Indian regulator finalizes PE oversight measures

SEBI published draft regulations in August 2011 and invited public comment. A desire to have funds clearly delineate their investment purposes - and stick with them - led to an initial proposal for nine sub-categories, ranging from private equity vehicles to social venture funds. Critics denounced the approach as too repressive and the compromise position is three categories.

The first category is for "AIFs with positive spillover effects on the economy, for which certain incentives or concessions might be considered." They include venture capital funds, SME funds, social venture funds and infrastructure funds. Category two is for vehicles that don't qualify for incentives or concessions: private equity funds, debt funds, fund-of-funds and anything else that doesn't fall under category one or category three. The third category is designed for vehicles that embrace high risk or complex trading strategies, i.e. hedge funds. Unlike funds in the first two categories, this group can be open- or close-ended, and also engage in leverage transactions subject to certain limits.

Another area of concession is on the portion of the fund corpus that must be put forward by sponsors. SEBI originally wanted to set it at 5%, but this was deemed to be unfair to newly launched vehicles whose sponsors might not have much capital at their disposal. As a result, the threshold has been lowered to 2.5% or INR50 million ($1 million), whichever is lower.

Elsewhere, SEBI has largely held firm to its original proposals. AIFs must be at least INR200 million in size and have no more than 1,000 investors. Individual investments must not account for more than 25% of the total fund corpus, and investors are entitled to receive annual reports on the financial status, material risks and management of portfolio companies. In addition, AIF units may be listed on a stock exchange but the AIF itself is prohibited from raising funds via the public markets.

At the same board meeting, SEBI also paved the way for stock exchanges to list - provided they can ensure autonomy for their supervisory functions. Goldman Sachs, Morgan Stanley and General Atlantic all hold minority stakes in the National Stock Exchange of India, while Citigroup, Deutsche Börse and Singapore Exchange are investors in the Bombay Stock Exchange.

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• Topics
• South Asia
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• India
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• regulation