SEBI Grants Flexibility to AIFs for Co-Investment Opportunities

The capital market regulator, the SEBI, has introduced greater flexibility for Alternative Investment Funds (AIFs) by allowing them to offer co-investment opportunities to investors within the AIF structure. This change is effective immediately and aims to simplify operations for AIFs.

What is Co-Investment?

In AIF terminology, co-investment refers to providing investors with an opportunity to make additional investments in the unlisted securities of an investee company where the AIF is also investing or has invested. These opportunities are made available to investors who meet certain objective criteria, such as a minimum commitment size and strategic relevance.

To facilitate ease of doing business, SEBI has amended regulations to permit Category I and Category II AIFs to offer co-investment opportunities to accredited investors through a separate co-investment scheme (CIV scheme) under the AIF framework, as outlined in its circular.

This is in addition to the existing co-investment route available through portfolio managers (PMS).

Introduction of New CIV Scheme Structure

According to SEBI, co-investment via the CIV scheme will be managed by the manager of the AIF and will be subject to specific conditions. These include:

• Co-investment for an investor in a company must be made either through the PMS route or the CIV scheme, not both.
• Managers must file a shelf placement memorandum detailing the principal terms of co-investments, governance structures, and applicable regulatory frameworks.
• Each CIV scheme will maintain separate bank and demat accounts, and its assets will be ring-fenced from those of other schemes.
• An investor’s co-investment in a company through the CIV scheme cannot exceed three times their commitment to the AIF scheme. This restriction does not apply to entities such as Multilateral or Bilateral Development Financial Institutions, State Industrial Development Corporations, government-controlled entities, Central Banks, and Sovereign Wealth Funds.
• Investors who are excluded from or have defaulted on their AIF contributions are not allowed to co-invest in that company.

SEBI also clarified that CIV schemes must not be used to provide investors with indirect exposure to investments they cannot hold directly, trigger additional regulatory disclosures that would apply if made directly, or invest in companies that are legally prohibited from accepting such investments.

Also Read: SEBI Issues Framework to Streamline KRA Deregistration Process and Protect Investors

Additionally, the CIV scheme will be subject to implementation standards set by a standard-setting forum of AIFs to ensure that co-investments are made for genuine purposes and to prevent misuse of the flexibility granted.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

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