Funding winter, illiquid startups and Sebi rules hamper AIF exits

livemint.com:

₹17,500 crore, are set to expire within the next 16 months, but are facing problems winding down. They blame it on the lack of liquidity and legal constraints resulting from a funding winter. AIFs have already exercised one extension but have now sought another.

But, this one has a rider—a host of Sebi rules, which experts say are difficult for the funds to comply with. Exit options After their term finally comes to an end, AIFs will have two options. The first is a liquidation scheme—a closed-ended scheme that purchases the units of the expiring AIF.

Once this scheme is initiated, the AIF cannot accept any additional funds and will revert to its original tenure but will not be eligible for extensions. The second option is in-specie distribution, wherein the AIF transfers its stake in portfolio companies, such as equity shares, compulsorily convertible preference shares (CCPS), compulsorily convertible debentures (CCD), etc., to investors on a pro-rata basis. For instance, if the AIF holds stakes in 10 startups, investors will be distributed the shares of all 10 startups, which will be deposited in their demat accounts directly.

But this can be done only after obtain approval from 75% of investors by value. In case it does not get this approval, the AIF will have to go for a forced in-specie distribution. Herein, the AIF is obligated to transfer its stake to all investors, irrespective of their consent.