SEBI pitches for creation of liquidation schemes for assets of Alternative Investment Funds

The Securities and Exchange Board of India (Sebi) on Wednesday released circular on creating liquidation schemes for unliquidated assets of Alternative Investment Funds (AIFs). It further provided clarity on requisite investor consents, valuation norms for residuary assets and the process of writing off of residuary investments as a last resort where requisite investor consent is not availabile.

According to the market regulator, the manager and the key management personnel of manager will ensure that the independent valuer computes and carries out valuation of the investments of the scheme of the AIF in the manner as specified by the board from time to time.

"Manager shall be responsible for true and fair valuation of the investments of the scheme of the AIF. In terms of proviso to aforesaid regulation, in case the established policies and procedures of valuation do not result in fair and appropriate valuation, the manager shall deviate from the established policies and procedures in order to value the assets or securities at a fair value and document the rationale for such deviation," Sebi said.

In this regard, the market regulator specified the following:

At each asset level, in case there is a deviation of more than 20 percent between two consecutive valuations or a deviation of more than 33 percent in a financial year, the manager shall inform the investors the reasons/factors for the same, both generic and specific, including but not limited to changes in accounting practices/policies, assumptions/projections, valuation methodology and approach, etc. and reasons thereof.

Any change in the methodology and approach for valuation of investments of scheme of AIF, shall be construed as material change significantly influencing the decision of the investor to continue to be invested in the scheme of the AIF and the AIF shall adhere to process to be complied with in such cases as mentioned.

The manager shall disclose the following as part of changes in PPM to be submitted annually to SEBI and investors: details of changes in the valuation methodology and approach, if any, for valuation of each asset class of the scheme of the AIF; details of changes in accounting practices/policies, if any, of the investee company and the scheme of the AIF; and details of impact of the aforesaid changes in terms of valuation of the investments of the scheme of the AIF.

According to Vivaik Sharma, Partner at Cyril Amarchand Mangaldas, SEBI's circular has provided clarity on the mechanism of selling assets to the liquidation scheme and issuing units of liquidation scheme to AIF's investors, including for investors of a fund of fund structure.

"Tax and exchange control considerations would apply in addition to the regulatory clarity provided by SEBI. However, there is lack of clarity in whether AIFs which have already exhausted their liquidation period of 1 year after the end of their tenure will be able to benefit from the circular or not," Sharma said.