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Sebi issues draft circular on pro rata, pari passu rights of AIF investors

Economic Times  

The Securities and Exchange Board of India (Sebi) has released a draft circular to clarify the operational aspects of maintaining pro rata and pari passu rights for investors in Alternative Investment Funds (AIFs). Pro rata signifies that investors share profits or returns in proportion to their investment, while pari passu ensures all investors are treated equally without special preference.For closed-ended AIF schemes, Sebi has proposed that investor rights in the distribution of investment proceeds should be based either on their total commitment or undrawn commitment. The regulator suggests that schemes must clearly disclose upfront in their Private Placement Memorandum (PPM) how pro-rata rights are calculated, and this method cannot be altered during the scheme's tenure. Furthermore, investors excluded from a particular investment cannot have their unused commitment deployed elsewhere. Existing AIF schemes compliant with current methods can continue, but those using different systems must align with the new guidelines for future investments.Open-ended Category III AIFs, which allow free entry and exit for investors, may not need to apply pro rata drawdowns but should distribute proceeds proportional to units held. However, if these schemes invest in unlisted securities, they must adhere to the same rules as closed-ended schemes.Returns or profits shared by investors with fund managers, such as carried interest, are exempt from the pro rata requirement. Sebi has invited public comments on the draft circular until November 28.