India ups disclosure requirements for local funds

India's Alternative Investment Fund (AIF) regime has grown in popularity among local managers following numerous improvements over the years intended to make them easier to use. Moreover, AIFs are not subject to the same restrictions as foreign-domiciled funds, encouraging several blue-chip GPs to make the switch. However, the latest batch of rules has prompted industry participants to express concerns about execution and cost.

In response to rising participation from local investors - many of whom are not familiar with private equity - in these structures, the Securities & Exchange Board of India (SEBI) is trying to make the fundraising process more uniform. First of all, it has instructed managers to follow a standardized format for private placement memorandums (PPMs). An internal or external auditor must be appointed to ensure compliance.

“SEBI officers and investors find it difficult to understand the fund terms [in a PPM] because every fund has its own style of writing commercial terms,” explained Richie Sancheti, a Mumbai-based lawyer with Nishith Desai Associates. “There is a risk of misselling [the] product.”

Angel funds do not have to meet this requirement, while vehicles in which each investor commits at least $10 million - suggesting a minimum level of scale and sophistication - can apply for a waiver. They would then stick to their existing PPM format and avoid annual audits. 

Second, benchmarking agencies will assess performance data, essentially checking that managers are being honest about their track records. Every firm must submit information regarding investments made before the end of September 2019. Data from funds domiciled overseas is also required. Benchmarks will be drawn up and made accessible to investors from July. 

The plan is to create benchmarks for each of the three classes of AIF in a way that facilitates comparison and is accessible to the public. No more detail is given on the process and some local GPs question the utility of these benchmarks, given the extent to which funds vary in terms of size, strategy, risk appetite and targeted returns.

In addition, the cost of the benchmarking agency will have to be absorbed by the fund sponsor. This could disadvantage smaller players and make it harder for them to retain talent.

“No other country has regulator-mandated benchmarking. There are third-party service providers doing this,” said Siddarth Pai, a partner at 3one4 Capital. “It’s a free service. They reach out and speak about the valuation criteria, package it and give it to prospective investors. They also help differentiate between stage and sectors.” 

Others believe, however, that the lack of experience in private equity has likely deterred local institutional investors from supporting the industry. In this sense, clearer regulations may ultimately help fundraising in the long term.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• South Asia
• Regulation
• India
• SEBI