Framework for Category I and II Alternative Investment Funds (AIFs) to create encumbrance on their holding of equity of investee companies
Summary
SEBI amended the AIF Regulations to permit Category I and II Alternative Investment Funds to create encumbrances on equity holdings in specific infrastructure investee companies. This flexibility is strictly limited to facilitating debt raising for development, operation, or management of projects listed in the Harmonised Master List of Infrastructure. The circular outlines detailed conditions regarding disclosure, investor consent, usage of borrowed funds, and compliance with foreign investment norms.
Text
AIF Regulations have been amended and notified on April 25, 2024, to provide ease of doing business and flexibility to Category I and II AIFs to create encumbrance on their holding of equity in investee companies.
Category I and Category II AIFs may create encumbrance on equity of investee company in infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure, only for the purpose of borrowing by such investee company.
Existing schemes who have not on-boarded any investors prior to April 25, 2024, may create encumbrance subject to explicit disclosure with respect to creation of such encumbrance and disclosure of associated risks in their Private Placement Memorandums (PPMs).
Any encumbrances already created by a scheme prior to April 25, 2024, may continue if such encumbrances were created after making an explicit disclosure in the PPM of the scheme.
Such encumbrances may be continued with, only if the encumbrances were created on securities of investee company as stated in para 2 above, and consent of all investors in the scheme of the AIF is obtained to this effect latest by October 24, 2024.
If consent of all investors is not obtained within the aforesaid time period, the encumbrances shall be removed latest by January 24, 2025.
Such encumbrances may not be continued with, if the encumbrances were created on securities of investee company other than as stated in para 2 above. Such encumbrances on securities of the investee company shall be removed latest by October 24, 2024.
Category I or Category II AIFs shall ensure that the borrowings made by the investee company against the equity investments encumbered by the AIFs are utilised only for the purpose of development, operation or management of investee company as stated in para 2 above.
The duration of encumbrance created on the equity investments shall not be greater than the residual tenure of the scheme of the Category I or Category II AIFs.
Any Category I or Category II AIF with more than 50% foreign investment or with foreign sponsor/ manager or with persons other than resident Indian citizens as external members in its investment committee which is set up to approve its decisions, shall ensure compliance with para 7.11.2 of RBI Master Direction dated January 04, 2018 on ‘Foreign Investments in India’, as though the AIF is a person resident outside India.
In case of default by the borrower investee company, Category I or Category II AIF shall ensure that the fund or its investors are not subject to any liability over and above the equity of the borrower investee company encumbered by the AIF.
The aforesaid flexibility of creating encumbrance on equity investment shall not be interpreted as allowing schemes of Category I and II AIFs to extend any form of guarantee for investee company.
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Source: SecMarx — Framework for Category I and II Alternative Investment Funds (AIFs) to create encumbrance on their holding of equity of investee companies. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.