The Securities and Exchange Board of India (SEBI) has released guidelines for borrowing by Category I and Category II alternative investment funds (AIFs) and the maximum permissible limit for extending tenure by Large Value Funds for Accredited Investors (LVFs) on Monday, August 19, 2024.

Category I and II AIFs are prohibited from borrowing or using leverage for investments, except for temporary needs in limited cases. These AIFs can borrow funds with specific restrictions to address temporary funding needs or manage day-to-day operational expenses.

This borrowing is allowed for a maximum period of 30 days, up to four times in a calendar year, and should not exceed 10% of the investable funds.

According to a circular, SEBI has permitted Category I and Category II AIFs to borrow to address a temporary shortfall in the amount called from investors for investing in investee companies (‘drawdown amount’) to facilitate ease of doing business and provide operational flexibility.

Regarding the conditions for borrowing, SEBI mentioned that the scheme’s Private Placement Memorandum (PPM) must disclose the borrowing. Borrowing is only allowed in emergencies as a last resort.

The borrowed amount should be the lower of 20% of the investment, 10% of investable assets, or the pending commitments from other investors. SEBI stated that only the investors who must provide their drawdown amounts will bear the borrowing costs.

Borrowing cannot be used to provide investors with different drawdown timelines, and details of borrowing and repayment must be regularly disclosed to all investors. AIFs must wait for a minimum of 30 days between two borrowing periods, calculated from the repayment date of the previous borrowing.

Regarding extending the tenure for LVFs, SEBI stated that it can be done for a maximum of five years with the approval of two-thirds of unit holders. LVFs with no disclosed extension period or an extension beyond five years must comply with the five-year limit by November 18. 

If all investors agree, they can modify their original tenure, and they must submit an undertaking to SEBI confirming this by November 18. They need to update their extension details in the quarterly report for the quarter ending December 31, 2024.

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