Ankush GoyalPartner
Rohan KohliSenior Associate
Natansh JainAssociate
Key Developments
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Guidelines for borrowing by Category I and Category II alternative investment funds and maximum permissible limit for extension of tenure by large value funds
The Securities and Exchange Board of India (SEBI) notified amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) on 6 August 2024 to provide (a) norms for borrowing by Category I and Category II Alternative Investment Funds (AIF), and (b) maximum permissible limit for extension of tenure by Large Value Funds for Accredited Investors (LVF). Subsequently, SEBI issued facilitative guidelines aimed at protecting the interests of investors by ensuring transparency, timely disclosures, and adherence to tenure limits for LVF schemes.
Guidelines for borrowing by Category I and Category II AIFs
Category I and II AIFs are now permitted to borrow to meet temporary shortfalls in the drawdown amount called from investors for making investments in investee companies (Drawdown Amount), subject to the following additional conditions:
- Disclosure in the Private Placement Memorandum: If an AIF intends to borrow to meet a shortfall in the Drawdown Amount, it must be disclosed in the Private Placement Memorandum (PPM).
- Last resort: Borrowing must only occur in emergencies, as a last resort, when an imminent investment opportunity is at risk and, despite best efforts, the Drawdown Amount from investors has not been received.
- Limit on borrowing: The borrowed amount must not exceed 20% of the proposed investment or 10% of the scheme's investable funds or the pending commitment to be drawn from investors, other than the investors who failed to provide the Drawdown amount, whichever is lower.
- Cost of borrowing: The cost of borrowing must only be charged to investors who failed to provide the Drawdown Amount.
- Flexibility: Flexibility of borrowing to meet shortfall must not be used as a means to create different drawdown timelines for investors.
- Disclosure of information: The manager must disclose borrowing details, including borrowing terms and repayment to all investors on a periodic basis as per the terms of agreement with the investors of the AIFs.
- Cooling off period: A 30-day cooling off period between two borrowings must be maintained, calculated from the date of repayment of the previous borrowing.
Maximum permissible limit for extension of tenure by LVFs
The extension in tenure of any existing LVF scheme will be subject to the following:
- Alignment of tenure: LVF schemes without a definite extension period in their PPM or with an extension beyond the permissible five years must comply with the specified extension requirements by 18 November 2024. These schemes must also report the revised extension period in the quarterly submission on the SEBI Intermediary Portal for the quarter ending 31 December 2024.
- Revision of original tenure: While realigning the extension period, LVF schemes can revise their original tenure with the consent of all investors, subject to an undertaking being submitted to SEBI by 18 November 2024, confirming that all investors have consented to revise the original tenure.
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Merger rules amended to permit foreign holding company to merge with Indian subsidiary under the fast-track route
The Ministry of Corporate Affairs (MCA) published the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (Amendment) with the objective of easing ‘reverse flipping’ norms in India. The Amendment is effective from 17 September 2024.
The Amendment introduces Rule 25A(5) to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, permitting the merger or amalgamation of a foreign holding company into an Indian subsidiary to be undertaken through the fast-track merger scheme set out under Section 233 of the Companies Act, 2013. A fast-track merger would not require approval from the National Company Law Tribunal, which would streamline the process and significantly reduce the costs and time required for a merger. Previously, the fast-track merger route was reserved for mergers between Indian holding companies and their subsidiaries, between start-up companies, or between start-up companies with small companies (i.e., companies with a paid-up share capital of less than INR 4,00,00,000 (~USD 476,000) and turnover of less than INR 40,00,00,000 (~USD 4,760,000).
(To read our detailed update on the Amendment, click here.)
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Framework for foreign venture capital investors revamped to streamline registration process, eligibility criteria and registration renewal
The Securitie and Exchange Board of India (SEBI) amended the SEBI (Foreign Venture Capital Investors) Regulations, 2000 on 5 September 2024 to streamlines and simplify the regulatory framework. The amended regulations will take effect from 1 January 2025.
A key change introduced by the amendments is that the process of granting registration to foreign venture capital investors (FVCI) has now been delegated to designated depository participants (DDP), similar to the registration process prescribed for foreign portfolio investors (FPI). Additionally, the eligibility criteria have been revised to provide that the applicant, must be:
- an entity incorporated or established outside India or in the International Financial Services Centre,
- a resident of a country whose securities market regulator is a signatory to the International Organisation of Securities Commission’s Multilateral Memorandum of Understanding, and
- a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008, amongst other conditions.
SEBI also issued operational guidelines on 26 September 2024 to facilitate a smooth transition to the amended FVCI framework. The guidelines include additional details on the registration and post-registration process, Know Your Client norms to be followed, and reporting of Type I or Type II material changes, similar to the compliances tasked upon FPIs and DDPs under the FPI framework.
Revamping the framework and simplifying the registration process is likely to boost foreign investment into India, encouraging a broader range of global investors to consider opportunities within the country.
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SEBI issues guidelines for migration of venture capital funds to the alternative investment funds framework to increase investor protection and ensure operational continuity
Following the amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) on 11 July 2024, SEBI issued guidelines for migration of Venture Capital Funds (VCF) registered under the SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations) to AIF Regulations. These guidelines provide a streamlined pathway for migration to the AIF framework, offering several advantages. The migration process ensures regulatory alignment and operational continuity for VCFs, while enhancing investor protection through clearer governance structures. Determination of tenure based on existing disclosures or investor approval allows flexibility while safeguarding investor interests. The enhanced regulatory reporting for non-migrated VCFs ensures that all funds, whether migrated or not, remain subject to SEBI’s oversight, promoting transparency and accountability.
The key aspects of the guidelines are discussed below.
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Determination of the tenure: VCFs opting for migration to AIF Regulations with schemes whose liquidation period under VCF Regulations has not expired can avail of the migration facility till 19 July 2025. The tenure of the migrated VCF scheme will be determined as follows:
- If a definite tenure was disclosed in the PPM, the scheme will retain the same tenure post-migration.
- If no definite tenure was disclosed in the PPM, the residual tenure will be determined prior to migration, with approval from 75% of investors by the value of their investment.
- Consequences of migration: Upon migration to AIF Regulations, the investors on board, investments held, and units issued by the VCF, or its schemes registered under VCF Regulations, will be deemed to be that of the migrated VCF or its scheme under the AIF Regulations.
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Consequences of non-migration: For VCFs that do not opt for migration to AIF Regulations, the following will apply:
- Schemes whose liquidation period has not expired under VCF Regulations will be subjected to enhanced regulatory reporting, similar to AIFs under the AIF Regulations.
- VCFs with at least one scheme whose liquidation period has expired will be subjected to appropriate regulatory action for continuing beyond their original liquidation period.
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Eligibility for migration: VCFs will not be eligible to migrate to AIF Regulations if:
- All schemes of the VCF have been wound up.
- No investment has been made by schemes that have not been wound up.
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Companies rules amended to streamline regulatory compliance and enhance transparency
On 15 July 2024, MCA amended the Companies (Management and Administration) Rules, 2014 (Management and Administration Rules) and the Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules), to enhance both regulatory compliance and transparency by upgrading the documentation requirements.
Under the Management and Administration Rules, the existing Form MGT-6 has been replaced with a new, updated version. Form MGT-6 relates to the return filed with the Registrar declaring beneficial interest in shares. The revised form has been designed to capture more detailed and organised information including the following:
- Introduction of Permanent Account Number verification feature: The form now requires the Permanent Account Number (PAN) or Passport Number of the Beneficial Owner (BO) to be entered. Once verified, the BO Identification Number (BO ID) generated after the form submission will be linked to the PAN provided in the form.
- Generation of Beneficial Owner Identification Number: Upon successful filing, a BO ID will be generated. This BO ID will be essential for future transactions involving the BO.
The amendment to the SBO Rules primarily streamlines the existing process of declaring significant beneficial ownership (SBO) by substituting Form Ben-2 through which every company must file a declaration of its SBO with the Registrar. The substituted form emphasises the requirement for comprehensive documentation and digital signatures from authorised personnel, ensuring the accuracy and authenticity of the information submitted. This verification process must be carried out by a practicing professional, such as a Chartered Accountant, Cost Accountant, or Company Secretary, enhancing the reliability of the disclosures and reinforcing regulatory compliance.
