The final guidelines by the Securities and Exchange Board of India (Sebi) will ensure that the “excuse” and “exclude” provisions coexist with the pro-rata distribution mandate for alternative investment funds (AIFs), sources said.
The mandate, which is aimed at ensuring that benefits are distributed in proportion to the commitments made by an investor in the AIF scheme, had triggered concerns about the applicability of these provisions.
Click here to connect with us on WhatsApp
While the “excuse” provision allows an investor to opt out of a deal, “exclude” enables the fund to prevent an investor from participating in a particular investment opportunity if that leads to violation of applicable laws.
AIFs are pooled investment vehicles for affluent investors with high entry barriers. These investments are drawn and deployed in tranches based on the investment opportunity. Hence, the committed amount is not drawn at one go.
“The excuse and exclude provisions will co-exist with pro-rata. Exemption will be provided in both excused and defaulted investors. This means if the investor did not contribute to an investment, they will not be a part of the distribution,” said a source familiar with the development.
The final notification of these regulations will provide clarity, he said.
Some industry players had earlier suggested that distributions should be based on contributions instead of commitments. They said the final norms are awaited for clarity, particularly regarding the reasoning behind the mandate and tax implications, as tax is calculated based on contributions rather than commitments.
“AIF investors may request to be excused from certain deals of the AIF due to legal or policy reasons. Certain DFIs (Development Finance Institutions) refrain from honouring capital calls towards investments in the business of tobacco or tobacco products, while insurers in India may not honour calls for overseas deals and there may also be situations where Limited Partners (LPs) default on their capital calls,” said Nandini Pathak, partner, Bombay Law Chambers.
Pathak talked about other examples where the ratio of contribution in a deal by LPs differs from the ratio of their commitment in the AIF. “In such situations, AIF managers should have the flexibility to determine the ratio of distributions (which may be different from the ratio of commitments) as long as no LP is worse off,” she said.
The pro-rata distribution mandate was introduced amid concerns about unfair distribution practices.
“Existing AIF schemes that had provided priority in distribution to certain class of investors over others, while continuing with the existing investments, will not be permitted to raise fresh commitments or make investment in a new investee company, directly or indirectly,” said Sebi after its board meeting on September 30.
Sebi’s press release was silent on the treatment of the excuse-exclude provisions.
“Excuse-exclude clauses are usually incorporated in the fund documents itself and there are Sebi norms governing them. Thus, investors usually have visibility upfront on such clauses,” said Saurabh Tiwari, partner, DSK Legal.
The regulator has also provided operational flexibility in cases where entities owned or controlled by the government, state industrial development corporations, or multilateral development financial institutions subscribe to junior classes of AIF units with less than their pro-rata rights in the investments.
First Published: Oct 10 2024 | 6:51 PM IST
