance in this regard and disclosure of associated
risks in their Private Placement Memorandums (PPMs).
3.2. Any encumbrances already created by a scheme of Category I or Category
II AIF prior to April 25, 2024, on the securities of investee company for the
purpose of borrowing of such investee company, may continue if such
encumbrances were created after making an explicit disclosure in the PPM
of the scheme.
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3.3. In case such encumbrances were created by a scheme of Category I or
Category II AIF without making an explicit disclosure in the PPM -
3.3.1. such encumbrances may be continued with, only if the encumbrances
were created on securities of investee company as stated in para 2
above, and consent of all investors in the scheme of the AIF is obtained
to this effect latest by October 24, 2024. If consent of all investors is not
obtained within the aforesaid time period, the encumbrances shall be
removed latest by January 24, 2025.
3.3.2. such encumbrances may not be continued with, if the encumbrances
were created on securities of investee company other than as stated in
para 2 above. Such encumbrances on securities of the investee
company shall be removed latest by October 24, 2024.
3.4. Category I or Category II AIFs shall ensure that the borrowings made by the
investee company against the equity investments encumbered by the AIFs
are utilised only for the purpose of development, operation or management
of investee company as stated in para 2 above, and not utilised otherwise
including to invest in another company. The aforesaid limitation on usage of
borrowing shall be included as one of the terms of the investment agreement
entered between the AIF and the investee company.
3.5. The duration of encumbrance created on the equity investments shall not be
greater than the residual tenure of the scheme of the Category I or Category
II AIFs.
3.6. Any Category I or Category II AIF with more than 50% foreign investment or
with foreign sponsor/ manager or with persons other than resident Indian
citizens as external members in its investment committee which is set up to
approve its decisions, shall ensure compliance with para 7.11.2 of RBI
Master Direction dated January 04, 2018 on ‘Foreign Investments in India’,
as though the AIF is a person resident outside India.
3.7. In case of default by the borrower investee company, Category I or Category
II AIF shall ensure that the fund or its investors are not subject to any liability
over and above the equity of the borrower investee company encumbered
by the AIF.
3.8. The aforesaid flexibility of creating encumbrance on equity investment shall
not be interpreted as allowing schemes of Category I and II AIFs to extend
any form of guarantee for investee company.
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3.9. Schemes of Category I or Category II AIFs shall not create encumbrance on
their investments in foreign investee companies.
4. The pilot Standard Setting Forum for AIFs (SFA) in consultation with SEBI shall
formulate implementation standards to ensure that the encumbrance created on
equity of investee company by Category I or Category II AIFs, is only utilized for
facilitation of debt raising at the infrastructure sector investee company as stated
in para 2 above. Managers of such AIFs shall adopt and adhere to such
implementation standards.
Such standards shall be published on websites of the industry associations which
are part of the SFA, i.e., Indian Venture and Alternate Capital Association (IVCA),
PE VC CFO Association and Trustee Association of India.
5. The trustee/sponsor of AIF, as the case may be, shall ensure that the ‘Compliance
Test Report’ prepared by the manager in terms of para 15.2 of Master Circular No.
SEBI/HO/AFD/PoD1/P/CIR/2023/130 for AIFs dated July 31, 2023, includes
compliance with the provisions of this circular.
6. The circular shall come into force with immediate effect.
7. This circular is issued with the approval of the competent authority.
8. This circular is issued in exercise of powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act, 1992 to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market.
9. The circular is available on SEBI website at www.sebi.gov.in under the categories
“Legal framework - Circulars" and "Info for - Alternative Investment Funds”.
Yours faithfully,
Sanjay Singh Bhati
Deputy General Manager
Tel no.: +91-22-26449222
ssbhati@sebi.gov.in
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