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SEBI’s Update on Dissolution Period for AIF Schemes

Update

(Ishaan Saraswat, General Editor at IELR)


Under the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations), the terms “liquidation” and “dissolution” refer to distinct processes for winding down a scheme of an Alternative Investment Fund (AIF).

 

Liquidation is the process where a scheme sells off its assets to settle liabilities and distribute any remaining proceeds to investors. This occurs during the liquidation period, which is typically defined in the scheme’s private placement memorandum. If the scheme is unable to liquidate all its investments within this period, it may apply for an additional liquidation period, subject to SEBI’s approval.

 

Dissolution on the other hand, is a subsequent process that kicks in if the scheme still holds unliquidated investments after the liquidation period ends. Instead of being forced to sell these assets at potentially unfavourable prices, the scheme can enter a dissolution period, allowing it to manage these remaining investments more flexibly. During this time, the scheme can continue to hold and manage unliquidated investments, with the option to distribute these assets in-specie to investors if they remain unsold.

 

The concepts of liquidation and dissolution apply to individual schemes within an AIF, not the entire AIF itself. An AIF can have multiple schemes under its umbrella, each with its own lifecycle. The dissolution of one scheme does not impact the operations of other schemes within the same AIF. This allows the AIF to continue operating and even launching new schemes while winding down specific ones.

 

Necessity of a Dissolution Period

 

The introduction of a dissolution period by the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2024, dated April 24, 2024, addresses scenarios where certain investments within a scheme cannot be liquidated due to market conditions. For example, selling certain assets might not be feasible without incurring significant losses due to a lack of market liquidity. The dissolution period provides the flexibility to manage these unliquidated investments more effectively.

 

This period allows the scheme to wait for better market conditions, potentially maximizing returns for investors rather than forcing a sale at unfavourable prices. Additionally, it ensures that the winding-down process is conducted in an orderly manner, meeting all regulatory requirements while protecting the interests of investors.

 

Overview of SEBI’s Circular Dated July 9, 2024

 

On July 9, 2024, SEBI issued a circular providing detailed guidelines on the procedural requirements for schemes of AIFs entering into a dissolution period, as per regulation 29B(2) of the AIF Regulations.

 

The circular outlines specific procedural requirements for AIFs entering a dissolution period. A key provision mandates that any scheme entering this period must submit an information memorandum to SEBI through a merchant banker. This submission is required to be made before the expiration of the scheme’s liquidation period or any additional liquidation period that may have been granted. SEBI has provided a detailed format for this information memorandum in Annexure I of the circular, ensuring that all necessary details about the scheme and its unliquidated assets are disclosed, thereby facilitating regulatory oversight. Additionally, the information memorandum must be accompanied by a due diligence certificate from a merchant banker, as per the format provided in Annexure II. This certificate serves as a verification that thorough due diligence has been conducted in preparing the information memorandum, ensuring compliance and protecting investor interests.

 

This circular is a significant step in enhancing the governance and transparency of the dissolution process for AIF schemes. By ensuring that schemes follow a structured process when entering a dissolution period, SEBI aims to protect investors and maintain market stability.

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© 2024 by Indian Economic Law Review.

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