AIFs may face borrowing curbs for making investment

AIFs may face borrowing curbs for making investment

The Securities and Exchange Board of India has proposed barring Category I and Category II AIFs from borrowing funds directly or indirectly, or engage in leverage for the purpose of making investments. Category I and II AIFs may borrow for the purpose of meeting shortfall in drawdown only if it is done as a last recourse, and the amount borrowed should not exceed 10% of the investment proposed to be made in the investee company. The cost of such borrowing will be charged only to investors who delayed or defaulted on drawdown payment. Category I and Category II AIFs will maintain 30-day cooling-off period between two periods of permissible leverage.

“Funds borrowed by Category I and II AIFs for investing in unlisted securities may lead to asset-liability mismatch. Further, Category I and II AIFs which invest predominantly in unlisted securities carry high risk of illiquidity. In order to ensure that such AIFs do not indulge in prolonged leverage, it is felt that a cooling-off period may be maintained between two periods of borrowing/leverage,” Sebi said in its consultation paper on Thursday.

“The flexibility of having no upper limit on extension of term of an LVF may result in a close ended fund acquiring the colour of a perpetual fund wherein investments of investors may get locked in for an uncertain period of time. This may also result in delayed disclosure or recognition of true asset quality, liquidity, fund value and fund performance of AIFs and their managers,” Sebi said.

Sebi has proposed that AIFs be mandated to hold the instruments or securities of their investments only in dematerialised form. This requirement will not apply to securities for which dematerialisation is not available.

“To fully realise the objective of ease of monitoring and administration by stakeholders and enhancing transparency, it is necessary that AIFs’ asset side (investments of AIF) is also dematerialised, as has been mandated for AIFs’ liabilities (units of AIF),” Sebi said. As per NSDL, assets under custody of the investments held by AIFs in dematerialised form stand at Rs 2.43 trillion as on March 31, 2023.