The Securities and Exchange Board of India (SEBI) released a paper proposing to revise the regulations around alternative investment funds (AIF), aiming to enhance the “ease of doing business” for category II AIFs.
Category II AIFs refers to funds that “do not undertake leverage or borrowing other than to meet day-to-day operational requirements”, and also do not fall into any of the other two types of AIFs.
The consultation paper comes after AIF associations contacted the SEBI about challenges they were about to face due to a change in the regulation regarding listing and disclosure requirements.
The AIF associations said that a in the listing obligations regulations would adversely impact the availability of unlisted securities, making it challenging for AIFs to adhere to the regulation. In addition to this, certain aspects of debt securities were completely beyond the control of AIFs and may be considered onerous compliance.
The SEBI acknowledged these issues, pointing out that a shrinking universe is contingent on investee company preferences for listing debt securities. This is because the decrease in investment opportunities and windows for category II AIFs with respect to debt securities would be dependent on uncontrollable factors of other companies. It also noted that the new listing rules could make it challenging for these funds to maintain their mandated investment allocation.
The SEBI has thus proposed allowing category II AIFs to invest more than 50% of their investible funds in a combination of unlisted securities and listed debt securities with a credit rating of ‘A’ or below.
The SEBI also proposes that investments in listed debt securities by category II AIFs be guided by credit ratings. This approach aims to ensure that AIFs continue to bear appropriate credit risk within the ecosystem.
The aim is to strike a balance between providing greater investment flexibility for AIFs and safeguarding market stability, ensuring the continued growth and development of the alternative investment sector in India.
