Markets regulator Sebi on Tuesday released rules allowing Alternative Investment Funds to keep liquidation proceeds after their standard fund life ends under defined conditions. It also created an Inoperative Fund category for funds that have wound up but still face remaining duties. The changes follow April 18 updates to Sebi AIF regulations that aim to ease operations during closure and registration surrender. AIFs or their schemes can hold proceeds past the dissolution period if they face litigation notices or regulatory demands, secure approval from at least 75 percent of investors by value to cover expected liabilities, or must cover leftover winding-up costs, according to the circular. Litigation notices may involve communications from tax bodies, regulators, enforcement agencies, courts, investors or counterparties about possible tax, legal or regulatory obligations, even if those have not yet become due. Managers seeking to retain funds for anticipated liabilities must state the proposed amount and expected holding period when asking for investor consent. Retention for operational expenses is limited to three years after the fund life ends. The Standard Setting Forum for AIFs will develop standards for allowable expense categories with Sebi input. Sebi also created Inoperative Fund status for AIFs that have sold all investments yet hold retained proceeds or stay registered while litigation continues. Such funds may not make new investments, start new schemes or charge management fees, and retained money can only go into instruments allowed under AIF rules. These funds gain relief from several reporting and audit duties. AIFs retaining funds and Inoperative Funds must file annual reports on retained amounts and liabilities with Sebi and investors within 30 days after each financial year ends. The framework took effect immediately and applies to Venture Capital Funds registered under the former 1996 rules.
