CIRCULAR
SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/175 December 13, 2024
To,
All Alternative Investment Funds (AIFs)
Sir/Madam,
Sub: Pro-rata and pari-passu rights of investors of AIFs
1. Securities and Exchange Board of India (Alternative Investment Funds)
Regulations, 2012 (“AIF Regulations”) have been amended and notified on
November 18, 2024, with respect to maintaining pro-rata and pari-passu rights of
investors in a scheme of an AIF. Copy of the aforesaid notification is available at
link.
A. Pro-rata rights of investors of AIFs -
2. Regulation 20(21) of AIF Regulations states as under –
“The investors of a scheme of an Alternative Investment Fund shall have
rights, pro-rata to their commitment to the scheme, in each investment of the
scheme and in the distribution of proceeds of such investment, except as may
be specified by the Board from time to time:
Provided that the rights of the investors of a scheme of Alternative Investment
Fund issued prior to the notification of the Securities and Exchange Board of
India (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024,
which are not pro-rata to their commitment to the scheme and not exempted
by the Board, shall be dealt with in the manner specified by the Board.”
3. In this regard, it is specified that the requirement of maintaining investors’ rights
pro-rata to their commitment to the scheme, shall not be applicable in an
investment of a scheme and distribution of proceeds of the investment to the
extent –
3.1. an investor has been excused or excluded from participating in the said
investment; or,
3.2. an investor has defaulted on providing his/her pro-rata contribution for the
said investment.
4. Further, the requirement of maintaining pro-rata rights of investors in distribution
of proceeds of investments of a scheme, shall not be applicable to the extent
returns or profit on the investments is shared by an investor with the manager or
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sponsor of the AIF (by whatever name it is called, such as carried
interest/additional return), in terms of contribution agreement executed between
them.
5. Additionally, to provide flexibility in fund raising from investors with varied risk
appetite, the following entities may accept returns lesser or share losses more
than their pro-rata rights in investments of an AIF/scheme of an AIF, i.e., may
subscribe to classes of units which are junior/subordinate to other class(es) of
units of the AIF/scheme of AIF -
a. Manager or sponsor of the AIF;
b. Multilateral or Bilateral Development Financial Institutions;
c. State Industrial Development Corporations;
d. Entities established or owned or controlled by the Central Government or a
State Government or the Government of a foreign country, including Central
Banks and Sovereign Wealth Funds.
6. In case manager or sponsor of an AIF subscribes to junior / subordinate class(es)
of units of the AIF/scheme of the AIF, it shall be ensured that the amount
invested by the AIF/scheme of the AIF is not utilized by an investee company,
directly or indirectly, to repay any of its obligations or liabilities towards the
manager or sponsor of the AIF or their associates.
Applicability on existing AIFs/schemes of AIFs -
7. Vide SEBI circular dated November 23, 2022, schemes of AIFs that had adopted
priority distribution model (i.e., schemes that issued senior and junior /
subordinate classes of units) were directed to neither accept any fresh
commitment nor make investment in a new investee company, until a view is
taken by SEBI in this regard.
8. Further, in terms of proviso to Regulation 20(21) of AIF Regulations, as referred
at para 2 above, rights of investors of AIFs/schemes of AIFs issued prior to the
date of notification of the aforesaid amendment to AIF Regulations (i.e.,
November 18, 2024), that are not pro-rata to their commitment to the AIF/scheme
and not exempted by SEBI, shall be dealt with in the manner specified by SEBI.
9. Accordingly, it is hereby specified that existing AIFs/schemes of AIFs that have
adopted priority distribution model and not falling under the exemption at para 5
above, shall neither accept any fresh commitment nor make investment in a new
investee company, directly or indirectly.
10. As a consequence of compliance with the clause at para 9 above or the SEBI
circular dated November 23, 2022 as mentioned in para 7 above, if the
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investment limits specified under AIF Regulations are breached by any
AIF/scheme of AIF, such breach may not be considered as non-compliance with
applicable provisions of AIF Regulations or circulars issued thereunder, to that
extent. However, the same shall be recorded in writing in the ‘Compliance Test
Report’ prepared by the manager in terms of Chapter 15 of SEBI Master Circular
for AIFs dated May 07, 2024.
B. Pari-passu rights of investors of AIFs -
11. Regulation 20(22) of AIF Regulations states as under –
“The rights of investors of a scheme of an Alternative Investment Fund, other
than that specified in sub-regulation (21) of this regulation, shall be pari-
passu in all aspects:
Provided that differential rights may be offered to select investors of a
scheme of an Alternative Investment Fund, in the manner as may be
specified by the Board, without affecting the interest of other investors of the
scheme:
Provided further that the requirement under sub-regulation (22) of this
regulation shall not apply to Large Value Fund for Accredited Investors:
Provided further that any differential right already issued by an Alternative
Investment Fund prior to the notification of the Securities and Exchange
Board of India (Alternative Investment Funds) (Fifth Amendment)
Regulations, 2024, not falling within the first proviso of sub-regulation (22) of
this regulation, shall be dealt with in the manner as specified by the Board.”
12. Accordingly, in terms of first proviso to Regulation 20(22) of AIF Regulations, it is
specified that differential rights may be offered by AIFs to select investors without
affecting the rights of other investors, based on the following guiding principles:
12.1. Any such right shall not result in any investor bearing liability accrued or
accruing to other investors of the AIF/scheme of AIF;
12.2. Any such right with respect to non-monetary / non-commercial terms shall
not provide control to an investor on the decision making of the AIF/scheme
of AIF, except in cases where investor/its nominee is part of any committee
set up in terms of Regulation 20 (7) of AIF Regulations;
12.3. Any such right shall not alter the right(s) available to other investors under
their respective agreements with the AIF/manager; and,
12.4. Any such right and eligibility to avail the same shall be transparently
disclosed in the PPM of the AIF/scheme of the AIF.
13. In this regard, it has been decided that the Standard Setting Forum for AIFs
(‘SFA’) shall, in consultation with SEBI, formulate the implementation standards
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for compliance with the aforesaid provision, prescribing the positive list of specific
differential rights that may be offered by AIFs. Such list may be reviewed and
updated by SFA, whenever necessary, in consultation with SEBI.
14. The implementation standards formulated by SFA shall be published on the
websites of the industry associations which are part of SFA, i.e., Indian Venture
and Alternate Capital Association (IVCA), PE VC CFO Association and Trustee
Association of India, on or before January 15, 2025.
15. AIFs, Managers of AIFs and their Key Management Personnel shall ensure the
following while issuing differential rights to select investors –
15.1. The differential rights shall be provided only in accordance with the
implementation standards formulated by SFA.
15.2. The following shall be disclosed in the PPM -
(a) Eligibility criteria for an investor to avail each differential right; and,
(b) Any investor meeting the specified eligibility criteria for a differential
right may opt to avail such right.
Applicability on existing AIFs/schemes of AIFs -
16. In terms of standard template for PPMs prescribed by SEBI vide its circular dated
February 05, 2020, AIFs are required to disclose to investors in their PPM that
any differential right offered to an investor(s), through separate classes of units or
side letters/agreements, shall not have any adverse impact on the economic
rights or any other rights of other investors.
17. AIFs/schemes of AIFs whose PPMs were filed with SEBI post applicability of the
aforesaid circular, i.e., on or after March 01, 2020, shall comply with the following
–
17.1. The manager shall report the details of differential right(s) which do not fall
under the implementation standards formulated by SFA, to SEBI in the
format as given at Annexure I, by emailing to aifreporting@sebi.gov.in, on
or before February 28, 2025.
17.2. Out of the rights reported to SEBI as per para 17.1. above, the manager
shall immediately terminate/discontinue those differential rights which are
ascertained to be affecting the rights of other investors.
18. Further, Large Value Fund for Accredited Investors (LVFs), whose PPMs are filed
with SEBI for launch of scheme post the date of issuance of this circular, may
avail exemption from the requirement of maintaining pari-passu rights among
investors, subject to the following -
18.1. Making appropriate disclosure in the PPM of the scheme; and,
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18.2. Obtaining undertaking from accredited investor at the time of on-boarding to
LVF in terms of para 4.1 of Annexure 8 of SEBI Master Circular for AIFs
dated May 07, 2024, with the following clause inserted for waiver to this
effect –
“The prospective investor is aware that LVFs may avail exemption from
the requirement of maintaining pari-passu rights among investors and
therefore, may offer differential rights to select investors which might
affect interest of others investors of the LVF.”
19. Existing LVFs may avail exemption from the requirement of maintaining pari-
passu rights among investors, subject to each investor of the scheme specifically
providing the waiver to this effect as mentioned in para 18.2 above.
20. The trustee/sponsor of AIF, as the case may be, shall ensure that the
‘Compliance Test Report’ prepared by the manager in terms of Chapter 15 of
SEBI Master Circular for AIFs dated May 07, 2024, includes compliance with the
provisions of this circular.
21. This circular shall come into force with immediate effect.
22. This circular is issued with the approval of the competent authority.
23. This circular is issued in exercise of powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act, 1992, read with Regulations 20(21),
20(22) and 36 of AIF Regulations, to protect the interests of investors in
securities and to promote the development of, and to regulate the securities
market.
24. 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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Annexure I
Format for reporting differential rights issued to investors
(in terms of para 17.1 of this circular)
S. Particulars Information submitted by the AIF
No.
(i) Name of AIF
(ii) Registration no. of AIF
(iii) Name of scheme
(iv) Name of manager
(v) List of differential rights and the
terms under which such differential
rights have been issued by the
AIF/scheme of AIF
Details of differential rights issued to select investors, which are not covered in the
implementation standards formulated by Standard Setting Forum for AIFs (‘SFA’) -
S. Differential rights Whether the Whether the Remarks, if
No. which are not differential right differential right any
covered in disclosed in the affects the rights
implementation PPM of the of other investors
standards AIF/scheme of of AIF/scheme of
formulated by SFA AIF AIF
(State ‘Yes or (State ‘Yes or No’)
No’)
(The aforesaid information, separately given for each scheme of AIF, shall be sent in
MS Excel format by emailing the same to aifreporting@sebi.gov.in, with the subject
‘Information of differential rights issued to investors’).
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