New Delhi, Feb. 6 -- The Securities and Exchange Board of India (SEBI) has proposed easing winding-up norms for alternative investment funds (AIFs), including allowing them to retain money to meet litigation and operational expenses, and laying out a framework to deal with "inoperative" funds awaiting litigation outcomes.

In a consultation paper issued on February 5, the market regulator said that just as eligibility criteria for entry into the market have been specified, the framework for exit "should be clear, predictable and operationally efficient".

Accordingly, SEBI has proposed allowing funds to retain money beyond their stated life to meet litigation expenses, provided there is documentary proof such as a demand notice from tax authorities or any other regulatory body, and consent from 75% of investors.

VCCircle had reported last July that, following the regulatory mandate for venture capital funds to transition to AIFs, several funds were looking for novel solutions to resolve pending liabilities. The latest consultation paper is expected to offer relief to such funds.

According to the paper, any money retained for this purpose would need to be invested in liquid assets such as liquid mutual funds, bank deposits, or other high-quality liquid assets, including treasury bills, triparty repos, commercial papers, and certificates of deposit until the funds are deployed for the stated objective or distributed to investors.

The regulator also pointed to funds that are not actively managing money or retaining capital, but are expecting inflows from litigation resolution. SEBI has proposed such funds be tagged "inoperative" and any money held by them be invested in liquid assets. They may apply for surrender of registration after meeting all liabilities and maintaining a nil bank balance.

Operational expenses

SEBI has suggested allowing funds to retain money beyond their life to meet operational expenses, subject to supporting documents or where such expenses are similar to those incurred in the previous year. "The regulatory intent is that the operational expenses are only to keep the fund alive and AIFs should demonstrate that the retention of funds is for the same," the paper said.

However, funds would need to justify the duration for which such money is retained, and the extension cannot exceed three years.

Published by HT Digital Content Services with permission from VC Circle.