The Securities and Exchange Board of India (Sebi) has made it mandatory for alternative investment funds, which includes private equity (PE) and venture capital (VC) firms, to segregate and ring-fence assets and liabilities of each scheme from others.
“The manager and either the trustee or the trustee company or the board of directors or designated partners of the AIF, as the case may be, shall ensure that the assets and liabilities of each scheme of an AIF are segregated and ring-fenced from other schemes of the AIF; and bank accounts and securities accounts of each scheme are segregated and ring-fenced,” Sebi said in an official gazette dated 15 November.
The capital market regulator has notified the amendment in SCRA (AIFs) Regulations, 2012.
The latest order is similar to what the market regulator did in December 2020 after Franklin Templeton wound up six of its mutual fund schemes without obtaining the consent of its investors by a simple majority. “All assets and liabilities of each scheme shall be segregated and ring-fenced from other schemes of the MF,” Sebi had ordered.
With the latest decision, Sebi has ensured that investors of one AIF scheme won’t get impacted when the other scheme operated by the same AIF goes bust or faces tremendous losses.
Put simply, ring-fencing will prevent AIFs from using the funds or assets of a scheme to settle their debts and offset them against losses in the corresponding schemes.
The move will provide more confidence to limited partners (LPs) to invest in schemes operated by a PE or VC fund. LPs in such schemes are high-net-worth individuals, pension funds, family offices, sovereign funds and insurance companies.
Meanwhile, in its latest order, Sebi has also made it mandatory for AIFs to submit a fresh application for a scheme launch if it fails to declare the first close of the scheme in the manner prescribed.