Alternative Investment Funds (AIFs) such as venture capital, real estate and private equity funds will come under the SEBI regulatory ambit, if a concept paper issued by the regulator eventually comes into force.
SEBI, on Monday released a concept paper on proposed alternative investments funds regulation for public comments. SEBI now plans to regulate these funds through a new set of regulations for the protection of the financial markets, said analysts.
AIFs are basically privately pooled funds of institutional investors or high net worth investors.
The objective of these proposed regulations would be to regulate these funds, which are systemically important but beyond the ambit of SEBI regulations. “Investors in VCFs, PE etc., are sophisticated and well informed. SEBI acts more as a facilitator with minimal regulation. However, with exponential growth of private fund industry and their systemic importance for stability of financial market, globally private pools of capital are now being subjected to regulation of different degree by various jurisdictions,” said the concept paper by SEBI.
These regulations are more for the protection of the markets than the investors, as the investors in AIFs are much more informed and also have heavy influence on the activities of the market, said a regulatory expert.
Today, only venture capital funds are regulated by SEBI, while private equity funds are not. Some private equity funds are coming as VC funds with the result that they are subject to the regulations of VC funds if they are registered with SEBI. VC funds, if registered with SEBI, are tax-exempt. SEBI regulation does not require all VC funds to be registered. If the new regulations come into play, the earlier VC regulation may be repealed, said the paper.
The regulations are in order to create a level-playing field for all the AIFs and to give them a rightful place and operate in financial markets in their respective spheres, said a SEBI expert.
The paper further adds that registration is a must for AIFs as and when the regulation commences. Funds already operating in the market and not registered, should get registered within six months of the regulations coming into play.
The eligibility criteria for the funds mandate that the entity must be a trust, a Limited Liability Partnership or a company. The sponsor and fund managers of the fund are required to have had relevant experience in managing such funds. Also, the applicant must be an investment company, trust or partnership and should be a fit and proper person.
With respect to the investments made by the funds, the paper proposes that the minimum size of the fund be Rs 20 crore which can be revised upwards, up to 25 per cent, after receiving the Board approval. The minimum investment in these funds would be 0.1 per cent of fund size, subject to a minimum amount of Rs 1 crore. Also, the sponsor of the fund should contribute a minimum five per cent of the fund size, which will be locked in till redemption by the last investor of the fund. The funds will be closed-ended with a minimum period of five years, with a two-year extension to be approved by 75 percent of the unit holders. In the absence of such consent, the fund will be fully liquidated within one year of the expiry of the fund.
The AIFs are not to accept any funds from the public or retail through issue of prospectus or offer documents or advertisements. There may also to be restrictions by the Board against investments in speculative or highly leveraged activities and an AIF cannot invest more than 25 percent of its corpus in one investee company. AIFs will not invest in any NBFC excluding infrastructure finance, micro finance institutions and asset finance companies. They shall not invest in gold financing companies and activity not permitted under the Industrial policy of the Indian government and anything else not specified by the Board.