Modalities for Migration of VC Funds

The SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations“) were amended on July 20, 2024, to provide flexibility for Venture Capital Funds (VCFs) previously registered under the SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations“). These amendments enable VCFs to migrate to the AIF Regulations, addressing unliquidated investments upon the expiration of their fund tenure. A “Migrated Venture Capital Fund” is defined in Regulation 19V(1) as a fund that transitions from VCF Regulations to the AIF Regulations as a sub-category under Category I – Alternative Investment Fund.

Registration Process – 

According to Regulation 19X(1), to register as a Migrated Venture Capital Fund, VCFs must submit:

• The original certificate of registration issued under the VCF Regulations.
• Required information in the format specified in Annexure I of the Master Circular.

Migration Conditions –

VCFs wishing to migrate, with schemes whose liquidation period (per Regulation 24(2) of the VCF Regulations) has not yet expired, must adhere to the following conditions:

• Migration is available until July 19, 2025.
• The tenure of schemes will be determined based on the following:
• If a definite tenure was disclosed in the Private Placement Memorandum (PPM), it will continue post-migration.
• If no definite tenure was disclosed, the residual tenure must be approved by 75% of investors by the value of their investments before applying for migration.

Implications of Migration –

Upon migration, all investors, investments, and units related to the VCF will be deemed part of the Migrated VCF under the AIF Regulations. For VCFs opting not to migrate:

• Schemes with unexpired liquidation periods must comply with enhanced regulatory reporting akin to that of AIFs.
• VCFs with at least one scheme whose liquidation period has expired will face regulatory actions for continuing operations beyond the expiration.

Non-Migration Conditions –

VCFs cannot migrate if:

• All their schemes have been wound up; or
• No investments have been made in the schemes that remain.

Such VCFs must submit an application to SEBI to surrender their registration by March 31, 2025. Failure to comply will lead to actions to cancel their certificate of registration.

Amendments to SEBI AIF Regulations: borrowing norms for  CAT – I & II AIFS and tenure extension guidelines for Large Value Funds

The SEBI (AIF) Regulations, 2012 (“AIF Regulations“) were amended and notified on August 6, 2024, introducing changes related to (i) borrowing norms for Category I and Category II AIFs, and (ii) the maximum permissible limit for tenure extensions by Large Value Funds for Accredited Investors (LVFs).

Under Regulation 16(1)(c) and Regulation 17(c) of the AIF Regulations, Category I and II AIFs are prohibited from borrowing funds directly or indirectly or engaging in leverage for investment purposes, except for meeting temporary funding needs or operational requirements. Such borrowing is restricted to a maximum of thirty days, no more than four times a year, and limited to 10% of investable funds, subject to SEBI’s conditions.

To improve business ease and provide operational flexibility, SEBI now allows Category I and II AIFs to borrow funds to cover shortfalls in amounts called from investors (drawdown amounts) when making investments in investee companies, subject to the following conditions:

1. If an AIF plans to borrow to cover a shortfall in drawdown amounts, it must disclose this in the Private Placement Memorandum (PPM) of the scheme.
2. Borrowing is allowed only in emergency situations, as a last resort when an investment opportunity is imminent but the drawdown amount from an investor has not been received, despite the manager’s best efforts.
3. The borrowed amount must not exceed the lesser of: 20% of the proposed investment in the investee company, 10% of the scheme’s investable funds, or the pending drawdown commitment from investors other than the defaulting one(s).
4. The cost of borrowing will be charged solely to the investor(s) who failed to provide the drawdown amount.
5. Borrowing flexibility cannot be used to provide different drawdown timelines to investors.
6. Managers must periodically disclose details of the borrowing, including the amount, terms, and repayment status, to all AIF/scheme investors as per the agreed terms.

Additionally, Category I and II AIFs must observe a cooling-off period of thirty days between borrowing periods, calculated from the repayment date of the previous borrowing. Regarding tenure extensions for LVFs, per the proviso to Regulation 13(5) of the AIF Regulations, an LVF may extend its tenure by up to five years with the approval of two-thirds of the unit holders by value. Extensions for existing LVF schemes must adhere to SEBI’s guidelines, including the following:

1. LVF schemes that have not specified a definite extension period in the PPM, or have disclosed an extension period beyond the permissible five years, must align their tenure within three months (by November 18, 2024). Revised extension periods should be updated in the quarterly report submitted on the SEBI Intermediary Portal (SI Portal) for the quarter ending December 31, 2024.
2. LVF schemes may revise their original tenure with the consent of all investors. An undertaking confirming this consent must be submitted to SEBI by November 18, 2024.

From the issuance date of this circular, the conditions outlined in para 12.14 of the AIF Master Circular regarding LVF tenure extensions will no longer apply. The trustee/sponsor of the AIF must ensure that the Compliance Test Report prepared by the manager, as per Chapter 15 of the AIF Master Circular, includes compliance with the provisions of this circular.

Amendment to Master Circular for Infrastructure Investment Trusts (INVITS) and Real Estate Investment

 To enhance ease of doing business for InvITs and REITs, SEBI established a working group to review and provide recommendations on business facilitation measures (“Working Group”). Among other things, the Working Group addressed provisions related to the review of investor complaint statements and the timeline for disclosing statements of deviation(s).

Based on the recommendations from the Working Group and the Hybrid Securities Advisory Committee (HySAC), it was observed that the requirement for prior review of investor complaint statements by the Manager’s Board of Directors (before submission to stock exchanges) is inconsistent with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). As per the LODR Regulations, such statements do not require prior Board approval; instead, they are to be presented to the Board on a quarterly basis.

To streamline this process, the following amendment is proposed to paragraph 4.16.4 of the Master Circular:

“The Trustee and the Board of Directors/Governing Body of the Manager must ensure that all investor complaints are resolved promptly by the Manager. Additionally, the statement outlined in Paragraph 4.16.3 shall be reviewed on a quarterly basis by the Board of Directors/Governing Body of the Manager and the Trustee.”

Regarding the timeline for disclosing statements of deviation(s) in the use of proceeds, paragraph 4.17.2 of the Master Circular currently states:

“The statement(s) must continue to be provided until the issue proceeds have been fully utilized or the purpose for which they were raised has been achieved. These statements must also be reviewed by the Trustee and the Board of Directors/Governing Body of the Manager, and after review, submitted to the stock exchange(s) within twenty-one days of the quarter’s end.”

Based on the Working Group and HySAC’s recommendations, it was noted that under the LODR Regulations, the statement of deviation or variation in the use of proceeds must be submitted to the stock exchanges along with the financial results on a quarterly basis. To align with the LODR Regulations and improve business efficiency, the following amendment is proposed to paragraph 4.17.2 of the Master Circular:

“The statement(s) must continue to be provided until the issue proceeds are fully utilized or the stated purpose has been achieved. These statements must also be reviewed by the Trustee and the Board of Directors/Governing Body of the Manager. Following the review, the statement must be submitted to the stock exchange(s) along with the submission of financial results.”

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