AIFs must ring-fence assets, liabilities in schemes: SEBI


Alternative investment funds (AIF), including venture capital (VC) and private equity (PE) firms, must “segregate and ring-fence” liabilities and assets of each scheme from others, mandated the Securities and Exchange Board of India (SEBI).

“The manager and either the trustee or the trustee company or the board of directors or designated partners of the AIF, as the case may be, shall ensure that the assets and liabilities of each scheme of an AIF are segregated and ring-fenced from other schemes of the AIF; and bank accounts and securities accounts of each scheme are segregated and ring-fenced,” said a SEBI gazette issued on 15 November.

This ring-fencing is expected to prevent AIFs from utilising the resources of a plan to pay off debts and offset losses in related schemes. Under the present rule, AIFs must file a new application for the launch of a scheme if they fail to disclose the initial closure of the scheme in the way required. This way, investors in one AIF scheme will not be negatively affected if another scheme run by the same AIF goes under or has significant losses.

Presently, Indian AIFs are allowed to launch several schemes. There was ambiguity on the norms regarding the ring-fencing and separation of each scheme, raising questions on whether the assets of one scheme might be utilised to meet the liability of another scheme.

SEBI had earlier issued a similar order in December 2020, after Franklin Temple-ton wound up six mutual fund schemes without obtaining investor consent. “All assets and liabilities of each scheme shall be segregated and ring-fenced from other schemes of the [mutual fund],” Sebi ordered at that time.