SEBI Permitted Cat II AIF to Invest in Listed Debt Securities

The Securities and Exchange Board of India (SEBI) has eased investment norms for Category II Alternative Investment Funds (AIFs), expanding their scope to include a broader range of debt instruments. Under the revised guidelines, Cat II AIFs are now permitted to invest in listed debt securities rated ‘A’ or lower by SEBI-registered credit rating agencies.

This regulatory change comes after the AIF industry expressed concerns over an earlier amendment to the Listing Obligations and Disclosure Requirements (LODR) Regulation, which could have restricted access to unlisted debt instruments—traditionally the core focus for these funds. The LODR amendment, effective from January 1, 2024, prevents entities with outstanding listed non-convertible debentures (NCDs) from issuing new unlisted NCDs, limiting options for AIFs that are required to focus primarily on unlisted securities.

Addressing these concerns, SEBI issued a notification on May 21, following a February consultation paper, to relax investment restrictions. The new framework allows Category II AIFs to invest in unlisted securities and/or listed debt securities, including securitised debt instruments rated ‘A’ or below, either directly or via other AIFs, as per SEBI's specifications

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At the time of consultation, SEBI highlighted that nearly 192 Cat II AIF schemes had over half their portfolios in unlisted debt. By permitting exposure to lower-rated listed debt instruments, the revised norms aim to enhance portfolio diversification and better match the risk-return profiles suited to these funds’ investment strategies.

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