The year 2020, gone for good has left us charred in many ways. As a fall-out of the Covid-19 pandemic, the mutual funds and alternative investment funds markets too were adversely affected in most parts of 2020.

Thus leaving investors in further dismay amidst widespread job loss and business shutdowns.

These markets faced serious concerns around the life of the funds centered around –

  • Early termination
  • Liquidation and 
  • Extension of the funds 


Termination & Liquidation of Alternative Investment Funds (AIF):

In this article, we have discussed these issues pertaining to alternative investment funds for further knowledge and awareness of investors and promoters alike.

We will concentrate primarily on Category I and Category II Alternative Investments Fund(s) as both these alternative funds (AIFs) are closed-ended funds, registered under Securities and Exchange  Board of India (SEBI) Alternative Investments Funds) Regulations, 2012 (commonly referred to as ‘AIF Regulations’) with SEBI.


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Before we delve deep, let us take a quick look at the different categories of AIFs and their significant features.


1) Alternative Investment Fund (AIFs) Categories:


The AIFs can be applied and be registered with SEBI under 3 broad categories –


 1) AIF Category I:

This set of AIFs has a positive spill-over effect on the financial system. To support the cause, SEBI/ GOI might consider certain incentives/ commissions for this category.

This AIF program includes funds that make advances to sectors that have significant economic and social viability and includes –


    1. Venture Capital funds (including Angel funds)
    2. SME funds
    3. Social venture capital funds
    4. Infrastructure funds

2) AIF Category II:

This category of funds, as permitted by SEBI, consists of borrowings to meet day-to-day operational expenses. This AIF program is unlike those that comprise of Category I and Category II Alternative Investment Funds.

This category also includes AIF debt funds. Based on the state objectives of the fund, investments are primarily done by listed / unlisted investee corporates in this fund. AIF Debt fund is being looked upon as the next game-changer for investments in debt instruments in India.


3) AIF Category III:

This AIF program comprises of all those funds that are likely to result in negative externalities involving complicated strategies in trading and degenerative systematic risk involved in leveraging and includes –

    1. Hedge Funds
    2. Private Investment in Public Equity (PIPe) funds


Global Alternate Funds: In recent developments, it has been observed that Indians now have the exposure to investing in Global Alternate Funds if they so desire.

AIFs are operating from International Finance Services Centre (IFSC), Gift City with an effort to herald the AIF industry onshore from countries like Singapore and Mauritius. This is per SEBI’s recent decision rolled out.

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2) Other salient features of AIFs:


  1. Regulations guiding and monitoring AIFs are unique to this investment vehicle and may apply for other funding vehicles.However those regulations applicable to mutual funds, various trusts, and collective investment schemes among others; do not affect AIFs borrowings and/ or management.
  2. AIFs of Category I and II are close-ended funds and have a minimum term of 3 years and that is determined at the time of filing an application itself.Extensions beyond the agreed term may be allowed for 2 more years with approvals of at least two-thirds of investors by value. Category III on the other hand has the option of being open-ended or closed-ended.
  3. SEBI mandates the filing of IM or information memorandum with stipulated fees; for review of various schemes being proposed to be launched under any AIF.
  4. For Category I and Category II AIF programs or all close-ended schemes under AIF may be listed on stock exchange provided the tradable lot comprise of a minimum amount of INR 1 Crore.However, the stock exchange mechanism cannot be opted by any AIF to raise funds.
  5. The permitted upper limit of investible funds in any Investee Company is 25% for any AIF programs/ schemes.
  6. As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, all AIFs are required to have Qualified Institutional Buyer (‘QIB’) status.
  7. To avoid any conflict of interest with respect to transparency and/ disclosures and mechanisms, proper guidelines are available in AIF regulations.
  8. On an annual basis, all Alternate Investment Funds are required to provide the investors with the composite financial details around portfolio companies and material risks involved along with the strategies used to manage them.
  9. As per guidelines, SEBI reserves the right of investigation and/ or inspection of the AIFs and also issue further necessary guidelines as required. 


The best ranked AIFs in the market are below (source


Top 10 AIF in India/ Best Ranked AIFs in the market
Rank AIFs Strategy
1 Abakkus Asset Manager Emerging Opportunities Fund
2 Roha Asset Managers Rhoa Emerging Companies Fund
3 Girik Advisors Girik Multicap Growth Equity Fund
4 Vishudhha Capital India Value and Growth Fund
5 Ampersand Capital India Value and Growth Fund
6 Accuracap Tech Vectra Fund
7 Proalpha Capital QG Dynamic Equity Fund (QGD)
8 Carnelian Asset Management Capital Compounder Fund
9 Alchemy Capital Leaders of Tomorrow (ALOT)
10 TCG Advisory Services SMF Disruption Fund


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3) Termination of Alternate Investment Funds:


Ideally, termination of any AIF is due when the fixed term of the fund as documented in the fund papers, expires.

However, every governing fund document has an ‘early termination’ clause inbuilt in it for the AIF to wound up (on an earlier date compared to the original expiry date) in the face of any serious uncertainty/ exigency detailed in the document.

Early terminations are provisioned for even in AIF regulations.

It is obvious that both the investors and fund managers are aligned and focus all strategies and efforts towards the continuation of the fund till its original expiry date; more so investments in funds with longer tenure are designed to reap returns over a designated time period.

The principal objective being the maximization of the value of the portfolio by aligning with the time available based on the tenure of the fund. For this asset class, the planned ‘orderly exit’ helps the fund to optimize the risk and return opportunities.

For AIF Category I, there is a distinct difference between liquidation and termination (winding up) of the fund. Liquidation should ideally happen within 12 months of termination of the fund. Understanding the difference becomes important in drawing giveback provisions for investors.



Legal Provisions for Termination (Winding-up) of Alternative Investment Funds

Guidelines around termination of AIFs are available in AIF Regulations under Indian Legal Provisions on Winding-Up of AIFS Regulation 29. Along with this, an AIF termination is also directed by the law incorporating the respective AIF.

For instance, the LLP Act of 2008 states that for a Limited Liability Partnership to be terminated, only if it is manned by less than two partners in it and that too for a term of greater than six months.

Thus in case an AIF is formed as a Limited Liability Partnership Company with fewer than 2 partners and has completed six months of operations, then the AIF in question may be terminated if required.

Moreover, in an AIF formed as a Trust, the trustee is allowed to take a call to terminate the fund by the AIF Regulations if he/ she is convinced that such an act is solely been undertaken to protect the interest of the said AIF investors.

Post-termination of the AIF, the AIF Trust via any of its members is bound to notify SEBI and all investors about the termination along with reasons that lead to the wound-up.

In such a situation, the AIF Regulators need the AIF also to (a) refrain from getting into any additional investments as on the date of said intimation as detailed here; also (b) liquidate assets within 12 months from the date of said intimation.

Then once the liabilities are taken care of, the amount accrued to the investors is required to be paid off. 

Learn more about SEBI rules and regulations for alternative investment funds


4) Key terms associated with Termination of Alternative Investment Funds:


Briefly described below are a few terms that are intrinsically associated with the termination of closed-ended alternate investment funds.


Early termination

Provided the AIF investment manager finds that the continuation of the alternative investment fund might result in violating the law in any way, or any bad actions have been taken (post-adjudication) the AIF itself or the manager and the Limited Partners have jointly decided to terminate the fund.

This is generally a common ground for early termination of an AIF that is not governed by AIF Regulations. Such grounds of termination may result in a fiscal penalty for the manager of the AIF. 


In case Investment Manager cannot be replaced

If a situation arises that an AIF manager stands separated from the company, and investors fail to get a replacement AIF manager (minimum75% vote by value is required); in that situation, the recalcitrant investors are required to be allowed the choice to withdraw their funds from the AIF.

The outgoing AIF manager is under compulsion to ensure and facilitate such exits.

This expectation/ obligation pose an inconsistency with respect to AIF Regulations because the manager of the AIF is not incentivised to execute this activity.

As a result, whenever such a situation arises, the manager of the AIF is likely to move towards terminating the said alternate investment funds.


Unit Transfer

Once the fund is terminated, the manager of the AIF gets 12 months for liquidating the alternate investment funds.

Post the investors are intimated about the termination of an AIF, the units pertaining to the AIF cannot be transferred to even the associates to take an account of the confirmed stock of Limited Partnerships’ liabilities and/ or circumvent any administrative (cost and time included) inefficiencies, being cognizant of the inherent statutory timelines considered.


Alternate Investment Vehicles or Parallel Funds

Sometimes if any Parallel Funds / Alternate Investment Vehicles are a part of any other primary fund or are identical with any such portfolio, and the primary fund needs to be terminated for any reason, it would result in a termination of the Parallel Funds / Alternate Investment Vehicles as well.

This is true even if there has been no such trigger incident to terminate the Parallel Funds / Alternate Investment Vehicles. This is due to inter alia legal terms and conditions wherein the two portfolios cannot be separated with similar or dependent holding pattern.


AIF Rebranding/ Restructuring

When it is decided that the AIF needs to be terminated, the first thought that comes to fund’s investment managers is to look for buyers (new replacement General Partner) who will take the AIF over with its existing portfolio for its existing set of Limited Partners.

The concept of termination and liquidation of AIFs is yet to be effected in India till date. It is to be observed whether only the AIF ‘registration’ is terminated when the entity with such registration viz. A trust, an LLP or a company; applies for a new AIF registration for the new buyer GP.

As on date, the applicability of section 56(2)(x) of the Indian Income-tax Act, 1961 is often discussed for the ideal way of treating the units of an AIF in the face of the fund is terminated. The board requires the registration certificate to be surrendered to the designated authority.

If the LP Secondary is done at a price which is lower than the fair market price, then Section 56(2)(x) may be applied provided the particular units are within the definition of “securities”.

Also, for LP secondaries, in the case of an AIF, there is a possibility of double taxation in the case where LPs pay taxes on the amount paid for the AIF units, and they are again taxed when the income is received in their hands, i.e. when the AIF distributes the amount.

This is how AIFs are taxed. 


Confidentiality Provisions

Investors are expected to receive updates on their investments from the investment managers of the AIF during the investment term of the fund. This is a basic business expectation for any investor.

Such updates should ideally include information on –

  • The portfolio composition
  • The trustee
  • The manager
  • Associates/ affiliates (as required)

Since the expected updates encompass price sensitive information that may comprise of competitive advantage for the AIF and stand a chance of being used unfairly by competition; confidentiality obligations of highest standards are expected to be maintained by the investors for a time frame agreed post-termination and liquidation of the fund.

Investing in AIFs has surely gained popularity since its launch in 2012 among the HNI and sophisticated investors in India by Indians, NRIs, PIOs, OCIs and foreign nationals too.

Given that these funds follow complicated procedures of investments and strategies encompassing them aimed at profit maximisation, it becomes imperative for the investors to understand the fund concepts, fate and treatment of the fund during uncertain times that may result in termination and thereafter liquidation of the fund.

This is critical for making a conscious and educated decision before making an investment in any AIFs.


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