Sebi cautions India Infra Fund II, Global Infra Partners and IDBI Trusteeship Services for AIF Rules violations

Interestingly, the order stated that the fund acted as a promoter or majority shareholder in the portfolio companies

The market regulator has cautioned India Infrastructure Fund II, its manager Global Infrastructure Partners India and IDBI Trusteeship Services for violating Alternative Investment Fund (AIF) Regulations and the AIF Code of Conduct.

The infra fund was found to have pledged securities of portfolio companies to provide collateral for loan taken by other portfolio companies. As a category I fund, it isn’t allowed to borrow or take leverage except for operational expenses.

The order from Securities and Exchange Board of India (Sebi) has said that the fund had violated the regulations by doing indirect borrowing as a promoter/majority shareholder of the portfolio companies. It also disagreed with the Noticees’ argument that the investors were made aware of the fund’s strategy through the Trust Deed, the Contribution Agreement and private placement memorandum, and the order stated that these cannot override AIF Regulations.

It directed the noticees to modify the terms of the Trust Deed that are inconsistent with the Regulations and submit the new Deed to Sebi within 30 days of the order.

The fund, the manager and the trustee had contended that the borrowing had not been done by the fund but by the portfolio companies. Therefore, they had not violated Regulation 16 (I) (c) of AIF Regulations. According to them, the fund and the portfolio companies are “distinct and separate entities”.

But the market regulator did not agree.

“In case, AIFs are permitted to engage in borrowing or leveraging against pledge or charge or hypothecation of assets of Funds or in any manner such as enabling portfolio companies to obtain loan then this may expose investors of AIF to probable financial risk in case the portfolio companies default on repayment of their loan/debt,” the Sebi order stated.

Interestingly, the order stated that the fund acted as a promoter or majority shareholder in the portfolio companies, and therefore engaged in indirect borrowing through this arrangement.

AIF-I Fund is prohibited from borrowing directly or indirectly.

“In pursuance of its declared portfolio strategy/ investment mandate, the Noticee No.1 acquired meaningful stake in portfolio companies and thus acted as the promoter/majority shareholder of such companies. The Noticee No.1 pledged securities held by it in portfolio companies for loans availed of by the portfolio companies. In my view, pledging of securities of companies by an AIF, holding meaningful stakes in such companies, for loans availed of by such companies fall within meaning of indirect borrowing,” the Sebi order stated.