SEBI issues a notification introducing the 'Securities and Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulations, 2023'.

The Securities and Exchange Board of India (SEBI) issued a notification on June 15, 2023, vide notification no. SEBI/LAD-NRO/GN/2023/132 (Notification). This Notification introduced the SEBI (Alternative Investment Funds) (Second Amendment) Regulation, 2023 (Amendment Regulation), which brings forth substantial modifications to the current framework under the SEBI (Alternative Investment Fund) Regulation 2012 (SEBI Regulation). These include revisions to the norms pertaining to addition of a new category of Alternative Investment Funds (AIFs), the introduction of the requirement for issuing units in dematerialized (demat) form, the mandatory appointment of a compliance officer, and valuation.

Overview of the Notification

Addition of a new category of AIF called Specified Alternative Investment Fund.

The addition of the new category of AIF i.e., Specified Alternative Investment Fund expands the existing three categories of AIFs, namely Category I AIF, Category II AIF, and Category III AIF, as outlined in Regulation 3(4) of the SEBI Regulation. The introduction of the Specified AIF category provides further diversification and opportunities for investment within the alternative investment landscape, subject to the criteria and guidelines set by SEBI.

Introduction of 'Corporate Debt Market Development Fund' (CDMF)

CDMDF is an AIF specifically established to make investments in accordance with the provisions outlined in Chapter III-C of the SEBI Regulation. The amendments with regards to CDMDF have been detailed below:

  • Registration of CDMDF: The CDMDF shall be structured as a trust, and its establishment requires the execution of a registered deed in accordance with the provisions of the Indian Registration Act of 1908. The CDMDF shall operate as a close-ended fund, meaning that it has a predetermined duration of 15 years from the date of its initial closing. The CDMDF are made available for investment to Asset Management Companies (AMCs) and specified debt-oriented schemes of mutual funds.
  • Eligibility criteria: For purchase of CDMDF during market dislocation the eligibility criteria are outlined as follows:
  • The corporate debt securities must undergo listing and hold an investment-grade rating.
  • The maturity period for these securities in residential terms should not exceed 5 years from the purchase date.
  • Securities that possess no potential for default or negative credit-related information or opinions.
  • Disclosure Norms: The portfolio of the CDMDF will be made available to the unitholders on a fortnightly basis. Additionally, the net asset value (NAV) of the CDMDF will be disclosed to the unitholders on a daily basis. These regular disclosures ensure transparency and provide timely information to the unitholders regarding the fund's holdings and NAV.
  • Compliance with governance mechanism: The CDMDF will select and appoint a trustee company. The appointment of both the board of directors of the trustee company and the manager of the CDMDF necessitates prior approval from SEBI.

The trustee company is authorized to engage solely in activities where it acts as the trustee of the CDMDF, unless prior written consent is obtained from SEBI. In terms of composition, two-thirds of the members on the board of the trustee company must be independent directors who do not have any affiliation with the sponsor or manager.

The appointment of any individual as a director of the trustee company is subject to the prior approval of SEBI. Furthermore, an audit committee must be established within the trustee company to oversee and assess compliance with the provisions outlined in the placement memorandum.

Issuance of units in dematerialized form by AIFs.

This amendment inserted a new clause into Regulation 10 of SEBI Regulation, mandating every AIF to issue units in dematerialized form, subject to conditions specified by the Board. The objective behind this amendment is multi-fold:

  • Enhanced monitoring and transparency.
  • Mitigation of operational and fraud risks.
  • Ease of transfer and transmission.
  • Administrative efficiency.

Appointment of Compliance Officer.

In accordance with the Amendment Regulation, each AIF is mandated to appoint a compliance officer who holds the responsibility of overseeing adherence to the provisions of the act, rules, regulations, notifications, circulars, guidelines, and any other directives issued by SEBI. The compliance officer must fulfill the eligibility criteria specified by SEBI.

Modification in valuation procedure.

In accordance with the Amendment Regulation, the manager of an AIF bears the responsibility of ensuring that the AIF appoints an independent valuer who meets the criteria specified by the SEBI on a periodic basis.

Conclusion

The Amendment Regulations have introduced significant revisions to the SEBI Regulations. These changes provide enhanced flexibility in addressing the challenges posed by illiquid investments during the liquidation or winding-up process. The amendments are aimed at improving regulatory efficiency by aligning them with market conditions and rectifying any inconsistencies. Additionally, the amendment pertaining to the CDMDF will play a pivotal role in boosting confidence in the corporate bond market and fostering greater investor participation.

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