India’s capital market regulator Securities and Exchange Board of India (SEBI) has issued two circulars, easing rules for borrowing by alternative investment funds (AIFs) and for migration of Venture Capital Funds (VCFs) to the AIF structure.
AIF Borrowing
To facilitate ease of doing business, SEBI said Category I and Category II AIFs can now borrow to meet temporary shortfall in drawdown amount or amount called from investors.
Angel funds, venture capital, and private equity funds, which are usually registered as Category I and Category II AIFs, can borrow the shortfall in a drawdown amount. This will be limited to 20% of the investment proposed to be made in the investee company or 10% of the investable fund, or the commitment pending to be drawn down from investors, whichever is lower.
However, SEBI said the borrowing should be done in case of emergency and needs to be disclosed in the private placement memorandum (PPM) of the scheme that AIFs file with SEBI detailing information about the fund.
Currently, AIFs cannot borrow money directly or indirectly for making investments, except to meet temporary funding or day to day operational requirements for 30 days on four occasions in a year.
The cost of borrowing post the new regulations will be borne by the investors who failed to provide the drawdown amount for making investments, SEBI further added in its circular. The funds need to maintain a 30-day cooling period between two such borrowings.
VCF migration
In a separate circular, SEBI detailed the procedure for Venture Capital Funds (VCF) to deal with unliquidated investments in case they are migrating to AIF.
They can do so until July 19, 2025.
These ‘Migrated Venture Capital Funds’, which were previously registered as Venture Capital Fund under the VCF Regulations, will be registered as a sub-category of Venture Capital Fund under Category I AIFs.
After migration the investors on-boarded, investments held and units issued by the VCF will be guided by the AIF regulations.
