Sebi releases framework for AIF-I and II to raise debt by pledging equity of investee companies

Category I and Category II AIFs may create encumbrance on equity of investee company, which is in the business of development, operation or management of projects in any of the infrastructure sub-sectors given in the Harmonised Master List of Infrastructure, said the circular

The market regulator has issued the framework for category I and category II alternative investment funds (AIFs) in the infrastructure sector to raise debt by pledging the equity of their investee companies.

The Board of the regulator had given the go-ahead for this after their March 15 meeting.

The Securities and Exchange Board of India (Sebi) amended the AIF Regulations and notified it on April 25.

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The release said, "Category I and Category II AIFs may create encumbrance on equity of investee company, which is 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 issued by the Central Government, only for the purpose of borrowing by such investee company and subject to such conditions as may be specified by the Board from time to time."

The circular said that existing schemes of such AIFs who have not on-boarded any investors prior to April 25, 2024, can create such encumbrances provided there is explicit disclosure on it in their Private Placement Memorandums (PPMs).

Any encumbrances already created by a scheme before April 25, 2024, can continue if such encumbrances were created after making an explicit disclosure in the PPM of the scheme.

If such explicit disclosures were not given, then the AIFs can retain such encumbrances if they were created for the specified reasons and if consent fo all investors in the scheme is obtained latest by October 24, 2024. If such consent is not obtained, then encumbrances have to be removed latest by January 24, 2025.

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If the encumbrances that were not disclosed in the PPM were not for the specified purposes, then they have to be removed by October 24, 2024.

The industry forum for AIFs, called Standard Setting Forum for AIFs (SFA), has been tasked with formulating standards to ensure that equity of investee companies is only pledged for reasons specified. The forum will do this in consultation with the regulator. The standard will then be made available on the websites of industry associations that are part of SFA.