SEBI’s Informal Guidance on Investment Conditions AIF

SEBI recently issued an Informal Guidance[1] dated 28th February, 2014 on the investment conditions of SEBI (Alternate Investment Fund) Regulations, 2012[2] (AIF Regulations) in response to the request for interpretation on the subject issued by Motilal Oswal Real Estate Investment Advisors Private Limited (Motilal).

Motilal is currently acting as an investment manager to a Catergory II, alternate investment fund by the name of India Realty Excellence Fund II LLP (Fund).

Interpretation was sought on certain investment restrictions as mentioned in Regulation 15 and 17 of the AIF Regulations as applicable to Cat II Funds. The interpretations requested were on the following —

  1. In terms of regulation 15 (c) of the AIF Regulations whether investment limit of 25% of the investible funds is to be complied with at the time of final close of the Fund or at the time of each investment by the Fund?
  2. In terms of regulation 17 (a) of the AIF Regulations whether the word ‘primarily’ appearing therein should be construed as 75% or 66.67% or 51% of the investible funds of the Fund.
  3. Whether the investment limit of 25% of the investible funds referred to in (a) and the limit on investment amount primarily in unlisted securities referred to in (b) above could be achieved by the Fund at the end of the life cycle of the Fund as in case of VCFs as set out in explanation to regulation 12 of the VCF regulations?
  4. For the purpose of calculation of investible funds of the Fund which amount is to be considered; Motilal’s maximum commitment of Rs. 100 crores or commitment of Rs. 50 crores or 20% of the Fund size without green shoe option that comes to Rs. 60 crores?

For the purpose of ease of reading the provisions they are re-produced below –

General Investment Conditions.

15. (1) Investments by all categories of Alternative Investment Funds shall be subject to the following conditions:-

(c) Category I and II Alternative Investment Funds shall invest not more than twenty five percent of the corpus in one Investee Company;

Conditions for Category II Alternative Investment Funds

17. The following investment conditions shall apply to Category II Alternative Investment Funds:-

(a) Category II Alternative Investment Funds shall invest primarily in unlisted investee companies or in units of other Alternative Investment Funds as may be specified in the placement memorandum;

SEBI responded to the queries stating that —

  1. The limits in Regulation 15 (c) and 17 (a) must be complied with through out the life cycle of the Fund or the scheme.
  2. While the investments to be made in unlisted investee companies is not quantified, SEBI explains that the thrust of investment ought to be unlisted securities as against aggregate of other investments
  3. The investible funds to be computed on the basis of the commitment funds of sponsor inclusive of green shoe option on the date of computation.

Currently under the market practices, the Funds were computing the investment limits at the end of the life cycle of the fund and where exposed to the risk of the threshold limits being breached if the investments did not go as envisaged. SEBI’s clarification though be just be a guidance but surely may make the funds be more cautious in their investment decisions.

With regard to investments by Cat II funds primarily in unlisted securities since SEBI has not quantified the investment threshold, it will be construed to mean that investments in unlisted securities should be higher than other investments.

The informal guidance surely would be helpful for the funds as they would have clarity on the investment restrictions that were open to interpretations and based largely on market practices.