AIF Extension, Associate Investment and Below-Minimum Investor
A Category II close-ended AIF has a corpus of ₹420 crore, 38 investors, and a five-year tenure ending 30 June. In May the manager proposes three actions: a one-year extension to sell two illiquid portfolio companies; a fresh investment of ₹18 crore in a company owned by the manager's cousin; and admission of a new investor at ₹80 lakh after the initial close. The manager says the investment committee and sponsor board have approved all three and that investor consent can be obtained after the extension. The private placement memorandum caps associate investments at 10% of investable funds and requires prior investor consent for any associate transaction. Existing associate exposure is 7%. The compliance officer must advise the manager before the proposals are executed.
1. Assess each of the three proposals against the AIF compliance framework.
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The extension cannot be imposed unilaterally. A close-ended AIF's tenure can be extended only with the consent of the required majority of investors by value, generally 75%, and the manager's plan to obtain consent after the extension reverses the legal sequence. If consent is not obtained before 30 June, the AIF must proceed with winding up or divestment as per the regulations. The associate investment fails on two grounds: the PPM caps associate investments at 10%, and existing 7% plus ₹18 crore on a ₹420 crore corpus adds about 4.3%, taking total associate exposure to about 11.3%; also, prior investor consent is required and has not been obtained. Sponsor board approval does not substitute for investor consent. The ₹80 lakh admission is below the ₹1 crore minimum investment for AIF investors; unless a specific exemption applies, such as the lower threshold for employees or directors of the manager or sponsor, the investor cannot be admitted.
2. What approvals and process should the compliance officer require before any of the proposals proceed?
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For the extension, convene an investor meeting with full disclosure of the illiquid assets, valuation, expected timeline and costs, and obtain consent of at least 75% of investors by value before 30 June. If the extension is within the permitted two-year period, no separate SEBI approval may be needed, but any extension beyond that period requires checking the applicable SEBI approval requirement. For the associate investment, obtain prior consent of 75% of investors by value, confirm that post-investment associate exposure remains within the 10% PPM cap, and disclose the cousin relationship and valuation. If the cap would be breached, do not invest. For the new investor, reject or refund the ₹80 lakh unless the investor falls within a recognised lower-threshold category; do not admit the investor at a reduced minimum. Record all approvals and update the compliance register.
3. What should happen if the manager executes the proposals without the required approvals?
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The compliance officer should issue a stop instruction, report the breach to SEBI and document the facts for the trustee or investor committee. The associate investment should be unwound or regularised only if the investors give valid consent and the cap can be met; a post-facto board approval does not cure the breach. The ₹80 lakh admission should be reversed and the amount refunded. The extension should not be treated as effective unless the required investor consent is obtained; otherwise the AIF must follow the winding-up or divestment process. The manager's claim that consent can be obtained later is not a defence. Investors should be informed of the breach and the remediation, and the compliance officer should assess whether the manager's conduct affects its fitness and propriety.