Sebi Eases AIF Debt Investment Norms: Allows 'A' Rated Listed Debt

New Delhi, Feb 7 (PTI) Markets regulator Sebi on Friday proposed to ease investment norms for Category II Alternative Investment Funds (AIFs), allowing them to invest in listed debt securities with a credit rating of 'A' or below.

The proposal comes following the possible shrinking of the universe of investment opportunities in unlisted debt securities after amendment to LODR (Listing Obligations and Disclosure Requirements) norms recently.

As per the LODR amendments, listed entities need to list all non-convertible debt (NCD) securities on the stock exchanges, which leads to possible shortage in the availability of unlisted debt securities for AIFs

In its consultation paper, Sebi has proposed "Category II AIF to invest more than 50 per cent of their total investible funds in unlisted securities, and/or listed debt securities having credit rating 'A' or below, directly or through investment in units of other AIFs".

The Securities and Exchange Board of India (Sebi) has sought public comments till February 28 on the proposal.


By virtue of being close-ended funds and with the mandate of primarily investing in unlisted securities, Category II AIFs assume both liquidity risk and credit risk. By assuming such risk, AIFs play a crucial role in providing much-needed capital to industries that may not have access to traditional sources of funding or companies that are not at a stage of their lifecycle to make a public offering.

With the amendment in LODR norms, and considering that there may be a shrinkage of investment opportunities in unlisted debt securities universe, it merits consideration that the scope of Category II AIFs to invest primarily in unlisted securities(>50 per cent) can be expanded to listed debt securities also, Sebi noted.

However, the same may be enabled in such a manner that such AIFs still assume the due credit risk in the ecosystem, it added.

It is believed that the credit rating of a security may be an appropriate parameter to ascertain credit risk profile. Therefore, it is viewed as appropriate that under listed debt securities, category II AIFs may be nudged to invest in listed debt securities with credit rating 'A' or below, in line with higher risk appetite of AIFs.

The proposal came after Sebi received representations from AIF industry association and from funds which predominantly invest in debt securities, highlighting their concerns.

The regulator observed that there are 192 schemes of Category II AIFs, which have invested more than 50 per cent of their investment in unlisted debt.