Liquidation scheme for AIFs to aid in deriving maximum value: Experts

The introduction of liquidation scheme for alternative investment funds (AIFs) by market regulator Sebi provides an additional avenue for managers and investors to derive the maximum value for unliquidated investments, experts said on Sunday.

The new scheme provides flexibility to AIFs to deal with investments that are not sold due to a lack of liquidity during the winding-up process.

Also, it allows such unliquidated investments to be either sold to a new scheme of the same AIF (liquidation scheme) or to be distributed in-specie to investors of the AIF.

The regulator, on June 15, amended rules to permit AIFs to launch a liquidation scheme. Sebi, last week, laid out the modalities for launching the scheme and in-specie distribution to investors.

Dipen Ruparelia, Head of Products, Vivriti Asset Management, said these regulatory changes are a long-term positive for the corporate governance in the debt and AIF industries and will go a long way toward investors’ confidence in the AIF.

“While the amendment and the Sebi circular aim to benefit the investors, some aspects lack clarity, such as benefits to schemes that have already exceeded their tenure, and consequences where the AIF/ manager fails to achieve the minimum bid of 25 per cent of the unliquidated assets,” Punit Shah, Partner, Dhruva Advisors, said.

Also, one needs to consider the tax implications arising from the transfer of unliquidated assets by the original scheme in exchange for units of the liquidation scheme. This could lead to capital gains in the hands of the unit holders liable to taxation, he added.

Under the scheme, AIFs are required to transfer assets not sold during the winding-up process to a new liquidation scheme or distribute such unliquidated investments in-specie after being subject to a 75 per cent consent by the value of investors in each case.

For launching a liquidation scheme, the AIF is required to obtain the consent of 75 per cent of investors by the value of their investments and will have to arrange a bid for a minimum of 25 per cent of the value of the unliquidated investments.

Further, they have to offer a full exit to the dissenting investors out of the bids arranged by the AIF/ manager.

For the value at which the unliquidated assets will be sold by the original scheme to the liquidation scheme — which can be one rupee if the AIF/ manager fails to arrange the minimum bid.

The payment to the original scheme will be in the form of the units of the liquidation scheme, which will onward be distributed in-specie to the investors of the original scheme.

In case the AIF decides to distribute unliquidated investments in-specie, similar to the process under the liquidation scheme, the AIF will have to obtain the consent of 75 per cent of investors by the value of their investments and will have to arrange a bid for a minimum of 25 per cent of the value of the unliquidated investments. Further, dissenting investors have to be offered a full exit out of the bids arranged.

If the AIF fails to obtain requisite investor consent for the launch of the liquidation scheme or in-specie distribution of unliquidated investments, then the unliquidated investments will be mandatorily distributed to investors in-specie without the requirement of obtaining the consent of 75 per cent of investors by the value of their investment in the scheme of the AIF.

In addition to the liquidation scheme, Sebi came out with guidelines for the valuation of investment portfolios that provide the much-required standardisation to enable a fair comparison of investment performance across funds for investors.