SEBI gives flexibility to AIFs to offer co-investment opportunities to investors

Market regulator SEBI provided flexibility to alternative investment funds to offer co-investment opportunities to investors within the AIF structure.

The move, effective immediately, is aimed at making it easier for AIFs to operate.

Co-investment, in AIF industry parlance, refers to the offering of the investment opportunity to the investors for additional investment in unlisted securities of an investee company, where an AIF is also making or has made the investment.

Such investment opportunities are offered to investors who meet certain objective criteria, such as the size of the minimum commitment and strategic value of the investor, among others.

With an objective to enhance ease of doing business for AIFs, SEBI has amended rules to permit Category I and Category II AIFs to offer a co-investment facility to accredited investors by launching a separate co-investment scheme (CIV scheme) within AIF rules, according to its circular.

This is in addition to the co-investment currently being facilitated to investors of AIFs through portfolio managers (PMS route).

SEBI said that co-investment through a CIV scheme would be carried out by the manager of Category I or Category II AIFs, subject to certain conditions.

These included "managers of AIFs shall make co-investment for an investor in an investee company either through the PMS route or CIV scheme route".

Also, they would file a shelf placement memorandum that includes principal terms relating to co-investments, governance structure, and regulatory framework for co-investment.

Each CIV scheme would have a separate bank account and demat account, and assets of each scheme would be ring-fenced from assets of the other schemes.

An investor's co-investment in a company through CIV schemes cannot exceed three times their contribution in the AIF scheme. This limit does not apply to investors such as Multilateral or Bilateral Development Financial Institutions, State Industrial Development Corporations, entities controlled by the Central Government or a State Government, Central Banks and Sovereign Wealth Fund.

Investors who are excluded or have defaulted on AIF contributions cannot co-invest in that company.

SEBI said that CIV schemes cannot invest in a way that gives investors indirect exposure they can't hold directly, triggers extra regulatory disclosures if done directly and invests in companies that cannot legally take their money.

CIV schemes cannot borrow or leverage funds.

Further, the CIV scheme would be subject to implementation standards formulated by a standard-setting forum of AIF to ensure that the investments by the CIV scheme are made for bona fide purposes and that the flexibility extended in this regard is not misused, SEBI said.