AIFs jittery over Sebi move to ban priority distribution

Prohibition will crimp ability to raise funds; consider better transparency checks, say AIFS

- Pavan Burugula,Sneha Shah

Alternative investment funds (AIFs) fear their ability to raise funds may be hurt by a recent regulatory move to curb so-called priority distribution models and have called for better transparency checks instead.

In November 2022, the Securities and Exchange Board of India (Sebi) asked AIFs with priority distribution models not to accept any fresh investments until the regulator took a call on the permissibility of such models. This was followed by a Sebi discussion paper in May, proposing to prohibit such models outright.

Such models are an integral part of debt AIFs, an industry executive said. “The industry feedback is for Sebi to consider a separate category that could allow priority distributions with certain checks and balances," said Nandini Pathak, leader of investment funds at Nishith Desai Associates.

In a priority distribution model, the AIF creates two classes of investors; senior investors hold superior rights, such as the distribution of proceeds until a hurdle rate is met, after which junior investors are paid. Similarly, in case of a loss, investors in the senior tranche take higher losses than the junior tranche investors.