The Securities and Exchange Board of India (“SEBI”), had earlier in its meeting held on September 30, 2024 (“Board Meeting”) considered explicitly mandating maintaining pro rata and pari passu rights of investors of alternative investment funds (“AIFs”), subject to specified exemptions. The abovementioned agenda was approved in the 207th meeting of the board of directors of SEBI (“Press Release”).

SEBI has now, vide notification dated November 18, 2024, notified the Securities and Exchange Board of India (Alternative Investment Funds) (Fifth Amendment) Regulations, 2024 (“Amendment Regulations”) to inter alia amend Regulation 20 of the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) as follows:

A. Sub-regulation (21) has been inserted which provides that:

(i) Investors of a scheme of an AIF shall have rights, pro rata to their commitment to the scheme, in each investment and in the distribution of proceeds of such investment, except as may be specified by SEBI; and

(ii) Rights of investors of a scheme of an AIF issued prior to the notification of the Amendment Regulations, which are not exempted by SEBI and not pro-rata to their commitment to the scheme, shall be dealt with in the manner specified by SEBI.

B. Sub-regulation (22) has been inserted which provides that :

(i) Rights of investors of a scheme of an AIF, other than those specified in sub-regulation (21), shall be pari passu in all aspects;

(ii) However, differential rights may be offered to select investors of a scheme of an AIF, in the manner as may be specified by SEBI, without affecting the interest of other investors of the scheme;

(iii) The aforesaid requirements shall not apply to large value fund for accredited investors; and

(iv) Any differential right issued by an AIF prior to the notification of the Amendment Regulations and not falling under sub-paragraph (ii) above shall be dealt with in the manner specified by SEBI.

The abovementioned amendments have been introduced with the objective to ensure that the essential principle of fair and equal treatment of investors of an AIF is adhered to subject to specified exemptions.

In the Board Meeting it was considered that operational flexibility should be provided to government-owned entities and multilateral institutions, besides sponsors and managers, to subscribe to junior tranches in AIFs. The aforesaid relaxations were considered citing need for structures similar to blended finance to enable private capital investment in sectors in need thereof. Additionally, the Press Release provided that existing schemes of AIFs having provided priority in distribution to certain classes of investors over others will not be permitted to, while continuing with the existing investments: (i) raise fresh commitments; or (ii) make investment, directly or indirectly, in a new investee company.

However, the aforementioned exemptions and specifications have not been incorporated in the Amendment Regulations. Accordingly, necessary guidelines would need to be issued by SEBI to provide necessary clarity on compliance with the Amendment Regulations.

Please find a copy of the Amendment Regulations, here. 

This update has been contributed by Aastha (Partner) and Aditi Singh Kashyap (Senior Associate).

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