Introduction
The Securities and Exchange Board of India ("SEBI") has issued an interpretative letter in response to certain queries raised by a fund registered as a Category II Alternative Investment Fund1 ("Cat II AIFs"). SEBI's responses to the querist AIF are relevant to operational aspects of domestic private equity funds, credit funds, special opportunities funds, sector agnostic funds, etc. which are typically registered as Cat II AIFs under the SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations").
Please note while the interpretative letter may be considered to be reflecting SEBI's viewpoint on the issues raised, the views communicated thereunder do not bind SEBI in any manner.
Key Takeaways
Query: Whether the Cat II AIFs can invest in a limited liability partnership ("LLP") by way of capital contribution?
SEBI clarified that Cat II AIFs are permitted to invest primarily in unlisted 'investee companies', which specifically includes LLPs.
Query: Whether the Cat II AIF can invest in debt securities?
SEBI clarified that a Cat II AIF can invest in debt securities in addition to equity and equity instruments of investee companies.
Query: Whether for the purpose of computing the limit of investment in a single investee company i.e. 25% of the 'investible funds', a Cat II AIF should consider 25% of total commitment (less estimated expenses) or 25% of the total amount drawn down?
SEBI clarified that for the purpose of computing the threshold on diversification, the manger should consider 25% of the investible funds i.e. total commitment of the fund net of estimated expenditure for administration and management.
Query: Whether the fund can borrow from its manager while being in compliance with the restrictions enshrined under the AIF Regulations on borrowings by Cat II AIFs?
SEBI clarified that the provisions of AIF Regulations are silent on the entities from which an AIF can borrow. Hence, there is no express bar on a Cat II AIF to borrow funds from its manager.
However, SEBI clarified that at all times; the AIF's manager must comply with its fiduciary obligations towards its investors. Any borrowing by the AIF from its manager must comply with the provisions of the AIF Regulations including conflicts of interest.
Query: Whether there is an upper/maximum limit for investment made by the Manager or Sponsor in the AIF.
As per the AIF Regulations, the manager or sponsor of a Category II AIF is required to have a minimum continuing interest in the AIF of not less than 2.5% of the fund's corpus or INR 5 crores, whichever is lower.
SEBI clarified that the AIF Regulations only prescribe a minimum continuing interest to be maintained by sponsor/manager as investment in the AIF. Since, the AIF Regulations do not provide for an upper limit on an investment by the manager or the sponsors, such investments can exceed the minimum continuing interest threshold prescribed under the AIF Regulations.
Footnotes
1 The queries were raised by Blacksoil Fund which is registered with SEBI as a Category II Alternative Investment Fund ("AIF") pursuant to the SEBI (Alternative Investment Regulations), 2012 ("AIF Regulations"). Blacksoil Realty Investment Advisors LLP acts as the investment manager of the Blacksoil Fund.
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