Previously, the Securities and Exchange Board of India (SEBI) released a notification on April 25, 2024, allowing flexibility to  Alternative Investment Funds (AIFs) schemes to opt for dissolution period for addressing their unsold unliquidated investments due to liquidity issues. More recently, SEBI has published a circular vide circular no. SEBI/HO/AFD-1/AFD-1-PoD/P/CIR/2024/100 dated 09^th July, 2024, which outlines the filing requirements for AIF schemes utilizing the dissolution period/additional liquidation period, as well as the conditions for in-specie distribution of AIF assets. The purpose of this circular is to improve transparency and establish a structured approach to the dissolution and liquidation processes of AIFs. Below is a comprehensive summary and analysis of the main points included in the circular:

1. An AIF scheme entering its dissolution period is required to file an information memorandum, accompanied by a due diligence certificate from a merchant banker, with SEBI before the expiration of the liquidation period or any additional liquidation period. This information memorandum should include substantial details such as the AIF's name, category, registration number, sponsor, manager, the scheme's tenure, and the percentage of the scheme's value in unliquidated investments for which the AIF or manager has arranged a bid, among other information.

2. In the case, if liquidation period for a scheme of an AIF has expired or is expiring within three months from 24th July 2024, it will be granted a new liquidation period until 24th April 2025. This is conditional upon the scheme not having any pending investor complaints regarding the non-receipt of funds or securities, provided that certain information like AIF's name, category, registration number, sponsor, manager, the scheme's tenure and other such information is filed with SEBI.

3. Under the guidelines, the in-specie distribution of assets is allowed under certain conditions, including approval from at least 75% of the investors by value of their investment in the AIF. The assets to be distributed in-specie must be valued by an independent valuer, and the valuation report should be shared with the investors.

4. The AIF must disclose the rationale for in-specie distribution, including details about the assets and the valuation method used. Investors must be given an option to dissent, and the distribution can proceed only if the dissenting investors constitute less than 25% of the total investment value.

5. During the in-specie distribution process, the manager, trustee, and key management personnel of the AIF must ensure all required compliances are met and prepare a compliance test report, which will be endorsed by the trustee or sponsor.

CHRI Legal comment:

The implementation of these guidelines highlights SEBI's dedication to preserving the integrity of financial markets and safeguarding investor rights. By mandating that AIFs follow these comprehensive procedures, SEBI seeks to reduce conflicts and guarantee an orderly and fair dissolution process. Moreover, the focus on consistent updates and conclusive reporting to SEBI strengthens regulatory supervision, ensuring AIF compliance during dissolution. The guidelines also recognize the challenges of liquidating varied assets and offer a measured approach to such situations, including the infrequent yet essential option for in-specie distribution. Consequently, this not only benefits investors but also bolsters the trustworthiness of AIFs by confirming their operation within a clearly established legal and regulatory structure.