At present, rules with respect to investment by the sponsor in the AIF say the sharing of loss by the sponsor should not be less than pro rata to their holding in the AIF vis-a-vis other unit holders.
“While it has not been explicitly restricted in AIF Regulations that the sharing of loss by a class of investors shall not be less than pro rata to their holding in the AIF vis-a-vis other classes of investors/unit holders, it has been brought to SEBI’s attention that certain schemes of AIFs have adopted a distribution waterfall in such a way that one class of investors (other than sponsor/manager) shares loss more than pro rata to their holding in the AIF vis-a-vis other classes of investors/unit holders, since the latter has priority in distribution over former (‘priority distribution model’),” Sebi said in a circular on Wednesday.
The regulator said the matter is being examined by it in consultation with its Alternative Investment Policy advisory committee, the AIF industry and other stakeholders.
“Whilst the senior-junior tranche structure was followed by a few AIFs, particularly the funds investing in debt securities, Sebi was not in favour of such structures. Whilst there was no express prohibition under the AIF Regulations restricting such structures, the regulatory view was to permit the same only where the junior or in some cases the first loss class was subscribed by the sponsor/manager and not by a set of third-party investors,” said Tejesh Chitlangi, Senior Partner, IC Universal Legal. “It seems Sebi may in future prescribe requisite checks and balances to permit certain priority distribution structures instead of completely prohibiting them,” Chitlangi said.
