SEBI Curbs Activities of AIFs Using Priority Distribution Models

SEBI (Securities and Exchange Board of India) has imposed restrictions on AIFs (alternate investment funds) that adopt a priority distribution model in their schemes.

A priority distribution model allows some investors to exit a scheme ahead of others. In a circular, SEBI said certain AIF schemes have adopted priority distribution models which allow one class of investors to receive payouts before other classes of investors, which causes disproportionate losses for the latter.

While current regulations prohibit the disproportionate sharing of losses between AIF sponsors and other investors, there is no explicit restriction for different classes of investors.

SEBI said the matter is under examination, in consultation with the AIF industry, and the restrictions imposed on such AIF schemes will remain in place until a decision is made.

Effective immediately, AIF schemes with priority distribution models are prohibited from accepting fresh investments and from investing in any new investee company until further notice.