Mandatory exit option

When an AIF makes a material change — new sponsor or manager, change in control, an adverse change in fees — some investors will not want to stay. In a close-ended fund they cannot simply redeem, and walking away from unpaid commitments would be a contractual breach of the subscription agreement.

The AIF Regulations solve this with a mandatory exit option. Investors who dissent must be bought out at a fair, independently set value, and the manager pays for the process, not the investors.

The workbook states that the provision applies to close-ended funds, and that it does not apply where the AIF has obtained the approval of not less than 75% of unit holders by value of their investment.

The prescribed process (Chapter 13, section 13.4.2):

1. Dissent window. Unit holders get not less than one month to express dissent.
2. Buyer. Units of dissenting investors are bought out by the manager, or any other person the manager arranges.
3. Price. Before the buyout, the units are valued by 2 independent valuers, and the exit is at a value not less than the average of the two valuations.
4. Responsibility and cost. Providing the exit is the manager's responsibility. All expenses are borne by the manager, sponsor, or proposed new manager or sponsor, and are not charged to unit holders.
5. Deadline. The whole exit must be completed within 3 months from the expiry of the last date of the offer for dissent.
6. Oversight. The trustee (for a trust) or the sponsor (for any other AIF) oversees the process, ensures compliance and regularly updates SEBI.

When it applies. For the reasons in sections 13.4.1 (material changes in the PPM) and 13.4.2 (change of sponsor, manager or control). The footnote traces it to SEBI circulars of June and July 2014, since subsumed into the AIF Master Circular of July 31, 2023.

The 75% carve-out. Where not less than 75% of unit holders by value approve, the workbook says the exit process does not apply.

Fund, holdings and valuations are illustrative; the rules are the workbook's.

A close-ended AIF with Rs 300 crore of investments announces that its sponsor is being acquired. Investors are given a dissent window from 1 March to 31 March.

Step 1 — is an exit needed? Investors holding Rs 216 crore approve:

216 ÷ 300 = 72%   → below 75%, so the exit option must be provided

(Had Rs 225 crore or more — 75% — approved, the workbook says the exit process would not apply.)

Step 2 — value the units. Nisha holds 2,00,000 units and dissents. Two independent valuers report:

Valuer 1: Rs 118 per unit
Valuer 2: Rs 124 per unit
Average : (118 + 124) ÷ 2 = Rs 121 per unit

Step 3 — the buyout. The price must be at least Rs 121:

Minimum exit value = 2,00,000 × Rs 121 = Rs 2.42 crore

The manager may pay more, not less. It may not use the lower valuation of Rs 118 (Rs 2.36 crore), and it may not deduct the valuers' fees or legal costs from Nisha's proceeds.

Step 4 — the deadline. The dissent offer closed on 31 March, so the buyout must be complete within 3 months of that date — by 30 June.

Chapter 13, section 13.4.2 ("Manner of Dealing with Material Changes / Change of Control"), sets out the full exit process; Chapter 9, section 9.5.3, introduces it as the compulsory exit option. Chapter 13 carries 10% weight, and this is one of its densest number sets. Expect questions on the one-month window, two valuers and the average, who bears the cost, the 3-month deadline and the 75% figure.

• Not less than the average of two valuations — not the lower, not the higher, and not a single valuation.
• At least one month to dissent; three months to complete, counted from the last date of the dissent offer, not from the announcement.
• Costs fall on the manager, sponsor or proposed new manager or sponsor — never on unit holders.
• The buyer is the manager or someone the manager arranges — not the AIF redeeming units out of the fund.
• The trustee oversees it for a trust; the sponsor for any other AIF.
• 75% by value, not by number of investors.
• The workbook applies it to close-ended funds.