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SEBI bars AIFs working on priority distribution model from making fresh investments

The new rule will come into force with immediate effect, the regulator said.

November 23, 2022 / 08:36 PM IST
Representative image (Source: ShutterStock)

Representative image (Source: ShutterStock)

The Securities and Exchange Board of India (SEBI) on November 23 barred Alternative Investment Funds (AIF) schemes having priority distribution model from making investments in a new investee company.

The capital market regulator has stopped such investments till it takes a view on this, a release said.

The new rule will come into force with immediate effect, the regulator said.

The circular is issued in exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, Sebi said.

Explaining the logic, the regulator said  it has observed  that certain schemes of AIFs have adopted a distribution waterfall in such a way that one class of investors share loss more than pro rata to their holding in the AIF than other classes of investors or unit holders,  since the later has priority in distribution over former.

As per SEBI's clause, the sharing of loss by the sponsor or manager shall not be less than pro rata to their holding in the AIF than other unit holders.

AIF is a privately pooled investment vehicle, which collects funds from investors, for investing it in accordance with a defined investment policy for the benefit of its investors.
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