Sebi mulls easing exit norms for AIFs, allows fund retention beyond scheme life

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• Sebi suggests AIFs keep limited funds post-scheme for expenses.
• AIFs may seek 'inoperative' status if no funds are retained after fund life ends
• Public comments on Sebi's proposals are invited until February 26

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Markets regulator Sebi on Thursday proposed allowing alternative investment funds (AIF) to retain limited funds beyond scheme life to ease the winding-up process and facilitate surrender of registration.

In its consultation paper, Sebi also suggested that AIFs which do not retain any funds after the expiry of their fund life may be permitted to seek an 'inoperative' status, subject to compliance with prescribed norms.

"These proposals are premised on the principle that while entry into the securities market is subject to specified eligibility criteria, the regulatory framework for exit, where an entity seeks to discontinue its activities, should be clear, predictable and operationally efficient," Sebi said in its consultation paper.

The regulator noted that AIFs often need to retain some money to meet residual operational expenses such as consultant and retainership fees, legal costs, registrar and transfer agent (RTA) payments, and filing of PPM audit reports.

Industry participants have pointed out that such retained amounts are typically small relative to the overall fund size. Moreover, as many expenses crystallise towards the end of the financial year or during the surrender process, it becomes difficult for AIFs to achieve a nil bank balance by the end of the permissible fund life.

Currently, surrender of registration is allowed only after all liabilities are discharged. As a result, such AIFs are required to continue complying with all regulatory requirements despite having no active fund management activity.

To address this, Sebi has proposed "AIF schemes may be permitted to retain liquidation proceeds beyond the permissible fund life for meeting operational expenses".

Such expenses would need to be substantiated through invoices or supporting documents, or be consistent with expenses incurred in the previous year, it added.

The regulator said that the intent is to allow retention of funds only to keep the fund operational for limited purposes.

Sebi said that AIFs would be required to demonstrate the necessity of retaining funds, including the proposed duration, which should not exceed three years.

Separately, Sebi observed that in some cases, AIFs may not retain any funds beyond the permissible fund life and may have no active investment activity, but continue to exist due to the possibility of future inflows arising from favourable litigation outcomes or tax-related matters.

In such cases, the fund remains subject to full regulatory compliance despite operating only for contingent reasons.

Accordingly, Sebi has proposed extending the option of being classified as 'inoperative funds' to such AIFs, with proportionate regulatory compliance. This would include obtaining consent from at least 75 per cent of investors by value in cases where potential liabilities may arise due to litigation or tax demands.

The Securities and Exchange Board of India (Sebi) has sought public comments till February 26 on the proposals.