Indian regulator proposes new measures for funds oversight
The Securities and Exchange Board of India (SEBI) has published draft regulations that would tighten its control over alternative investment funds (AIFs). Vehicles specializing in private equity, venture capital, PIPE, infrastructure, real estate and small- and medium-sized enterprises would fall under SEBI’s revised remit, as would debt funds, social venture funds and strategy funds, including hedge funds.
The proposed regulations, which have been posted on SEBI's website and are open for public comment until August 30, are intended to replace the current venture capital funds (VCF) system, LiveMint reported.
The VCF approach is seen as insufficient because the classification requirements are so broad, which means it is difficult to grant targeted concessions that promote start-ups. At the same time, VCF registration is not mandatory and so many funds are able to slip beneath SEBI's radar.
Under the proposed changes, an AIF will be a closed-end fund at least INR200 million ($4.5 million) in size. The minimum investment amount will be 0.1% of the fund, or at least INR10 million, and the fund sponsor must contribute at least 5%. An AIF cannot invest more than 25% of its capital in one company. The number of partners in an AIF formed as a limited liability partnership will be capped at 50. Fund tenure must be at least five years, with an option to extend by two years if approved by three-quarters of the shareholders.
VCFs are to be capped at INR2.5 billion and prohibited from investing in any company that is backed - directly or indirectly - by any of the top 500 domestically listed companies. At least two-thirds of VCF capital must be invested in unlisted equity, with no more than one-third allocated to unlisted debt instruments of portfolio companies and preferential equity shares in listed firms.
PIPE funds face a similar cap on their exposure to debt instruments, but are obliged to commit at least two-thirds of their capital to publicly listed equities. Private equity funds would be required to invest at least 50% of capital in unlisted companies and no more than 50% in companies that have made listing proposals.
Social venture funds must target social enterprises such as microfinance firms, while strategy funds would be allowed to invest in derivatives and other structured products, but must disclose their investment strategies to investors.
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