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19 Nov 2024
The Securities and Exchange Board of India (SEBI) has issued new guidelines permitting Category I and Category II Alternative Investment Funds (AIFs) to borrow funds to address shortfalls in drawdown amounts from investors. This decision aims to enhance operational flexibility and ease of doing business for these funds.
Under the new regulations, AIFs can borrow funds on a maximum of four occasions each year, with the borrowing capped at 10% of the investable funds. The borrowing is intended strictly for emergencies, specifically when an investment opportunity is imminent, and the required drawdown from investors has not been received despite efforts by the fund manager.
AIFs are required to disclose any borrowing in their Private Placement Memorandum (PPM) and must inform investors about the borrowed amounts, terms, and repayment details periodically. Additionally, the cost of borrowing will be charged only to those investors who failed to provide the required drawdown.
To ensure prudent borrowing practices, SEBI mandates a cooling-off period of 30 days between two borrowing instances. This guideline aims to maintain a balance between flexibility and financial discipline within AIF operations.
SEBI's move comes in response to feedback from industry stakeholders who emphasized the importance of temporary borrowing for maintaining the viability of AIFs. The regulator's guidelines reflect a commitment to fostering a conducive environment for investment while ensuring that borrowing does not become a regular practice for funding investments.
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