Winding Up, Liquidation Schemes, and Dissolution in AIFs (Part 4)

The final phase of an Alternative Investment Fund's life cycle involves the orderly winding up of its operations and the distribution of terminal proceeds to its investors. This concluding part details the regulatory procedures for winding up, the framework for Liquidation Schemes, and the recently introduced concept of the Dissolution Period.

15.6 Winding Up of an Alternative Investment Fund

Alternative Investment Funds (AIFs), particularly close-ended ones, must be dissolved upon the completion of their tenure or the specific scheme's life cycle. The process of winding up is governed by Regulation 29 of the SEBI (AIF) Regulations and must also comply with the specific statute under which the AIF was constituted, such as the Indian Trusts Act, 1882, the Companies Act, 2013, or the Limited Liability Partnership Act, 2008.

15.6.1 Circumstances Triggering Winding Up

An AIF must be wound up under the following conditions:

Tenure Expiry: When the tenure of the AIF or the scheme as stated in the Private Placement Memorandum (PPM) concludes.
Trustee Opinion: If the trustees or the trustee company believe that the fund should be wound up in the best interests of the unit holders.
Investor Resolution: If 75% of investors by value of their investment pass a resolution at a meeting to wind up the AIF.
SEBI Direction: If SEBI directs the winding up in the interests of the investors.

15.6.2 The Liquidation Period

Once the decision to wind up is made, the AIF enters a Liquidation Period, which is typically one year following the expiry of the tenure or the extended tenure. During this time, the assets must be liquidated, and the proceeds distributed to investors after satisfying all liabilities. From the date of intimation of winding up, the AIF is prohibited from making any further investments.

15.7 Liquidation Scheme Framework

If an AIF has unliquidated investments at the end of its tenure, it may launch a Liquidation Scheme or opt for an in-specie distribution of those assets, subject to specific conditions.

15.7.1 Launching and Operating a Liquidation Scheme

A Liquidation Scheme is a close-ended scheme launched exclusively to liquidate the unsold investments of an expiring scheme.

Naming Convention: The scheme's name must mandatory include the words "Liquidation Scheme".
Subscription Restrictions: These schemes are not permitted to accept fresh commitments or make any new investments; they exist solely to harvest remaining assets.
Filing Requirements: The manager must file a PPM with SEBI through a merchant banker, though these schemes are exempt from the standard requirement of obtaining SEBI's comments on the PPM.
Current Regulatory Status: SEBI has notified that no new Liquidation Schemes shall be launched after April 25, 2024.

15.7.2 Exit for Dissenting Investors

To protect investors who do not wish to participate in a Liquidation Scheme or an in-specie distribution:

Bid Arrangement: The AIF or Manager must arrange bids for at least 25% of the value of the unliquidated investments.
Valuation: The valuation must be conducted by two independent valuers, and the results must be disclosed to all investors.
Exit Price: Dissenting investors are offered an option to exit the scheme using the 25% bid arranged by the manager.

15.8 The Dissolution Period

The Dissolution Period is a defined timeframe following the liquidation period, established for the sole purpose of liquidating any remaining unliquidated investments.

15.8.1 Key Features of the Dissolution Period

Investor Consent: Entering a Dissolution Period requires the approval of at least 75% of investors by value of their investment.
Documentation: The scheme must file an Information Memorandum and a Due Diligence Certificate from a merchant banker with SEBI before the liquidation period expires.
Tenure Limits: The dissolution period cannot exceed the original tenure of the scheme and cannot be extended under any circumstances.
Operational Restrictions: Similar to liquidation schemes, no fresh commitments or new investments are allowed during this period.

15.7.3 Mandatory In-Specie Distribution

If a scheme fails to obtain the necessary investor consent to launch a Liquidation Scheme or enter a Dissolution Period, the unliquidated investments must be mandatorily distributed to investors in-specie. If an investor is unwilling to accept this distribution, the investment is written off by that investor.

Key Takeaways

Trigger for Winding Up: Winding up can be voluntary (tenure expiry or 75% investor vote) or regulatory (SEBI direction).
Liquidation Timeframe: Managers have one year post-tenure to liquidate assets and settle liabilities.
Dissolution Period: This is a final opportunity to liquidate remaining assets with 75% investor consent, but its tenure is capped at the scheme's original life.
Investor Protection: Dissenting investors in liquidation or in-specie processes must be provided an exit through a 25% bid mechanism.
Reporting: All values associated with Liquidation Schemes or in-specie distributions must be reported to Performance Benchmarking Agencies.

Important Terms

Liquidation Period: A one-year window following the end of an AIF's tenure to sell assets and return capital.
Dissolution Period: The period following the liquidation period dedicated to disposing of remaining unliquidated assets.
In-specie Distribution: The physical distribution of underlying securities (rather than cash) to investors.
Original Scheme: The initial AIF scheme whose tenure has expired and which is transferring assets to a Liquidation Scheme.
Information Memorandum: A document filed during the Dissolution Period detailing the remaining assets and the plan for their disposal.

End of Chapter 15 Summary.

Chapter 15: Winding Up, Liquidation Schemes, and Dissolution in AIFs (Part 4)