Markets regulator SEBI introduces a framework that lets Alternative Investment Funds (AIFs) retain liquidation proceeds beyond their prescribed fund life, subject to specific conditions. The change applies to AIFs facing unresolved obligations during winding up, including litigation-related communications, regulatory or tax demands, and other legal claims that could lead to future liabilities. Under the guidelines, funds may retain proceeds if they have received litigation notices or regulatory/tax communications that indicate potential liability, even if the liability has not crystallised. For anticipated liabilities, the AIF can retain proceeds after disclosing the proposed retention amount and estimated retention period, and obtaining consent from at least 75% of investors by value.
SEBI also permits retention for residual winding-up operational expenses, but limits this to no more than three years beyond the end of the permissible fund life, with the retained amount supported by invoices or comparable expense records. SEBI introduces an “Inoperative Fund” status for AIFs that have completed liquidation of investments but keep retained proceeds or remain registered pending pending matters. Inoperative Funds cannot launch new schemes or charge management fees, must invest retained money only in permitted liquid instruments, and receive compliance relief from several reporting and certification requirements. Annual reporting of retained monies and outstanding liabilities continues until obligations are settled. The framework is extended to Venture Capital Funds under the erstwhile VC regulations.
