SEBI Unveils New Borrowing Rules For Category I, II Alternative Investment Funds
The Securities and Exchange Board of India introduced new guidelines on Monday on how category I and category II alternative investment funds can borrow money. Under the new guidelines, these funds cannot borrow money to make investments or use leverage, except for covering temporary shortfalls in their daily operations.
Category I AIFs invest in areas like startups, small and medium-sized enterprises, social ventures that aim to make a positive impact, and infrastructure projects like railways and airports. Category II AIFs include funds like private equity, which helps unlisted companies raise capital, and debt funds, which invest in the debt securities of these companies.
If an AIF needs to borrow funds because they have not received promised funds from investors in time for an investment, they can do so under specific conditions. This borrowing should be disclosed in the fund's scheme documents and only used in emergencies. according to SEBI's circular.
The borrowed amount must be within certain limits. The guidelines mention that the amount borrowed cannot exceed 20% of the proposed investment in the company, 10% of the AIF's total investable funds or the outstanding commitment from other investors, whichever is lower. The cost of borrowing must be charged to the investors who delayed their payments, not to the fund overall. Funds must also wait 30 days between borrowing periods, calculated from when the previous loan was repaid.
These new conditions also affect how long the AIFs can extend their tenure. Funds that have not specified their extension period or those exceeding the allowed five years must adjust their extension period to meet the new requirements. They need to align with these rules by Nov. 18 and update their quarterly reports accordingly. Any changes to the original tenure must be approved by all investors, and a formal undertaking must be submitted to SEBI by the deadline.
As mentioned in the circular, these guidelines are to be effective immediately.
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