In a bid to unblock AIF exits, SEBI is now permitting funds to keep some of their liquidation proceeds even after the fund’s life is up, and has made room for an Inoperative Fund. These are two ways to get to a clean closure while putting a fence around any open-ended liabilities – something that has been a thorn for managers and investors in the private capital space here in India.
Why the move now
You can trace this circular back to some changes we saw on April 18 meant to make winding up and giving up your registration a bit less of a chore. Too often, you have tax or legal loose ends that put off the final payout and leave a licence on the table longer than it should be.
Under the new framework, SEBI is acknowledging that a liability doesn’t have to be a done deal to be one. The kind of official word that would prompt a fund to retain cash could come from anywhere: the regulator, the taxman, law enforcement, a court, or even an investor or counterparty.
The rules on what to keep and for how long
If an AIF gets wind of a possible tax, regulatory or legal issue, it can put some of the proceeds aside. They can also do so if 75 percent of the investors by value are on board with holding back for a case or a tax bill down the line.
When asking for the green light from investors, managers have to be upfront about the figure and how long they think they’ll need it. There’s also leeway to set aside some for the cost of wrapping things up, provided you have the invoices and past records to show for it.
But if you’re only holding on for those left-over operational costs, you can’t go beyond 3 years from when the fund was supposed to end. The Standard Setting Forum for AIFs is on the job to put some standardisation in the way these expenses are treated.
When the dust has settled and the retained cash has been handed over, the scheme is wound up per the AIF regulations. It’s a way to have a tidy ending without any hard corners cut.
Making a fund inoperative
For AIFs that have done with the liquidation but still have some money in hand or are on the register because of a case in the courts, SEBI has created an Inoperative Fund status. An AIF with a scheme in that position and wanting to hand in its registration can put in an application.
Even if there are no monies being held, but the fund is hanging on for a good result in a lawsuit, it can be made inoperative. Of course, you won’t be able to start a new scheme or put a charge on management fees in that state.
Any money you do have to keep can only be put in what the AIF Regulations allow. On the flip side, Inoperative Funds are off the hook for a number of things: no more quarterly or annual activity reports, compliance tests, performance benchmarking, PPM term audits or some of the usual sign-offs for key personnel.
There is one must-do though. Every year, whether you are an AIF with retained funds or an Inoperative one, you have to file a report with SEBI and your investors on where you stand with the monies and any open liabilities. That has to be in within 30 days of the financial year closing.
What it means for investors
SEBI is walking a line: protect against the what-ifs but don’t let a fund drag on. The investor is in the know on the numbers and the when of it, and the manager has a lane to clear the admin without having to run the whole show.
This also holds for the VC Funds under the 1996 rules. Having that kind of level playing field between the legacy and the new is a way to stave off any arbitrage.
Some of the take-aways for the market:
– We can now retain for potential, not just proven, liabilities
– Get 75 percent of the investors to agree and you have wider scope to hold back
– If it’s for operations, the 3-year clock is ticking
– Inoperative Funds are out of the running for management fees
Looking ahead
Effective right away, AIFs can put retention in motion within the lines drawn and go for Inoperative status if it makes sense. With the Standard Setting Forum’s templates for what counts as an eligible expense, we should see a more even approach and fewer hiccups in closing out across the board.
