SEBI proposes allowing Cat II AIFs to invest in listed debt with credit rating 'A' or below

SEBI's analysis found that out of the 330 Cat II AIF schemes that have investment in debt securities, 192 scemes have invested more than 50 percent of their investment in unlisted debt

The market regulator has proposed that Category II Alternative Investment Fund (AIF) be allowed to invest in listed debt having credit rating 'A' or below.

In a consultation paper released on February 7, the Securities and Exchange Board of India (SEBI) said that this proposal became necessary following the recently introduced Regulation 62A of SEBI (LODR) Regulations, 2015. Public comments and suggestions need to be sent in by February 28.

The impact of the LODR Amendments, according to AIF industry associations, are as under:
1.A listed entity, having outstanding listed debt securities, will only be able to issue listed debt securities from January 01, 2024 onwards.2.Any outstanding unlisted debt security, issued pursuant to January 01, 2024, may require to be listed in terms of Regulation 62A (3) of SEBI (LODR) Regulations, 2015, if the issuer lists any of the debt security on stock exchange(s) in future subsequent to issue of such unlisted debt security.

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Therefore, the universe of investment opportunities in unlisted debt securities may possibly shrink in future for AIFs for making fresh investments. Category II AIFs are required to invest more than 50 percent of their investible fund in unlisted securities.

SEBI's analysis found that out of the 330 Cat II AIF schemes that have investment in debt securities, 192 scemes have invested more than 50 percent of their investment in unlisted debt. Therefore, the regulator concluded that investment of such debt fund schemes may be impacted due to a possible shrinking of universe of investment opportunities in unlisted debt securities due to compliance with the LODR amengments.

Given this and other considerations, the regulator has made the current suggestion.