SEBI Update - Guidelines for winding up of AIFs with respect to retention of proceeds and ‘Inoperative Fund’ status

SEBI has introduced a framework permitting AIFs and erstwhile VCFs to retain liquidation proceeds beyond the permissible fund life in specified circumstances, including pending or anticipated litigation, tax/regulatory demands, or residual winding-up expenses. The circular also introduces the concept of an “Inoperative Fund”, allowing AIFs that have completed investment activities and seek to surrender registration, but continue to retain monies or await the outcome of pending litigation, to obtain an inoperative status from SEBI. Such funds are prohibited from launching new schemes or charging management fees and are subject to a reduced compliance framework, while being required to submit annual status reports on retained monies and outstanding liabilities. The retained funds must be invested in accordance with Regulation 15(1)(f) of the SEBI (AIF) Regulations, 2012, and the facility is also extended to Venture Capital Funds registered under the erstwhile SEBI (VCF) Regulations, 1996. The circular is effective immediately.