SEBI on November 8 issued a draft circular on the rights of investors in Alternative Investment Funds (AIFs) in proportion to their investments. The market regulator has said that in case of distribution of investment proceeds in a closed-ended AIF scheme, the investor’s rights should be based on his total commitment or undrawn commitment.
This draft circular states, “AIF Investors in the Scheme will have the right to distribution of proceeds on a pro-rata basis based on their contribution to such investment. or on a time weighted pro-rata basis, pro-rata to his contribution to such investment, as will be disclosed upfront to the investors in the PPM of the Scheme.”
The regulator has said that the scheme will have to clearly state upfront how the pro-rata rights are calculated and this method cannot be changed during the tenure. Investors who do not participate in a particular investment will not have unused commitments elsewhere. This method will prevent an investor from taking excessive stake in an investee company beyond the prescribed concentration limit.
The existing AIF scheme will be able to continue with its existing method if it is compliant. But, those using a different method will have to follow the new guidelines for future investments. Open-ended Category III AIFs where investors can enter and exit freely do not have to apply for pro-rata drawdown. But, the proceeds will have to be distributed in proportion to the units held by him.
However, if such schemes invest in unlisted securities, they will have to follow the same rules as closed-ended schemes. In investments made before December 13, 2024, distributors will have to follow the conditions which they will have informed the investors about earlier. It has also been clarified in this circular that profits like carried interest shared by investors with fund managers will be outside the scope of pro-rata requirement.