The Securities and Exchange Board of India (“SEBI”) has issued an informal guidance dated October 17, 2018 to JM Financial Limited (“JMFL”), under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 in connection with SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).

Facts

JMFL provides investment management services, amongst other funds, to JM Financial India Fund II (“Fund”), a scheme of JM Financial India Trust II (“Trust”). The Trust is registered as a Category II Alternative Investment Fund with SEBI since March 30, 2017 under the AIF Regulations.

During the course of operations, the AIFs may come across situations where there are unutilised funds lying in bank accounts for, inter alia, the following reasons:

i. Capital contribution received from investors, pending investment of such funds (uninvested portion of investible funds); and

ii. Time gap between (i) receipt of proceeds on sale/transfer of investment or (ii) the returns are earned from the investments (investments (such as dividend, interest, etc.) and distribution of (i) and (ii) to the investors.  In certain cases where the amounts may be small, the same are likely to get accumulated at the Fund level and will be distributed to the investor at a later stage. Till the time the funds are distributed to the investors, the same may remain as idle funds. 

The Fund proposes to invest such unutilised funds into liquid mutual funds and similar liquid investments as they typically offer better returns than money lying in current account thereby providing a better overall return for the investors. 

Issue

Informal guidance has been sought on the following: whether an AIF under the AIF Regulations is in compliance with the provisions of AIF Regulations, when its invests its unutilised funds (other than that permitted under Regulation 15(1)(f) of the AIF Regulations) in the units of the liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, commercial papers, etc.

Applicable Regulations

Regulation 15 of the AIF Regulations lists out the general investment conditions for AIFs. 

Under regulation 15(1)(c) of the AIF Regulations, Category I and II Alternative Investment Funds are required to invest not more than 25% (twenty five percent) of the investable funds in 1 (one) investee company.

Under regulation 15(1)(f), all AIFs are subjected to the following condition: un-invested portion of the investable funds may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as Treasury bills, CBLOs, Commercial Papers, Certificates of Deposits, etc. till deployment of funds as per the investment objective.

SEBI’s guidance

SEBI held that the provisions under Regulation 15(1)(f) is provided in the interest of investors’ with respect to uninvested portion of the investible funds till deployment of these funds as per the investment objective. Considering the same rationale in the interest of investors, SEBI registered AIFs may invest investment income/investment proceeds arising from sale/transfer of the investments or returns from the investment (dividend or interest on securities) in liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, commercial papers etc.

However, to ensure the transparency and disclosure requirements as specified in AIF Regulations, the AIF shall, therefore disclose the information about the proposed transaction periodically to the investors as mandated under regulation 22 of the AIF Regulations. 

The provision of Regulation 15(1) (c) shall remain applicable to all funds including investible funds and investment income/investment proceeds.