SEBI to ease exit norms for PE/VC funds with illiquid assets in AIFs
August 25, 2023
There are over 100 such funds with assets worth ₹15,000-20,000 cr
The Securities and Exchange Board of India is considering giving relaxations to alternative investment funds that have not wound down or liquidated their assets for many years.
There are over 100 such private equity and venture capital funds, with total assets in the vicinity of ₹15,000-20,000 crore, according to industry estimates. Some of these include real estate, infrastructure and buyout funds, and could be older than 15 years.
SEBI recently allowed the transfer of unliquidated investments to a new liquidation scheme. The option is, however, available only to funds that are within their liquidation period and do not extend to VC funds.
Such funds may now be allowed to avail of the liquidation scheme on a case-to-case basis, said people in the know.
In instances where there are legal impediments such as IBC proceedings, SEBI may give a relaxation to the fund to shift to the liquidation scheme without the need for approval from unit holders. In such cases, in-specie distribution is not possible as the fund has to wait for the conclusion of the legal process.
“Funds that have breached the liquidation period have approached SEBI for clarification regarding the liquidation scheme as in-specie distribution has never been the preferred option by investors and fund managers,” said Yashesh Ashar, partner, Illume Advisory.
He added that there are situations where it’s not practically feasible for fund managers to undertake in-specie distributions due to situations such as lawsuits, insolvency process and disputes with promoters at the portfolio company level.
“SEBI has been considering these applications on a case-to-case basis,” Ashar said.
Several funds have gone past the fund timeline, and the regulator is mandating these funds to wind down, said experts.
According to Ashish Fafadia, partner at Blume Ventures, the regulator is working with various stakeholders and trying to ensure that they come up with factors which permit funds to get approval from their investors and create part liquidity.
“The industry has raised thousands of crores in assets but has faced a challenge when it comes to exits. If the funds do not monetise the assets and return the money to the LPs, the system will face a huge challenge,” said Fafadia.
Market watchers believe that the liquidation scheme has several limitations, and the regulator is trying to sort out the same.
For instance, the income tax laws do not provide for any specific exemption from transition of assets to the liquidation scheme. Such a transition entails a swap, which would result in a taxable transfer depending on the fair value of the assets transferred. In-specie distribution of foreign assets to entities which may not be able to hold foreign assets directly or require regulatory approval prior to acquisition may pose another challenge.
“Clarity will take time as changes to other regulations may be required to operationalise the liquidation scheme construct. SEBI has been extremely receptive to market feedback on this,” said Siddarth Pai, founding partner, 3one4 Capital.
An email sent to SEBI did not get an immediate response.
In the past year, SEBI has passed orders in the case of Urban Infrastructure Venture Capital Fund and the Vistra Religare Media Fund, emphasising that VC funds have a defined lifespan and must be wound up upon expiry of their tenure.
Funds typically struggle to liquidate assets because of adverse market conditions and legal obstacles.
[The Hindu Business Line]
