The Securities and Exchange Board of India (“SEBI”) has issued an informal guidance on September 5, 2019 to BlackSoil Realty Investment Advisors LLP (“BRIA”/ “Manager”), which acts as an investment manager to BlackSoil Realty Trust (“BRT”/ “Fund”) is registered as a Category II Alternative Investment Fund, clarifying certain aspects with the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).  

The clarifications sought from SEBI and the clarifications provided by it are summarised herein as follows:

Issues: 

1. Whether there would be any violation of the provisions of AIF Regulations on account of investment by BRT in an LLP by way of capital contribution to such LLP?

SEBI referred to Regulation 17(a) of the AIF Regulations, stating that:

“Category II AIFs shall invest primarily in unlisted investee companies or in units of other AIFs as may be specified in the placement memorandum.”

Further, reference was made to Regulation 2(1)(o) of the AIF Regulations, that provides the following:

“an “investee company” means any company, special purpose vehicle or limited liability partnership or body corporate or real estate investment trust or infrastructure investment trust in which an AIF makes an investment”.

In light of the same, SEBI stated that the AIF Regulations indicate that BRT can invest in an LLP by way of capital contribution to such LLP. 

2. Regulation 17 of the AIF Regulations provides for investment by Category II AIF primarily in unlisted investee companies. Is it intended to cover only investment in equity shares of Indian entities, or whether investment in debt securities is covered as well?

SEBI observed that even though Regulation 17(a) of the AIF Regulations does not specifically provide for investments in the nature of debt securities, Regulation 3(4)(b) and Regulation 2(i) of the AIF Regulations indicate that “debt funds” which primarily invest in debt or debt related securities of listed or unlisted investee companies, are registered under Category II AIFs.

In light of the same, SEBI stated that Category II AIFs include the funds which primarily invest in debt or debt related securities of listed or unlisted investee companies. 

3. Whether for the purpose of computing 25% (twenty five percent) threshold of Regulation 15(1) of the AIF Regulations, the Fund should consider 25% (twenty five percent) of total commitment (less estimated expenses) or 25% (twenty five percent) of the total amount drawn down?  

SEBI referred to following provisions of the AIF Regulations: 

Regulation 15(1)(c) of the AIF Regulations which states that “Category I and II Alternative Investment Funds shall invest not more than twenty five percent of the investible funds in one Investee Company”;

Regulation 2(1)(p) of the AIF Regulations which states that ““investible funds” means corpus of the Alternative Investment Fund net of estimated expenditure for administration and management of the fund”; and

Regulation 2(1)(h) of the AIF Regulations which states that ““corpus” means the total amount of funds committed by investors to the Alternative Investment Fund by way of a written contract or any such document as on a particular date.”  

In light of the Regulations stated above, SEBI observed that it may be interpreted that “for the purpose of computing 25% threshold of Regulation 15(1)(c) of the AIF Regulations, the fund should consider 25% of total commitment net of estimated expenditure for administration and management of the fund”

4. If the Fund were to borrow Rs. 10,00,000 (Rupees ten lacs) for a period of 29 (twenty-nine) days from the Manager (only one time in a year), would it tantamount to any violation of provisions of AIF Regulations?  

SEBI considered Regulation 17(c) of the AIF Regulations that provides the following:

“Category II Alternative Investment Funds may not borrow funds directly or indirectly and shall not engage in leverage except for meeting temporary funding requirements for not more than thirty days, not more than four occasions in a year and not more than ten percent of the investible funds”.              

SEBI also referred to Regulation 21 of the AIF Regulations and noted that the same inter alia mandates the sponsor or manager to act in fiduciary capacity towards investors and disclose all conflicts of interest, establish and implement written policies and procedures to identify, monitor and mitigate conflicts of interest throughout the scope of business, and abide by high level principles on avoidance of conflicts of interest with associated persons.

Hence, in light of the aforesaid provisions, SEBI observed that there is no express bar for an AIF to borrow funds from its manager, subject to the compliance of other conditions mentioned in the AIF Regulations (including that of the conflict of interests), other applicable laws and provisions.

5. Whether there is any upper/maximum limit for investment made by the Manager or Sponsor?

SEBI referred to Regulation 10(c) and Regulation 10(d) of the AIF Regulations (Investment in Alternative investment Fund) to observe that aforesaid provisions only specify the criteria for investment and the amount of minimum investment by investors and the amount of minimum continuing interest to be maintained by the sponsor or manager.  

In light of the same, SEBI observed that these Regulations, namely Regulation 10(c) and Regulation 10(d) of the AIF Regulations do not provide for the upper/maximum limit for investment made by the Manager or Sponsor. However, it was stated that the quantum of investment made by the Manager or Sponsor must not be contrary to the continuous eligibility requirement of an AIF.

This update has been contributed by Arka Majumdar (Partner) and Ishita Malhotra (Associate).