Sebi issues a draft circular on pro-rata, pari-passu rights of AB investors

Markets regulator Sebi on Friday issued a draft circular to clarify the operational aspects of enforcing pro-rata and pari-passu rights of investors in alternative investment funds (AIFs).Pro-rata typically means that investors share profits or returns in proportion to their investment, while pari-passu means that all investors are treated equally, with no one given special preference.

In its draft, Sebi proposed that for closed-end AIF schemes, investors’ rights should be based on their total stake or on the undrawn stake, while the investment returns are distributed.”The investors of a scheme of an AIF will have rights to the distribution of returns from an investment, pro rata to their contribution to such investment; or, pro rata to their contribution to such investment, on a time-weighted pro rata basis, as clearly disclosed in advance to investors in the PPM of the scheme,” Sebi suggested.

The regulator said schemes must clearly disclose in advance how pro-rata entitlements are calculated and cannot change this method during their term. Investors who are excluded from a specific investment cannot have their unused stake used elsewhere.

The methodology should also prevent investors from holding an excessive stake in an investee company beyond the prescribed concentration limits. Existing AIF schemes can continue with their current methodology if they comply, but schemes using other systems will need to adapt to the new guidelines for future investments. Open-ended Category III AIFs, which investors can freely enter or exit, may not need to apply pro-rata withdrawals but must distribute proceeds in proportion to units held.

However, if such schemes invest in unlisted securities, they will have to follow the same rules as closed-end schemes, Sebi said.

For investments made before December 13, 2024, distributions will follow existing terms and conditions already disclosed to investors.

The circular also clarified that returns or profits shared by investors with fund managers, such as carried interest, are exempt from the pro-rata requirement.

Sebi has also directed that AIF trustees maintain proper records demonstrating compliance with pro-rata rights, and trustees must ensure that compliance reports reflect compliance with these provisions.

This followed the amendment to the AIF regulations of November 2024 and a subsequent circular of December 2024.

The Securities and Exchange Board of India (Sebi) sought public comments till November 28.