The Securities and Exchange Board of India (“SEBI”) issued a circular dated April 10, 2023 prescribing the guidelines with respect to the exclusion of an investor from an investment of an alternative investment fund (“AIF”).

The circular provides the following circumstances in which an AIF may excuse an investor from participating in a particular investment:

1. If the investor confirms that its participation in the investment opportunity will be in violation of an applicable law or regulation, provided that such a confirmation is backed by an opinion of a legal professional or advisor, then the investor can be excused from participating in a particular investment.

2. If, owing to the contribution agreement or any other agreement signed with the AIF, the investor had disclosed to the manager that the investor’s participation in the investment opportunity will be in contravention to the internal policy of the investor then the investor can be excused from participating in a particular investment. In such a case, the manager of the AIF must ensure that the terms of the agreement(s) with investors include the reporting of any change in the disclosed internal policy to the AIF within 15 (fifteen) days from such change.
3. An AIF can exclude an investor from participating in a particular investment opportunity, if the manager of the AIF is satisfied that the participation of such an investor in the investment opportunity will lead to the scheme of the AIF being in violation of applicable law or regulation or will result in a material adverse effect on the scheme of the AIF.

4. In case the investor to an AIF is an AIF or any other investment vehicle itself, then such an investor may be partially excused or excluded from participating in an investment opportunity to the extent of the contribution of the said fund/ investment vehicle’s underlying investors who are to be excused or excluded from such an investment opportunity. The manager of the AIF must record the rationale for such exclusion(s).

The Circular will come into force from immediate effect.

Please find a copy of the Circular, here.

This update has been contributed by Adity Chaudhury (Partner) and Amaan Rahman (Associate).

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