News and developments
WINDING UP AIFS SET UP IN THE FORM OF TRUSTS
It also seeks to highlight the interface between the SEBI (Alternative Investment Fund) Regulations, 2012 and the Indian Trusts Act, 1882. Lastly, this paper attempts to put forth a few plausible solutions for the issues highlighted in the paper.
Introduction
“Alternative Investment Fund” means a fund established or incorporated in India under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) in the form of a trust, a company, a limited liability partnership, or a body corporate. The AIF Regulations define an alternative investment fund (“AIF”) (i) as a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and (ii) which is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Securities and Exchange Board of India (“SEBI”) to regulate fund management activities. The AIF Regulations further specify certain trusts/ legal structures which are not considered as AIF for the purpose of the AIF Regulations, such as a family trust set up for the benefit of relatives or an employee welfare trust.
The AIF Regulations have very clearcut procedures for the setting up of an AIF and prescribe in detail, the eligibility criteria for the AIF’s sponsor and the investment manager, the qualifications required for the key personnel of the AIF’s investment management team, the procedure to apply for a certificate of registration including the form to be filed, the attachments that should accompany such application, the fees to be paid at the time of filing the application and at the time of registration, etc. However, in comparison, the procedures and guidelines contained in the AIF Regulations for winding up of an AIF are very rudimentary. The problems or rather, confusion regarding the proper procedure to be followed when winding up an AIF is accentuated by the fact that most AIFs are set up in the form of a private trust under the Indian Trusts Act, 1882 (“Trusts Act”), and neither such trusts nor the schemes of such trust, are legal entities.
I. Grounds for winding up an AIF under the AIF Regulations
Regulation 29 of the AIF Regulations governs the winding up of AIFs. Sub-regulation (1) of Regulation 29 addresses the winding up of an AIF set up as a trust. Sub-regulation (2) of Regulation 29 addresses the winding up of an AIF set up as a limited liability partnership (“LLP”). Sub-regulation (3) of Regulation 29 addresses the winding up of an AIF set up as a company. Sub-regulation (4) of Regulation 29 addresses the winding up of an AIF set up as a body corporate.
Sub-regulation (2) of Regulation 29 states that an AIF set up as an LLP shall be wound up in accordance with the provisions of The Limited Liability Partnership Act, 2008. Sub-regulation (3) of Regulation 29 states that an AIF set up as a company shall be wound up in accordance with the provisions of the Companies Act, 2013. Sub-regulation (4) of Regulation 29 states that an AIF set up as a body corporate shall be wound up in accordance with the provisions of the statute under which it is constituted. However, in contrast to sub-regulations (2), (3) and (4), sub-regulation (1) of Regulation 29 which addresses the winding up of an AIF set up in the form of a trust, does not state that an AIF set up as a trust shall be wound up in accordance with the provisions of the Trusts Act.
As per Sub-regulation (1) of Regulation 29, an AIF set up as a trust may be wound up on the following grounds:
- when the tenure of the AIF or all schemes launched by the AIF, as mentioned in the AIF’s placement memorandum (“PPM”) is over; or
- when the trustee(s) of the AIF are of the opinion that the AIF should be wound up in the interests of investors in the AIF; or
- if seventy five percent of the investors of the AIF by value of their investment in the AIF pass a resolution at a meeting of unitholders that the AIF be wound up; or
- if SEBI directs that the AIF be wound up in the interests of investors.
- On a reading of the provisions of VCF Regulations, it is clear that the Scheme was required to be wound up within three months from the date of intimation of the intention to wind up the Scheme.
- Liquidation of the assets of the Scheme within the prescribed timeline was not impossible but was economically unfeasible. Avoidance of loss could not be a valid ground for not complying with the mandatory obligation prescribed under VCF Regulations.
- The PPM contained disclosures of adequate and material risk factors and the investors in the Scheme were sophisticated (individual investment of minimum Rs. 1 crore or more). Thus, it was reasonable to infer that they had invested in the Scheme knowing very well the associated risks involved in a real estate scheme and were aware that there was a possibility of loss.
- In the absence of any provision in law or any customary/market practice, it may not be an appropriate interpretation of the law to state that a scheme that had invited investors to invest in the fund promising it to have a definite lifespan, could be permitted to continue to exist in perpetuity only on the ground that any exit that may be provided to the unit holders, may not be profitable to them at the time of their exit.
- duly signed application/cover letter giving the details of the surrender of registration of the AIF and rationale for the same;
- self-attested copy of a board resolution or partner resolution or a copy of the resolution passed by trustee, depending upon the legal structure of the AIF;
- duly signed and stamped declaration from the AIF’s investment manager and a practicing chartered accountant that the AIF has liquidated all its assets and distributed proceeds to unit holders proportionately specifying the amounts realized by liquidation of the AIF’s assets and its distribution to the unit holders;
- duly signed and stamped declaration from the investment manager that the AIF is wound up and is not undertaking any AIF activity and shall not accept any further investments for the AIF;
- duly signed and stamped declaration from the investment manager that it shall continue to be responsible for any liabilities, in relation to its investment management activities;
- duly signed and stamped declaration from the AIF’s investment manager and trustee that no enquiry or proceeding or any other action has been initiated or is currently pending against the AIF;
- duly signed and stamped declaration from the AIF’s investment manager and trustee that the AIF has complied with the AIF Regulations with regard to winding up;
- duly signed and stamped declaration from the AIF’s investment manager and trustee that all schemes of the AIF have been wound up;
- self-attested latest bank statement of the AIF/latest audited financial accounts of the fund/schemes;
- tenure/duration of the fund is to be specified; and
- original certificate of registration of the fund (which has to be submitted to SEBI in physical form).
- file quarterly returns with SEBI;
- carry out an annual audit of their PPMs as required by SEBI circular bearing number SEBI/HO/IMD/DF6/CIR/P/2020/24 dated February 5, 2020; and
- prepare an annual compliance test report.
- the AIF has exited from all its investments and has distributed the exit proceeds to its investors; or
- the AIF’s investments have lost their value and have become worthless.