Tenure Expiry with Unsold Assets
A Category II fund raised Rs 500 crore with an eight-year tenure ending 31 March. At expiry, two unlisted portfolio companies, carried at 18% of corpus, remain unsold. The manager circulates a written resolution to extend the scheme by 18 months and obtains approvals from investors holding 62% by value. It also proposes to distribute the two companies' shares in specie to LPs at a valuation prepared by an affiliate of the manager, and to charge Rs 2.5 crore of legal and restructuring costs to the scheme. One large LP has demanded immediate cash distribution and says the extension is invalid. The PPM allows 'such extension as permitted by law' and distribution in specie 'with investor consent', but does not specify a voting threshold or valuation method.
1. Is the 18-month extension valid on 62% approval? What is the correct process and time limit?
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No. For a Category I/II AIF, the scheme tenure may be extended only with the consent of at least two-thirds of investors by value, which is 66.67%. Approvals from investors holding 62% fall short, so the resolution fails unless the regulations or the PPM provide a lower threshold, which they do not here. The manager should convene a proper LP meeting with full information: the reasons for the extension, a liquidation plan, expected timeline and costs, and alternatives. If extension is not approved, the scheme must enter liquidation on expiry. The liquidation period is 12 months, unless extended as permitted by the regulations. During liquidation, the manager should sell assets and distribute proceeds, and it cannot make new investments or continue charging management fees beyond the period specified. The large LP's demand for immediate cash may not be feasible if the assets are illiquid, but the manager must act in the best interest of all LPs and cannot prefer one. If the liquidation period lapses, the manager must seek regulatory guidance and should not hold assets indefinitely.
2. Can the manager distribute shares in specie on the proposed valuation? What safeguards apply?
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Distribution in specie is possible only if the PPM and scheme documents permit it and informed investor consent is obtained. The valuation cannot be prepared by the manager's affiliate alone. The manager should appoint an independent valuer, follow the AIF valuation guidelines, use recognised methods, and disclose assumptions as of a recent date. LPs should receive a term sheet showing the number of shares, valuation, tax treatment, and any lock-in or transfer restriction. Because the shares are unlisted and illiquid, the manager should offer a cash alternative where feasible, or a continuation vehicle, and obtain consent from each LP or the required majority. A related-party valuation is a conflict: the LPAC should review it, and the manager should bear the valuer's fee if the affiliate selected the valuer. Transfer taxes, legal costs, and any indemnities must be disclosed. If the extension itself was invalid, the manager should not proceed with a distribution that depends on it.
3. May the Rs 2.5 crore costs be charged to the scheme?
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Costs must be for the scheme's benefit and allocated under the PPM and the fund's expense policy. Legal and restructuring costs of an extension or a distribution may be scheme expenses if they are incurred for winding up and are approved by the LPAC. But costs of defending the manager's own position, or costs caused by the manager's delay, should be borne by the manager. Rs 2.5 crore is 0.5% of the corpus, which is material, so it needs line-item disclosure and investor approval if the PPM requires it. The manager cannot use scheme assets to pay its affiliate's valuation fee or its own regulatory penalties. If the extension was invalid, costs incurred on it may not be chargeable to the scheme. The manager should provide a cost budget and seek LPAC approval before charging.