Liquidation Scheme
A 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.
In plain language
Category I and II AIFs are close-ended: they must wind up when their tenure ends. But unlisted investments do not always find buyers on schedule, and a fund can reach its end date still holding shares nobody has bought.
The liquidation scheme was one of SEBI's answers. The workbook defines it as "a close-ended AIF scheme launched only for the purpose of liquidating the unliquidated investments in its existing AIF schemes, whose tenure has expired". Such schemes contain the words "Liquidation Scheme" in their name.
It is a dedicated vehicle to finish the job of selling — nothing more. It cannot take new money or buy anything new.
It is also now a closed door: SEBI has notified that no AIF shall launch any new Liquidation Scheme post 25 April 2024. The workbook still describes the route, and existing liquidation schemes still exist, so the concept remains examinable.
How it works
Features of a liquidation scheme:
- its tenure is determined at the time of filing the PPM with SEBI;
- its tenure cannot be extended;
- it does not accept any fresh commitment from any investor; and
- it does not make any new investment.
How a scheme could get there. A fund's life may be extended by up to 2 years with the approval of two-thirds of investors by value. Beyond that, with approval of at least 75% of investors by value, the AIF could launch a liquidation scheme, choose in-specie distribution of unliquidated investments, or enter a dissolution period. Without investor consent, such investments are dealt with as SEBI prescribes.
The routes that remain after 25 April 2024:
- Dissolution period — the period after the liquidation period of the scheme, entered only with the requisite consent of existing investors. Before seeking consent, the AIF must disclose the proposed tenure, the unliquidated investments and their valuation by two independent valuers. If the investments are still unsold at the end of the dissolution period, they are mandatorily distributed in specie, and no further extension or liquidation period is available.
- In-specie distribution — permitted, subject to the fund documents and PPM, at any time during the life cycle or at winding up, as investors prefer.
One operational carve-out. AIFs must hold investments in dematerialised form, but that requirement does not apply to investments held by a liquidation scheme that are not available in dematerialised form.
A worked example
Illustrative figures. Tungabhadra Venture Fund I, a Category I AIF, reached the end of its tenure (after a 2-year extension) in January 2024. Of a portfolio originally worth Rs 400 crore, three unlisted holdings valued at Rs 36 crore were still unsold.
Path taken in February 2024. Investors holding 78% by value approved launching "Tungabhadra Venture Fund I — Liquidation Scheme". The PPM filed with SEBI fixed its tenure at two years. The scheme took no fresh commitments, made no new investments, and existed only to sell the three holdings. Its tenure could not be extended.
The same situation in September 2024. A sister fund, Tungabhadra Venture Fund II, hits the same problem with Rs 22 crore of unsold holdings. It cannot launch a liquidation scheme — the route closed after 25 April 2024. Instead:
- it discloses the proposed dissolution period, the three holdings and valuations from two independent valuers;
- investors give the requisite consent and the scheme enters a dissolution period;
- two holdings are sold; the third, valued at Rs 6 crore, is not; and
- at the end of the dissolution period, that third holding is mandatorily distributed in specie to investors. No further extension is available.
Why NISM asks about it
Chapter 10 (Fund Monitoring, Reporting and Exit) defines the liquidation scheme at 10.10, sets out the dissolution period at 10.11, and covers the options on unliquidated investments at 10.8 and 10.9. Chapter 4 (Regulatory Framework — Indian Context) carries the demat carve-out for liquidation-scheme holdings. Expect questions on its features (fixed tenure, no extension, no fresh commitment, no new investment), on the 75%-by-value approval, and on the bar on new liquidation schemes after 25 April 2024.
Common exam traps
- No new liquidation schemes after 25 April 2024. The workbook still teaches the concept; a question asking whether an AIF can launch one today should be answered no.
- Its tenure is fixed when the PPM is filed and cannot be extended.
- No fresh commitments, no new investments — it only liquidates.
- Two different approval thresholds: extending fund life by up to 2 years needs two-thirds by value; launching a liquidation scheme, in-specie distribution or a dissolution period needs at least 75% by value.
- The dissolution period ends in mandatory in-specie distribution of whatever is unsold, with no further extension.
- Dissolution period disclosures need valuation by two independent valuers, not one.
- The name must contain the words "Liquidation Scheme".
Where this is taught
- 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
- Material changeA change to an AIF's PPM or fund terms significant enough to influence an investor's decision to stay invested — such as a new sponsor or manager, change in control, or adverse fee change.
- 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.
- 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.
- Strategic SaleAn AIF's exit by selling its stake in a portfolio company to a corporate buyer in the same or an adjacent industry — usually the second most preferred exit after an IPO.
- 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.
- Dematerialised unitsAIF unit capital held in electronic form with a depository: every scheme must now issue units in demat only, each carrying its own ISIN against which the NAV is uploaded.
- 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.
- Tenure of a SchemeThe life of an AIF scheme — from the date of first close to the last date of its term in the fund documents — fixed when SEBI is applied to, a minimum of 3 years, and extendable by 2 with two-thirds investor consent.