At current, guidelines with respect to funding by the sponsor within the AIF say the sharing of loss by the sponsor shouldn’t be lower than professional rata to their holding within the AIF vis-a-vis different unit holders.
“Whereas it has not been explicitly restricted in AIF Rules that the sharing of loss by a category of buyers shall not be lower than professional rata to their holding within the AIF vis-a-vis different lessons of buyers/unit holders, it has been dropped at SEBI’s consideration that sure schemes of AIFs have adopted a distribution waterfall in such a manner that one class of buyers (aside from sponsor/supervisor) shares loss greater than professional rata to their holding within the AIF vis-a-vis different lessons of buyers/unit holders, because the latter has precedence in distribution over former (‘precedence distribution mannequin’),” Sebi mentioned in a round on Wednesday.
The regulator mentioned the matter is being examined by it in session with its Different Funding Coverage advisory committee, the AIF trade and different stakeholders.
“While the senior-junior tranche construction was adopted by a couple of AIFs, notably the funds investing in debt securities, Sebi was not in favour of such buildings. While there was no specific prohibition underneath the AIF Rules proscribing such buildings, the regulatory view was to allow the identical solely the place the junior or in some instances the primary loss class was subscribed by the sponsor/supervisor and never by a set of third-party buyers,” mentioned Tejesh Chitlangi, Senior Accomplice, IC Common Authorized. “It appears Sebi could in future prescribe requisite checks and balances to allow sure precedence distribution buildings as a substitute of fully prohibiting them,” Chitlangi mentioned.