AIFs reject early exit pleas from banks, plan for 'defaults'

economictimes.indiatimes.com:

alternative investment funds (AIFs) in India have turned down 'early exit' requests from banks and finance companies, and are now exploring ways to deal with these investors as they default on 'capital calls' from funds.

Will AIFs impose a penalty on banks and non-banking finance companies (NBFCs) which, following the Reserve Bank of India's recent dos and don'ts, fall short of their original commitments to the funds? Will a fund forfeit the amount already invested? Or, will funds simply cap the investment with contributions made so far, make an exception for banks and NBFCs caught in the new regulations, and move on to preserve relationships with these large investors?

While the third appears more likely, it could all depend on each fund and multiple factors: the size of commitments by affected investors, how aggressive a stance a fund manager takes, and whether the absence of future drawdowns could unsettle a fund's investment plan and dynamics. A bank or NBFC which stops contributing can be technically categorised as 'defaulter', but a fund may think twice before doing it, said AIF circles who, however, were unanimous on the denial of early redemption to select investors.

According to Tejesh Chitlangi, senior partner at the law firm, IC Universal Legal, «The Category I and II AIFs in which RBI's governed Regulated Entities (REs) primarily invest, are all closed-ended funds with investors not permitted preferential redemption rights in terms of SEBI AIF Regulations.

This is keeping in view the blind pool nature of such funds with a defined tenure and timing of pro rata payout to each investor rightly considered at par under Sebi Regulations. The priority distributions to any investors are also subject to SEBI