The Securities and Exchange Board of India (SEBI) has introduced new rules for Alternative Investment Funds (AIFs).
The regulator says these changes will give funds more flexibility in handling legal, tax, and regulatory issues even after a fund’s official term has ended.
SEBI has also launched a new category called the “Inoperative Fund” to manage funds that have completed their investments but still have pending obligations.
When Can AIFs Retain Investor Money?
Under the new guidelines, AIFs can hold back a portion of investor money if there are outstanding legal or regulatory matters.
For example, funds may retain money if they receive notices from courts, tax authorities, investigation agencies, investors, or any other party that could lead to financial liabilities.
Funds can also keep money aside for possible future liabilities, but only if investors approve the decision.
Investor Approval Is Mandatory
If an AIF wants to retain money for potential future liabilities, it must first share complete details with investors.
The fund manager must clearly explain how much money will be retained, why it is being kept, and for how long.
This decision can only be implemented after receiving approval from investors representing at least 75% of the fund value.
Funds Can Be Retained for Up to Three Years
SEBI has also set limits on how long money can be retained for administrative and operational expenses related to closing a fund.
In such cases, the retained amount can remain with the fund for a maximum of three years after the fund’s term expires.
Once this period ends, any remaining money must be returned to investors.
What Is an Inoperative Fund?
SEBI has introduced a new structure known as an Inoperative Fund.
This category is meant for AIFs that have already sold all their investments but still have retained funds or unresolved legal and regulatory matters.
Such funds can apply for Inoperative Fund status before surrendering their registration.
Restrictions on Inoperative Funds
An Inoperative Fund will face several restrictions.
It will not be allowed to make new investments, launch fresh schemes, or charge management fees from investors.
Any retained money can only be invested in instruments permitted under AIF regulations.
Annual Reporting Requirements
SEBI has made annual reporting mandatory for funds that retain investor money or operate as Inoperative Funds.
These funds must submit reports to both SEBI and investors within 30 days of the end of every financial year.
The reports must include details about retained funds and any pending liabilities.
Rules Effective Immediately
SEBI has clarified that these new rules are effective immediately.
The framework will also apply to existing venture capital funds registered under the older 1996 regulations.
According to SEBI, the new system will help funds manage pending issues more efficiently while ensuring better protection for investors.
