In-specie Distribution
Distributing 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.
In plain language
Normally a fund that is winding up sells its investments and pays investors in cash. In-specie distribution is the alternative when some investments cannot be sold: the fund hands the investments themselves to its investors.
The workbook introduces it in the winding-up rules. If a Category III AIF scheme is unable to liquidate some of its assets within its liquidation period, in-specie distribution of such assets may be made to investors as per the terms of the PPM, Contribution Agreement or Subscription Agreement, subject to conditions specified by SEBI.
It is both an option and a backstop. During the liquidation period investors can choose it; at the end of a dissolution period it becomes mandatory for whatever is left.
How it works
Two points in the life cycle
| When | Status | Condition |
|---|---|---|
| During the liquidation period — for investments not sold due to lack of liquidity | Optional | Approval of at least 75% of investors by value of their investment in the scheme |
| At the end of a dissolution period — for investments still unsold | Mandatory | No further extension or liquidation period is available |
The alternative during the liquidation period is to enter a dissolution period, which needs the same 75% approval.
Compliance. The Compliance Test Report asks whether the Category III AIF took 75% investor approval for making in-specie distribution of unliquidated investments, or for selling them to a liquidation scheme. The modalities come from SEBI's circulars of 21 June 2023 and 9 July 2024.
No liquidation-scheme route for new cases. Although modalities for liquidation schemes exist, SEBI notified that no AIF shall launch a new liquidation scheme after 25 April 2024 — leaving in-specie distribution and the dissolution period as the paths for unliquidated investments.
How investors share. Investors in an AIF scheme have rights pro-rata to their commitments in each investment and in the distribution of its proceeds.
A worked example
Illustrative figures. Tungabhadra Special Opportunities Fund – Scheme II reaches the end of its liquidation period holding 10,00,000 unlisted shares of Company Q, for which no buyer has been found.
Investor holdings by value:
| Investor | Share of scheme |
|---|---|
| Alpine Family Trust | 50% |
| Coastal Insurance | 30% |
| Individual investors | 20% |
The vote. Alpine and Coastal (80% by value) approve in-specie distribution; the individuals abstain.
Approval = 50% + 30% = 80% ≥ 75% → permitted
The distribution, pro-rata:
Alpine 50% × 10,00,000 = 5,00,000 shares
Coastal 30% × 10,00,000 = 3,00,000 shares
Individuals 20% × 10,00,000 = 2,00,000 shares
Total = 10,00,000 shares
Each investor now holds Company Q shares directly and bears the job of eventually selling them.
A counterfactual. Had Coastal voted no, approval would be 50% — below 75% — and the in-specie route during the liquidation period would not be open on that vote. If the scheme had instead entered a dissolution period and still held the shares at its end, in-specie distribution would be mandatory, with no vote needed.
Why NISM asks about it
Chapter 5 (Regulatory Framework) covers in-specie distribution in 5.17 (Winding-up), alongside the liquidation period, dissolution period and the April 2024 bar on liquidation schemes, and again in the Compliance Test Report table at 5.19. Expect questions on the 75% approval, the difference between optional and mandatory in-specie distribution, and which documents it must be consistent with.
Common exam traps
- 75% by value, not two-thirds (two-thirds is for tenure extension).
- Optional during the liquidation period; mandatory at the end of a dissolution period.
- It distributes the assets, not their cash value.
- It must follow the PPM, Contribution Agreement or Subscription Agreement and SEBI's conditions.
- No new liquidation schemes after 25 April 2024, so selling to one is not a route for new cases.
- No further extension after a dissolution period — the in-specie distribution is the end of the road.
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
- Compliance Test ReportThe annual self-certification an AIF manager prepares in SEBI's prescribed format, testing the fund against the AIF Regulations and routed through the sponsor and trustee for comment.
- Dissolution PeriodThe 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.
- 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.
- Contribution AgreementThe agreement between one investor, the trustee and the investment manager that sets the terms on which that investor participates in the AIF — the contract that turns a commitment into units.
- 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.
- Pari-passu rightsThe rule that differential rights offered to select AIF investors must not harm others: no liability to other investors, no control, no change to others' rights, and full disclosure in the PPM.
- 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.
- Dissent periodThe window of not less than one month an AIF must give unit holders to record dissent to a material change, after which the manager must buy out the dissenters within three months.