SEBI introduces new borrowing rules for Category I and II AIFs

On Monday, the Securities and Exchange Board of India announced new guidelines regarding borrowing for category I and category II alternative investment funds. According to these guidelines, such funds are prohibited from borrowing money to make investments or to use leverage, except to address temporary shortfalls in daily operations.

Category I AIFs invest in sectors such as startups, small and medium-sized enterprises, social ventures with positive impacts, and infrastructure projects like railways and airports. Category II AIFs include private equity funds, which assist unlisted companies in raising capital, and debt funds, which invest in the debt securities of these companies. 

If an AIF needs to borrow funds due to delayed contributions from investors, it may do so under certain conditions. According to SEBI's circular, this borrowing must be disclosed in the fund's scheme documents and is permitted only in emergencies.

March 2024 marked a significant milestone in the real estate industry as SEBI collaborated with key market players, such as Property Share, to unveil SM REIT regulations. The primary objective of these guidelines was to create an avenue for regulated investment opportunities through listed trust vehicles akin to mainboard REITs and ensure that all FOP businesses operate within regulatory boundaries. This move aimed at enabling investors to enjoy growth benefits while providing transparency and accountability in their investments on FOP platforms. The introduction of REIT guidelines transformed the real estate investment landscape allowing smaller investors to engage in the market.

The borrowed amount must adhere to specific limits. According to the SEBI guidelines, it cannot exceed 20% of the proposed investment in the company, 10% of the AIF's total investable funds, or the outstanding commitment from other investors, whichever is lower. Additionally, the cost of borrowing must be charged to the investors who delayed their payments, rather than to the fund as a whole. Funds are also required to wait 30 days between borrowing periods, starting from the repayment date of the previous loan.

The new conditions also impact the extension periods for AIFs. Funds that have not set an extension period or those exceeding the permitted five years must adjust their extension periods to comply with the new guidelines. They must align with these rules by November 18 and update their quarterly reports accordingly. Any changes to the original tenure require approval from all investors, and a formal undertaking must be submitted to SEBI by the deadline.