SEBI Consulting papers for the Alternative Investment Funds (‘AIFs’) and ForeignVenture Capital Investors (‘FVCIs’)

The Securities and Exchange Board of India (‘SEBI’) has issued new series of consulting papers for the alternative investment funds (‘AIFs’) and foreign venture capital investors (‘FVCIs’) on May 18, 2023.
This alert provides a brief snapshot of the propositions by the SEBI through the consulting papers:

Sr. No.Discussion paperDescription
1Review of qualified institutional buyer status (‘QIB’) for AIFs and FVCIs.
SEBI | Consultation Paper on the proposal to review Qualified Institutional Buyer status of Alternative Investment Funds, Venture Capital Funds and Foreign Venture Capital Investors
It is proposed that the QIB status should be available only for
a. AIFs other than those having 50% or more contribution from a single investor or investors belonging to the same group; and
b. FVCIs, other than those which are corporate bodies and family offices
2Streamlining regulatory framework for registration of FVCIs
SEBI | Consultation paper on streamlining regulatory framework for registration of Foreign Venture Capital Investors (FVCIs)
It is proposed that the following changes be made in the regulatory framework for FVCIs:
a. The process of granting registration to FVCI and other post registration references to be delegated to designated depository participants (‘DDPs’) (as in case of foreign portfolio investors (‘FPIs’).
b. Eligibility criteria for registration of FVCIs to be streamlined on the lines of FPIs.
c. FVCIs to be mandated to hold securities in dematerialized form.
d. Perpetual registration for FVCIs to be withdrawn. FVCI registration to be valid for each block of 5 years on payment of fees of USD 2,500 to the DDP.
3Streamlining governance mechanism for AIFs
It is proposed that the following changes be made in the governance framework for AIFs:
a. Specify guidelines for borrowings for temporary investments by category I and II AIFs.
b. AIFs to be mandated to hold securities in dematerialized form.
c. The requirement for appointing custodians to be mandated for all AIFs.
d. To prescribe a maximum extension of tenure for large value fund (LVF up to four years, subject to approval of two-thirds of the unit holders by value.
e. AIFs be mandated to pay 50% of its application for subsequent blocks of 5 years post the initial 5 years before three months from the expiry of the block. This requirement will be applicable to all existing AIFs.
Our comments:
These are the second series of consulting papers issued by the SEBI reforming the AIF regulatory framework in January and February this year. The proposed suggestions for AIFs in relation to licencing requirements, re-aligning the requirement of extension of tenure, mandatory dematerialization, guidelines for borrowings by AIFs provide towards the continuous monitoring and reforming the AIFs regulations. The proposed suggestions for the FVCIs are also a welcome move given the long term overdue at the re-visit to the FVCI Regulations.
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