Experts seek to do away with mandatory categorisation in AIFs

Alternative Investment Funds should be re-categorised under four broad categories of venture capital, debt, equity and strategy funds and not according to end use, finance professionals assisted by PwC have suggested to SEBI.

The group suggested removal of mandatory categorisation. Permission to debt and equity funds to invest in listed securities including through the secondary market with lock-in restrictions was also sought.

Securities and Exchange Board of India had proposed to create regulations for alternative investment funds under SEBI (Alternative Investment Fund) Regulations.

The funds which would come under the proposed regulation include, Venture Capital Funds, PIPE Funds, Private Equity Fund, Debt Funds, Infrastructure Equity Fund, Real Estate Fund, SME Fund, Social Venture Funds, Strategy Fund (Residual Category, including all varieties of funds such as hedge funds, if any).

“These funds raise capital from a number of high net worth investors (HNIs) with a view to investing in accordance with a defined investment policy for the benefit of those investors,” SEBI draft had said.

The group of professionals suggested that mandatory categorisation may be removed as it hinders risk diversification by limiting options for funds in terms of asset classes and sectors. It could also result in poor investor response. The group said that these changes would assist in minimising overlap between various fund categories.

To decrease the cost and the tedium of compliance for AIFs that fall under more than one category, the group suggested that SEBI may consider giving AIFs the option to operate under a specific sector if a certain percentage(say 66.66 per cent) is expected to be deployed in a specified sector.

The regulator could put this as a caveat for AIFs who wished to avail themselves of certain benefits.

AIFs investing in other AIFs may also be covered under the proposed regulation, said the group.

The professionals have suggested that sponsor contribution of at least five per cent (prescribed by SEBI) of the fund size should be reduced to a maximum of two per cent with no lock-in condition (SEBI has proposed that the sponsor cannot redeem until redemption by the last investor).

The rationale is that fund sizes are high and it is practically not feasible for a sponsor to make a five percent investment without backing from financial institutions. Also new age fund managers being highly entrepreneurial in spirit, they may find the threshold too high, said the group.

A lock in may result in the capital and returns of the sponsor being locked in (as investors are paid returns on capital only after capital has been paid back), said the group.

The group was in favour of continuing the extant venture capital fund regulation on exempting the minimum investment criteria for directors and employees of the fund, for trustees and for the AMC.