SEBI seeks information from AIFs on ‘Closure'; an industry-wide rule awaits

5 Dec 2022 , 10:50 AM

In the midst of inspections, complaints, and questions about performance and compliance, the capital market regulator asked all alternative investment funds (AIFs) on Friday to explain whether the various schemes run by them have reached ‘final closure’– if not, why – and the schemes’ end date.

Private equity venture capital, debt, and infrastructure funds, cannot accept new capital after the ‘final closing,’ while a fund is required to exit its investments by the ‘end date.’

Professionals believe that the Securities and Exchange Board of India’s (Sebi) data collection could be a precursor to an industry-wide rule.

After receiving a minimum commitment of Rs20 crore from investors, a fund achieves its “first close” roughly within a year of its registration. The final close is usually completed within two years of the first close.

However, these are commercial deadlines rather than legally binding regulations that can be pushed back in order to delay closing in anticipation of more inflows and extend a fund’s life, possibly indefinitely, in order to grab more profitable opportunities to cash out.

Several AIFs have pleaded Sebi to allow extensions beyond the regulatory acceptable period, but many in the industry believe that the regulator will not grant a case-by-case exemption.

Numerous fund managers keep delaying exits and closures due to a challenging market, litigations, portfolio company non-performance, a drop in property prices, or delays in TPOs by investee companies, particularly start-ups.

Funds Managers claim that their legal obligation is to keep funds alive in order to fish for better deals.

Reports suggested that Sebi’s stance in the Urban Infra AIF order was a strong indication that the life of a fund Carl could no longer be extended indefinitely to avert a fire sale of assets and securities.

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