SEBI Relaxes Rules for Category I and II AIFs to Borrow Funds

The Securities and Exchange Board of India (SEBI) has relaxed regulations for Category I and II Alternative Investment Funds (AIFs), allowing them to borrow funds to address temporary shortfalls in drawdown amounts. This move aims to simplify business operations for these investment vehicles.

Previously, these AIFs were restricted in their borrowing activities, with limitations on the amount and frequency of borrowings. The new rules provide greater flexibility for AIFs to access funds in situations where investor drawdowns are delayed.

However, SEBI has imposed certain conditions on these borrowings. AIFs must disclose their intention to borrow in their private placement memorandum (PPM) and ensure that such borrowings are only used in emergencies and as a last resort. Additionally, the borrowed amount should not exceed a specified percentage of the investment or the investee company’s value.

To maintain transparency and prevent potential conflicts of interest, SEBI has introduced a cooling-off period between borrowing periods. This ensures that AIFs do not become overly reliant on borrowed funds.

Furthermore, the circular allows large value funds (LVFs) to extend their tenure by up to five years, subject to approval from unit holders. This provides flexibility for LVFs to align their extension periods with their investment strategies.

These regulatory changes are expected to enhance the operational efficiency of Category I and II AIFs, enabling them to seize investment opportunities more effectively. By providing greater flexibility in accessing funds, SEBI aims to support the growth and development of the alternative investment fund industry in India.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.