In a significant move that expands the scope and powers of the Securities and Exchange Board of India (Sebi) beyond the universe of listed companies, the market regulator on Monday cleared the framework of the rules governing Alternative Investment Funds (AIF).
“With a view to extending the perimeter of regulation to unregulated funds and ensuring systemic stability, increasing market efficiency and encouraging formation of new capital, the Board approved proposal to frame SEBI (Alternative Investment Funds) Regulations, 2012,” SEBI said in a press release.
According to the rules, AIFs shall not be permitted to invest more than 25 per cent of the investible funds in one investee company and shall not invest in associate companies. AIFs shall also provide, on an annual basis, investors with financial information of portfolio companies as also material risks and how these are managed.
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The move will bring the private equity (PE) industry in India, which is at a nascent stage, under an independent regulator for the first time. Under the new regulations, Sebi has made registration compulsory for all AIFs, whether these are operating as PE funds, real estate funds or hedge funds. The funds will be registered under three broad categories.
Funds enjoying certain incentives from Sebi or the central government will fall under Category I AIF. These include venture capital funds, SME funds, social venture funds and infrastructure funds.
The second category includes private equity funds, debt funds and fund of funds.
Both private equity funds and debt funds shall be close-ended, cannot engage in leverage and shall have a minimum tenure of three years.
Funds, which seek more flexibility in strategy, such as hedge funds, fall under the third category. These are “considered to have negative externalities, such as exacerbating systemic risk through leverage or complex trading strategies”. The third category of funds can be open- or close-ended and may engage in leverage, subject to limits as may be specified by the Board, said the Sebi statement.
The regulator has also stipulated conditions for the manager or the general partner of these funds. Accordingly, the manager or sponsor will have a continuing interest in the AIF of not less than 2.5 per cent of the initial corpus or Rs 5 crore, whichever is lower, and such interest shall not be through the waiver of management fees, said the regulator.
Mahendra Swarup, president, India Venture Capital Association, said, “Sebi has done a good job by bringing more flexibility and removing uncertainty. The norms will encourage more domestic fund launches.”