Markets regulator SEBI issues new guidelines that allow Alternative Investment Funds (AIFs) to retain liquidation proceeds beyond the prescribed fund life and, in certain cases, transition into an “inoperative fund” status while winding up. The framework addresses situations where liabilities do not crystallize by the time a fund’s tenure ends, such as ongoing or potential litigation, regulatory or tax demands, and residual operational expenses needed to complete winding up.
Under the rules, AIFs or their schemes can hold proceeds after liquidation or dissolution if they have received litigation or other legal communications indicating possible future liabilities. For anticipated liabilities, fund managers can retain money if they obtain investor consent from at least 75% of investors by value and disclose the proposed amount and estimated retention period. For residual winding-up expenses, retention is permitted for expenses supported by invoices or comparable expense records, but cannot extend beyond three years from the end of the permissible fund life.
SEBI also introduces an “inoperative fund” category for AIFs that have completed liquidation of investments but retain proceeds for pending obligations or are awaiting outcomes of litigation. Inoperative funds cannot launch new schemes or make new investments and cannot charge management fees on existing schemes. SEBI provides exemptions from several reporting and compliance requirements, while requiring annual reporting to SEBI and investors on retained monies and outstanding liabilities within 30 days of each financial year-end. The framework also applies to venture capital funds under the erstwhile SEBI (Venture Capital Funds) Regulations.
