Sebi settles charges against power sector venture capital fund

Market regulator Sebi has agreed to settle charges against power sector private equity fund 'Small is Beautiful' for alleged violation of venture capital investment rules, after payment of Rs 37.5 lakh by the fund as settlement charges.

'Small is Beautiful' was established in 2004 as the country's first private equity fund focussed on investments in power generation assets and is registered with the Securities and Exchange Board of India (Sebi) as a venture capital fund.

Sebi had initiated enquiry into alleged violation of its investment guidelines for venture capital entities by the Rs 231-crore fund, which had garnered contributions from as many 21 public sector banks, financial institutions and insurance companies including Life Insurance Corporation (LIC).

However, the fund sought settlement of these proceedings through Sebi's consent mechanism, wherein a case can be settled after payment of certain charges.

In its consent order, dated November 1, Sebi said its High Powered Advisory Committee has accepted the consent terms involving a payment of settlement charges of Rs 37.5 lakh, which was later agreed upon by the regulator's panel of Whole-Time Members as well.

Accordingly, the "enquiry proceedings initiated against the appellant (Small is Beautiful) for the alleged violation" of Sebi's venture capital regulations has been settled upon the payment of these charges, the Sebi order said.

The alleged violation by the private equity fund was brought to Sebi's notice by the Income Tax Department.

The fund had a total committed corpus of Rs 231 crore, out of which Rs 226 crore was contributed by state-run banks, insurers and other financial institutions and the balance Rs 5 crore by its investment manager KSK Energy Ventures.

Other contributors included IDBI Bank, Power Finance Corp, REC, Andhra Bank, SIDBI, PNB, Bank of Baroda, Oriental Bank of Commerce, Syndicate Bank, UCO Bank and Union Bank of India.

In its income tax returns for assessment year 2007-08, the fund had sought exemptions amounting to Rs 11.84 crore. During assessment proceedings, the Additional Commissioner of Income Tax, Hyderabad observed the fund had violated Sebi's investment guidelines for venture capital funds.

Under these regulations, a Venture Capital Fund is restricted from making investment in its associated companies. However, it was noted that, during the period of 2005-07, the fund had made investment in its three associated companies, Arasmeta Captive Power Company Ltd, Sai Regency Power Corporation Ltd and KVK Energy Infrastructure Ltd.

The matter was brought to the notice of Sebi by the tax department in March 2011, after which the market regulator initiated enquiry proceedings by the issuance of show cause notice on August 9, 2011 into the affairs and dealings of the fund for alleged violation of these regulations.