Termination and Liquidation of Alternative Investment Funds (AIF)

The year 2020 has gone for good as it affected many businesses including alternative investment funds which leaves investors in dismay amidst widespread job loss and business shutdowns.

These markets faced serious concerns around the life of funds centered around-

  • Early Termination
  • Liquidation and
  • Extension of the Funds

In this blog we will discuss Alternative Investment Fund and primarily we will discuss category I and II in this blog, as in India these both funds are close ended funds registered under SEBI.

Different Types of Alternative Investment Funds

  1. AIf Category I- This category has a positive effect on the financial system. The AIf programme includes funds that make advances to sectors that have significant economic and social viability and includes Venture Capital Funds, SME Funds, Social Venture Capital Funds and infrastructure Funds.
  2. AIF Category II- This category of funds used to meet day to day expenses that are permitted by SEBI. This category also includes AIF debt funds. Based on the state objectives of the fund, investments are done primarily by listed/unlisted investee corporates in this fund. 
  3. AIF Category III- This AIF program comprises of all those funds that are likely to result in negative externalities involving complicated strategies in trading and degenerative systematic risk involved in leveraging and includes –
  1. Hedge Funds
  2. Private Investment in Public Equity (PIPe) funds

Salient features of AIF

Following are the salient features of AIF-

  1. Category I and II are given for a term of 3 years and can be extended for 2 more years with the approval of at least two third of investors by value. Category III on the other hand has the option of being open ended or close ended.
  2. SEBI mandates the filing of information memorandum for stipulated fees. 
  3. AIF under category I and II may be listed on stock exchange provided the tradable lot comprise a minimum amount of INR 1 Cr. However, stock exchange programmes cannot be opted by any AIF to raise funds.
  4. The permitted upper limit of investible funds for any investee company is 25% for any AIF programmes/schemes.
  5. As per SEBI, all AIFs are required to have qualified Institutional Buyer status.
  6. Proper guidelines are available in AIF regulations in order to avoid any conflict in future.
  7. On an annual basis all AIFs are required to provide the investors with the composite financial details around portfolio company and material risk involved along with the strategies used to manage them.
  8. As per guidelines SEBI reserves the right of investigation and/or inspection of the AIFs and also issues further necessary guidelines as required.

Termination of Alternative Investment Funds

AIFs generally expire when the fixed term of the fund as documented in the fund papers expires.

However there is always a prior termination of AIFs as mentioned in the clause of the agreement. AIF regulations also talks about early termination of AIFs.

It is obvious that both the investors and fund managers are aligned and focus all strategies and efforts towards the continuation of the fund till its original expiry date; more so investments in funds with longer tenure are designed to reap returns over a designated time period.

The principal objective being the maximisation of the value of the portfolio by aligning with the time available based on the tenure of the fund. For this asset class, the planned ‘orderly exit’ helps the fund to optimize the risk and return opportunities.

For AIF Category I, there is a distinct difference between liquidation and termination (winding up) of the fund. Liquidation should ideally happen within 12 months of termination of the fund. Understanding the difference becomes important in drawing giveback provisions for investors.

Leave a Reply

Your email address will not be published. Required fields are marked *