30/05/2019 SEBI’s Informal Guidance on Investment Conditions for AIFs – Vinod Kothari Consultants

SEBI’s Informal Guidance on Investment

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 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
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time of nal 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 ve percent of the
corpus in one Investee Company;

Conditions for Category II Alternative Investment

Funds

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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 speci ed 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 quanti ed, 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
clari cation 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 quanti ed
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.

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[1]
http://www.sebi.gov.in/cms/sebi_data/commondocs/Indiarealty-
SEBIletter_p.pdf

[2]
http://www.sebi.gov.in/cms/sebi_data/attachdocs/1337601524196.pdf

– Reported by Nidhi Bothra

[nidhi@vinodkothari.com]

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