O
n the face of it, the Securities and Exchange Board of India's (SEBI) latest proposals on regulating Alternative Investment Funds (AIF) confer a degree of functional autonomy to these entities. The devil may well be in the detail. For instance, it had earlier proposed very rigid investment rules for each class of funds and limits on monies that could be collected, all of which smacked of attempts at micro managing the investment operations of these funds. It has however blotted its copy book by needlessly tinkering with the classification of these funds, that would only add to the confusion among those subject to its oversight. For one, the note proposes that AIFs register under three categories, instead of the original nine. However, these categories seem to be rather vaguely defined as: AIFs with positive economy-wide ‘spillover effects' such as SME funds, those with ‘no concessions' from the government (private equity) and those which have ‘negative externalities' (hedge funds). One could argue that investments by even those funds that are not targeting SME enterprises could have positive spill-over effects. Investment entities and SEBI could get caught up in unnecessary litigation over classification. Worse still, the former might fear being falsely accused of violation of registration conditions, after having invested in an enterprise that they believe is in conformity with the original conditions for grant of registration. If the perception of a regulatory risk leads to their not seeking registration in the first place, the loser most certainly would be the Indian economy and enterprises that might have profited from such funding support.
That would be unfortunate as the latest proposals start out with the intention of undoing much of the damage implicit in the proposals contained in the concept paper. If the purpose is to get all alternative investment firms to proactively seek such a registration and contribute to capital formation in the economy, SEBI will need to define much more sharply the different heads under which they will be recognised. SEBI has also erred in permitting hedge funds to access the debt market, while denying the same privilege to other categories of funds. What is ironic in the proposed regulatory dispensation is that it is these hedge funds that by SEBI's own reasoning carry out investment operations that have ‘negative externalities'. Why then aggravate them by giving hedge funds the freedom to leverage their original capital with additional resources by way of debt? If debt funds are not to be sourced from the retail public, the category of investors who need regulatory protection, then SEBI can well leave it to the commercial judgement of those lenders who wish to support these investment entities with loans.
Fund-raising activity in the venture capital and private equity space has been at a low ebb over the past year. Clearing the regulatory uncertainty would at least make players less wary of launching new funds.