The Securities and Exchange Board of India has issued guidelines for alternative investment funds (AIFs) to transfer assets not sold during the winding-up process to a new liquidation scheme or distribute such unliquidated investments in-specie, subject to a 75% consent by value of investors in each case.
The AIF manager has to call for bids for 25% of the unliquidated investments to give exit to dissenting unit holders. The additional amount has to be used to give exit to non-dissenting unit holders. The AIF will disclose the bid value along with the valuation of the unliquidated investments carried out by two independent valuers to investors of the original scheme.
Also read: Cyient arm’s IPO to open for subscription on June 27
“Private equity as an asset class has many unknowns, particularly when dealing with illiquid and unlisted securities. While exits have been a challenge in the Indian context, the same has also improved significantly in terms of investors and funds being able to find good exits for their investments in India. However, this may not necessarily tie in from a timing perspective and with Sebi’s view on fund extensions, it could put the fund and the manager in a sticky situation. So, the liquidation scheme is a welcome move,” added Divaspati Singh, partner, Khaitan & Co.
The dissenting investors of the original scheme, who did not consent to sell the unliquidated investments to the liquidation scheme, will be offered an option to fully exit the original scheme out of the 25% bid arranged by the AIF/manager.
Subsequently, the unliquidated investments of the original scheme shall be sold to the liquidation scheme. The value of such a sale shall be bid value, if the bid for a minimum of 25% of the value of unliquidated investments of the original scheme is arranged for or one rupee, if the AIF/manager fails to do so.
If the AIF fails to obtain requisite investor consent for launch of liquidation scheme or in-specie distribution, the unliquidated investments will be distributed to investors in-specie. The value of such investments will be a rupee. For investors not willing to take the in specie distribution, such investments will be written off.
No transition provision has been provided for the schemes that have already exceeded their tenure and the circular is not clear in case of a scenario where the bid of 25% of the unliquidated investment fails, according to Yash Ashar, partner at Illume Advisory.
“The bid condition per se may not be implementable in many cases as the investments by AIFs are in illiquid startups, real estate projects, etc. Also, the exit provision to dissenting unitholders may disincentivise the unitholders approving the liquidation scheme for the larger good of all the unitholders,” Ashar said.
Also read: Sebi bans Eros International, promoters, MD and CEO from capital market in fund diversion case
“The investment manager has to run a process to value 25% of the underlying assets, which could be difficult. Further, a forced exit may be detrimental to investors and the fund’s interest as the odds would be stacked in the favour of the purchaser,” added Singh.
Though the in-specie distribution had always been an option prescribed under the AIF regulations, it has not been much popular among investors and investment manager community at large, due to various practical reasons and consequent tax implications.
“The circular talks about the two-way exchange and distribution of units of the liquidation scheme which may lead to two-level taxation on fair market value basis the unliquidated investment in the hands of the investors. Taxation of transition to the liquidation scheme would not be the intention of the authorities. This aspect should be clarified by the income tax authorities providing exemption for such transition,” said Ashar.