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SEBI restricts alternative investment funds scheme with priority distribution model from making investment in new investee firm

The Securities and Exchanges Board of India (SEBI) on Wednesday said schemes of alternative investment funds (AIFs), which have adopted priority in distribution among investors model, will not accept any fresh commitment or make an investment in a new investee company till the markets regulator takes a decision in this regard.

Under the rules, with respect to investment by the sponsor or manager in the AIF, the sharing of loss by the sponsor or manager would not be less than pro rata to their holding in the AIF vis-a-vis other unit holders.

“…It has not been explicitly restricted in AIF Regulations that the sharing of loss by a class of investors shall not be less than pro rata to their holding in the AIF vis-a-vis other classes of investors/unit holders,” Sebi said in a circular.

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The regulator noted that certain schemes of AIFs have adopted a distribution waterfall in such a way that one class of investors (other than the sponsor or manager) share loss more than pro rata to their holding in the AIF vis-a-vis other classes of investors since the later has priority in distribution over former. This method is called the priority distribution model.

This matter is being examined by the Securities and Exchange Board of India (Sebi) in consultation with the Alternative Investment Policy Advisory Committee, AIF industry associations and other stakeholders.

“Meanwhile, it has been decided that schemes of AIFs which have adopted aforesaid priority distribution model, shall not accept any fresh commitment or make an investment in a new investee company, till a view is taken by Sebi in this regard,” the regulator noted.

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The directive would come into force with immediate effect.

An alternative Investment Fund (AIF) is a privately pooled investment vehicle, which collects funds from investors, for investing in accordance with a defined investment policy for the benefit of its investors.

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