SFA Operating guidelines on framework for Category

SFA Operating guidelines on framework for Category I and II Alternative Investment Funds to create encumbrance on their holding of equity of investee companies

With reference to SEBI circular no. SEBI/HO/AFD/PoD1/CIR/2024/027 dated April 26, 2024 on ‘Framework for Category I and II Alternative Investment Funds (AIFs) to create encumbrance on their holding of equity of investee companies’ (hereinafter referred as “SEBI circular”)[1], the implementation standards to be adopted by AIF industry (Standards), as formulated by the Standard Setting Forum for AIFs (‘SFA’), are given below:

[1] Upon update to SEBI Master Circular for AIFs for FY24-25, the said reference to circular to be read as reference to corresponding chapter in the updated Master Circular for AIFs

1. Identification of eligible sub-sectors

I. Para 2 of the Circular reads as under:
Accordingly, in terms of provisos to Regulation 16(1)(c) and 17(c) of AIF Regulations, Category I and Category II AIFs may create encumbrance on equity of investee company, which is in the business of development, operation or management of projects in any of the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure issued by the Central Government, only for the purpose of borrowing by such investee company and subject to such conditions as may be specified by the Board from time to time.

II. The AIF shall verify the eligibility of the sector/subsector of the investee company, in terms of the harmonised Master List (HML) of Infrastructure issued by the Central Government which can be accessed at https://www.infrastructureinindia.gov.in/harmonized_list

III. In view of the above, the AIF shall collect necessary details from investee companies in order to ascertain whether the investee company is being covered under HML issued by the Central Government. AIF shall ensure that at least one of the following conditions is satisfied for ensuring that the investee company falls under the HML:

a). RBI regulated lender has categorised the loan extended / proposed to be extended to the investee company of AIF, towards the sector as covered under the HML or

b). The investee company has obtained clarification from the central government on its business being covered under the HML.

2. Utilization of borrowings made by the investee company:

IV. In terms of Para 3.4 of the SEBI Circular, the AIF shall have a well-laid out policy on how such objectives shall be ensured.

3. compliance with para 7.11.2 of RBI Master Direction

V. In terms of Para 3.6 of the SEBI Circular, the AIF shall have a well-laid out policy on how compliance with the RBI master directions to be ensured.

4. Default by the borrower investee company

VI. At the time of such encumbrance being created, the AIF shall enter into an agreement / contract with the lender where it shall be clearly laid out that in case of default by the borrower investee company, the AIF, schemes of an AIF, or its investors are not subject to any liability over and above the equity of the borrower investee company encumbered by the AIF.