Dissolution Period
The period after an AIF scheme's liquidation period, entered with 75%-by-value investor approval, to sell unliquidated investments — ending in mandatory in-specie distribution of whatever remains.
In plain language
When an AIF scheme's tenure (and any extension) ends, it has a liquidation period of 1 year to sell its assets and distribute the proceeds. Some assets, especially illiquid ones, may still be unsold at the end of that year.
The dissolution period is the extra time a scheme can take to deal with them. The workbook defines it as "the period following the expiry of the liquidation period of the scheme for the purpose of liquidating the unliquidated investments".
It is not automatic and it is not open-ended. A scheme enters it only with the approval of at least 75% of investors by value of their investment, must disclose the proposed tenure and independent valuations first, cannot take fresh money or make new investments during it, and — if investments are still unsold at the end — must distribute them in specie to investors. There is no further extension.
How it works
The sequence for unliquidated investments.
- Tenure ends (after any permitted extension).
- Liquidation period — 1 year following expiry of the tenure or extended tenure, to fully liquidate the scheme's assets.
- For investments not sold due to lack of liquidity, with approval of at least 75% of investors by value, the AIF may either:
- distribute them in specie to investors; or
- enter a dissolution period, subject to SEBI's conditions.
- At the end of the dissolution period, any unsold investments are mandatorily distributed in specie.
Conditions on the dissolution period.
- Before seeking consent, the AIF discloses the proposed tenure of the dissolution period, details of the unliquidated investments and their valuation by 2 independent valuers, among other things.
- A Category III AIF entering a dissolution period files an information memorandum with SEBI through a merchant banker, with a due diligence certificate.
- The dissolution period shall not be more than the original tenure of the scheme and cannot be extended in any manner.
- The scheme accepts no fresh commitments and makes no new investments during it.
- No further extension or liquidation period is available after it expires.
Context. SEBI has notified that no AIF may launch a new liquidation scheme after 25 April 2024, which leaves in-specie distribution and the dissolution period as the routes for unliquidated investments.
A worked example
Illustrative figures. Brahmaputra Special Situations Fund, a close-ended Category III AIF scheme with an original tenure of 3 years, reaches the end of its extended tenure on 31 March 2025. Its liquidation period runs to 31 March 2026.
By then it has sold everything except two holdings: unlisted debentures of a restructured company and a thinly traded small-cap stake.
Step 1 — disclosure. The manager proposes a dissolution period of 18 months, lists the two holdings, and obtains valuations from two independent valuers: Rs 14 crore and Rs 15 crore for the debentures; Rs 6 crore and Rs 5.5 crore for the stake.
Step 2 — approval. Investors holding 78% by value approve. (At 72% it could not proceed.) The fund files an information memorandum with SEBI through a merchant banker with a due diligence certificate.
Step 3 — limits. 18 months is within the original tenure of 3 years. During the period the scheme takes no new commitments and makes no new investments.
Step 4 — outcome. The debentures are sold for Rs 14.5 crore and distributed. The small-cap stake finds no buyer. When the dissolution period ends, it is mandatorily distributed in specie — investors receive the shares in proportion to their holdings. No further extension is possible.
Why NISM asks about it
Chapter 5 (Regulatory Framework) covers winding up, the liquidation period, in-specie distribution and the dissolution period at 5.17, including the bar on new liquidation schemes after 25 April 2024. Expect questions on the 75%-by-value approval, the two independent valuers, the limit that the dissolution period cannot exceed the original tenure, and what happens to investments still unsold at its end.
Common exam traps
- The dissolution period follows the liquidation period, which is itself 1 year after the tenure or extended tenure expires.
- Approval: at least 75% of investors by value. Tenure extension uses two-thirds; entering a dissolution period or distributing in specie uses 75%.
- It cannot exceed the original tenure of the scheme and cannot be extended.
- Unsold investments at the end are mandatorily distributed in specie — not written off, not held indefinitely.
- Two independent valuers, not one, value the unliquidated investments before consent is sought.
- No fresh commitments and no new investments during the dissolution period.
- No new liquidation schemes after 25 April 2024, so the dissolution period is not an alternative to a liquidation scheme launched today.
Where this is taught
- Series XIX-B · Chapter 5: Regulatory Frameworkintroduced here
- Series XIX-A · Chapter 10: Fund Monitoring, Reporting and Exitintroduced here
- Series XIX-C · Chapter 15: Fund Monitoring, Reporting and Exitintroduced here
- Series XIX-E · Chapter 13: Fund Monitoring, Reporting and Exitintroduced here
- Series XIX-D · Chapter 12: Fund Monitoring, Reporting and Exitintroduced here
Related terms
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Close-ended fundA mutual fund scheme that sells units only in its NFO, runs for a fixed period and redeems all units at maturity — in between, investors can exit only by selling on the stock exchange, where listing is compulsory.
- In-specie DistributionDistributing an AIF's unsold investments themselves, rather than cash, to investors — allowed in the liquidation period with 75%-by-value approval and mandatory at the end of a dissolution period.
- Liquidation SchemeA close-ended AIF scheme launched only to liquidate unsold investments of existing schemes whose tenure has expired. SEBI has barred new liquidation schemes after 25 April 2024.
- Independent ValuerThe valuer of a Category III AIF's unlisted holdings — not an associate of manager, sponsor or trustee, with 3 years' experience, and IBBI-registered with a professional membership or a CRA group entity.
- Liquidation PeriodThe 1-year period following expiry of an AIF scheme's tenure or extended tenure, for fully liquidating its assets and distributing the proceeds to investors.
- Lock-in PeriodThe stretch of time after an investor commits money to a Category III AIF during which they cannot redeem — not fixed by SEBI, but 2 years is common practice.
- Inoperative FundA SEBI-granted status for an AIF scheme holding money beyond its fund life that wants to surrender registration, or keeping registration only for pending litigation — no new schemes, no management fees.
- Information MemorandumIn AIF due diligence, the investee company's own document of representations and forecasts; separately, the document an AIF scheme files with SEBI through a merchant banker to enter a dissolution period.