Sebi allows AIFs, venture capitals to retain fund beyond expiry

This addresses bottlenecks where funds cannot close because of locked-up capital due to unfavourable circumstances such as disputes, tax claims, or ongoing wind-up costs. The circular, which comes into immediate effect, follows the regulator’s notification in April to provide such flexibilities to AIFs. 

There are three conditions specified by the regulator for both AIFs and venture capital funds, of at least one needs to be met for retaining funds beyond expiry. These include providing demonstrable receipt of litigation notice or demand by the funds that indicates a potential tax, regulatory, or legal liability. 

Another condition that allows them to retain funds is to obtain at least 75% of the investors in terms of the value of their investment in the scheme due to anticipated liabilities from a litigation or tax demand.

The third one is through the substantiation of amounts retained for meeting residual winding up-related operational expenses incurred in previous years, as per the circular. 

The Standard Setting Forum of AIFs (SFA), in consultation with Sebi, will formulate the implementation standards for standardizing the operational heads under which the funds can be retained. 

The markets regulator also allowed to obtain the ‘Inoperative Fund’ status for schemes with retained fund and those are intending to surrender their registration. A scheme that has not retained any fund beyond the permissible fund life, but intending to continue with the registration solely in anticipation of a favourable outcome of a pending litigation, can also apply for obtaining the ‘Inoperative Fund’ tag. 

Once this tag is obtained, they cannot launch any further scheme under the specific fund, make new investments, or charge management fees. They should also submit an annual report regarding their retained funds and outstanding liabilities to Sebi within 30 calendar days from the end of every financial year.