Pro-rata generally means investors share profits or returns in proportion to their investment, while pari-passu means all investors are treated equally, with no one getting special preference.
In its draft, Sebi proposed that for closed-ended AIF schemes, investor rights should be based on either their total commitment or undrawn commitment while distributing investment proceeds.
“The investors of a scheme of an AIF shall have rights in distribution of proceeds of an investment pro-rata to their contribution to such investment; or, pro-rata to their contribution to such investment on a time weighted pro-rata basis, as clearly disclosed upfront to investors in the PPM of the scheme,” Sebi suggested.
The regulator said schemes should clearly disclose upfront how pro-rata rights are calculated and cannot change this method during their tenure. Investors who are excluded from a specific investment cannot have their unused commitment used elsewhere.
The methodology should also prevent any investor from holding an excessive stake in an investee company beyond prescribed concentration limits.Existing AIF schemes can continue with their current method if compliant, but those using different systems should align with new guidelines for future investments.Open-ended Category III AIFs, where investors can enter or exit freely, may not need to apply pro-rata drawdowns but should distribute proceeds in proportion to the units held.
However, if such schemes invest in unlisted securities, they should follow the same rules as closed-ended schemes, Sebi said.
For investments made before December 13, 2024, distributions will follow existing terms already disclosed to investors.
The circular also clarified that returns or profits shared by investors with fund managers such as carried interest are exempt from the pro-rata requirement.
Also, Sebi directed that AIF managers maintain proper records showing compliance with pro-rata rights, and trustees should ensure that compliance reports reflect adherence to these provisions.
This followed the November 2024 amendment to AIF regulations and a subsequent circular issued in December 2024.
The Securities and Exchange Board of India (Sebi) sought public comments until November 28.