AIFs get regulator's nod to pledge equity of investee companies in infra sector

Market regulator Securities and Exchange Board of India (SEBI) on March 15 said that it will allow Alternative Investment Funds (AIF) to pledge equity shares of investee companies in the infrastructure sector.

SEBI has allowed Category I and II AIF to pledge equity shares of investee companies to ease the way for companies to raise debt.

In the press release, SEBI said, “ With an objective to provide ease of doing business for Alternative Investment Funds (AIFs) and to foster an ecosystem wherein private capital effectively complements the various modes available for infrastructure financing, the Board has approved the proposal to allow Category I and II AIFs to create an encumbrance on the equity of its investee companies in infrastructure sector to facilitate raising of debt/loan by such investee companies, subject to certain conditions, including compliance with RBI regulations. For this purpose, the companies in the infrastructure sector are such companies which are engaged in the business of development, operation or management of projects in any of the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure sub-sectors, as issued by the Government of India."

Earlier, the market regulator prevented Cat I and II AIF from pledging shares to obtain loans as investors of AIF may lose money in the fund if investee companies default on loan repayment.

In a consultation paper published on February 2, SEBI said it is important to allow AIFs to pledge equity to raise debt to increase investments in the infrastructure segment.

While allowing infrastructure companies to finance a project through debt, via ‘project finance’ protection to lenders is provided by the pledge of equity shares in the project. The pledge will allow lenders to step into the project in case of default. Without the ability to pledge equities, financing opportunities are at risk, said SEBI.

SEBI in the paper also said a large public sector bank told the regulator that if AIFs are not allowed to pledge shares to get loans from banks, it will lead to a loss of opportunity for the banks.