Sebi seeks a balance in the business of alternative investment funds

The Securities & Exchange Board of India (Sebi) is forming a working group, which would include senior fund industry officials like Gopal Srinivasan (chairman of TVS Capital Funds) and Renuka Ramnath (founder of the PE fund Multiples) to explore the way forward.

The group is expected to suggest ways to lower the costs of funds and make it easier for them to do business while keeping an eye on investor protection.

The development, according to industry circles, is the outcome of a tussle between the regulator and the fund lobby playing out for more than a year. Sebi had brought in a string of regulations as wealthy local and foreign investors poured money into alternative investment funds (AIFs) — the umbrella term for PE, VC, and angel funds which are regulated by it.

As money flowed in and the regulator pushed through measures for greater transparency and better governance of the funds and their managers, the fund lobby argued that the regulatory framework for AIFs, which handle the money of rich savvy investors, should be far less rigid than mutual funds investing on behalf of small investors.

The fund industry bodies made representations to the regulator and the government to put across their point that world over the PE-VC funds flourish on a light-touch regulation — that high net worth (HNI) investors making conscious and risky bets on unlisted companies do not need the regulatory shield that MF investors expect.

“Sebi has made several changes to strengthen their governance framework for AIFs. This has made compliance a strenuous task for the funds. There is a need to balance governance and ease of doing business by following a risk-based approach. Some of the requirements such as appointment of merchant bankers, dematerialisation of units etc. can be relaxed based on the risk profile of the AIF. Also, the approval for AIFs in certain cases can be put on an automatic approval route,” said Tushar Sachade, partner at Price Waterhouse & Co. LLP.With AIFs receiving investment commitments of around Rs 2 lakh crore each in the last two financial years, Sebi introduced a code of conduct for fund directors, managers and intermediaries; rules on the closing of funds; regulations to treat all investors on a par, segregation of assets and liabilities of various schemes, and matching a fund tenure to that stated in the fund document. Also, rules to disclose and address investor grievances were brought in.

Thus, the regulator wants to know more about how the funds are run, the valuation at which deals are cut, and whether some of the investors are short-changed etc. However, the industry believes that Sebi can tweak some of the rules to help AIFs attract more private capital — particularly with many startups across markets struggling to raise money.

Some of the changes the industry is lobbying for are: lowering the minimum capital threshold for ‘large value funds’ (which enjoy certain regulatory exemptions) from Rs 70 crore (which is considered too high) to Rs 10-15 crore; AIFs have a certain track record receiving automatic approval of their private placement memorandum (PPM) — the basic document funds share with potential investors; making it easier for a fund to extend its life or tenure of the fund to avoid a fire sale of assets; lowering cost with annual valuation of fund portfolio instead of half-yearly valuation; and drafting a simpler framework for offering co-investment opportunities to investors which funds in other markets practice.