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Markets regulator Sebi has proposed allowing alternative investment funds (AIFs) to retain limited funds beyond the expiry of their scheme life to ease the winding-up process and enable smoother surrender of registration. In a consultation paper released earlier this week, the regulator said the move aims to make the exit framework for AIFs more predictable and operationally efficient. Sebi noted that AIFs often need to retain small amounts to meet residual operational expenses such as legal fees, audit costs and regulatory filings, which makes achieving a nil bank balance within the permissible fund life difficult. Separately, Sebi has proposed permitting certain AIFs with no active investments to seek an inoperative status, with proportionate compliance requirements. Public comments on the proposals have been invited until February 26.
The Securities and Exchange Board of India (Sebi) has proposed a set of regulatory changes aimed at simplifying the exit process for alternative investment funds (AIFs), including permitting limited retention of funds beyond the expiry of a scheme's life and introducing an inoperative fund status for eligible cases. Advertisement
In its consultation paper issued on Thursday, Sebi stated that while entry into the securities market is governed by strict eligibility norms, the framework for exit should be clear, predictable and operationally efficient for entities seeking to discontinue their activities. The regulator observed that AIFs often face practical challenges in winding up operations within the prescribed fund life.
According to Sebi, AIFs typically need to retain small amounts of money after the end of their fund tenure to meet residual operational expenses. These include consultant and retainership fees, legal costs, payments to registrars and transfer agents, and expenses related to filing private placement memorandum audit reports. Industry participants have highlighted that such retained amounts are usually insignificant compared to the overall fund size but are unavoidable, as many expenses crystallise towards the end of the financial year or during the registration surrender process.
At present, AIFs are permitted to surrender their registration only after all liabilities have been discharged. This requirement often forces funds with no active investment activity to continue complying with full regulatory obligations solely because a small balance remains in their accounts. To address this, Sebi has proposed allowing AIF schemes to retain liquidation proceeds beyond the permissible fund life specifically for meeting operational expenses.
The regulator clarified that such expenses would need to be supported by invoices or relevant documentation, or be consistent with costs incurred in the previous year. The intent, Sebi said, is to permit retention of funds only to keep the fund operational for limited purposes. AIFs would be required to justify the need for retaining funds, including the proposed duration, which should not exceed three years.
Separately, Sebi noted that some AIFs may not retain any funds or have active investments after the end of their scheme life but continue to exist due to potential future inflows arising from litigation outcomes or tax-related matters. In such cases, Sebi has proposed extending the option of being classified as inoperative funds, subject to proportionate regulatory compliance. This would require consent from at least 75% of investors by value where potential liabilities may arise.
Source - PTI
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