Alternative Investment Funds (AIF) in category I and II can now borrow for operational flexibility, the Securities and Exchange Board of India (SEBI) said in a circular on Monday (August 19, 2024).

“The regulator has capped borrowings to 10% of investible funds, or 20% of drawdown value, which is the amount called from investors for making  investments in  investee companies,” SEBI said in the circular and mandated that the information about leveraging be disclosed to investors.

Further, AIFs should maintain a cooling off period of 30 days between two borrowings, the regulator added. 

Borrowings should be the last resort for AIFs and the cost of such borrowings should be borne by investors who failed to provide for the drawdown amount, the regulator said.

AIF funds are put in three categories. The first category invests in venture capitalist funds and SME funds among others, and is prohibited from borrowing to invest. Category two AIFs are all that do not fall in category I and III and are not allowed to leverage. Category three involves investments using complex strategies and in unlisted companies. The funds in category three are allowed to leverage their investments.

The market watchdog also allowed the tenure of Large Value Funds (LVFs) to be extended to five years, as per its circular. The circular will come into immediate effect, SEBI said.