Partial reprieve for alternative investment funds as Sebi eases regulations

Those overseeing investment decisions of alternative investment funds (AIFs) have found some respite from an exemption order the Securities and Exchange Board of India (Sebi) gave on Wednesday.

But the relief is limited and some issues on serving on such committees remain, according to experts.

Sebi, in its board meeting on Wednesday, said it would provide a leeway to investment committees of AIFs.

“The Board approved amendment to Sebi (Alternative Investment Funds) Regulations, 2012 (AIF Regulations) to provide certain exemptions to AIFs in respect of Investment Committee members in terms of Regulation 20(6) of AIF Regulations, conditional upon capital commitment of at least … (Rs 70 crore) ... from each investor accompanied by a suitable waiver,” it said.

Vivek Mimani, partner at Khaitan and Co, said the regulator might be providing these exemptions to those investing at least Rs 70 crore because they were expected to be more sophisticated. This should help those on the investment committees of funds that have such investors. The obligations may continue for funds that have investors with lower allocations.

“For funds accepting larger commitments, it provides a certain amount of clarity,” he said.

Sahil Shah, principal associate at J. Sagar Associates, said before the exemption, members of the investment committee, along with the fund manager, had been made equally responsible for decisions. They had also been made responsible for ensuring that the investments by the fund were in compliance with the AIF Regulations and other fund documents.

However, the exemptions decided at the Sebi board meeting are expected to ease this burden where each investor makes a capital commitment of more than Rs 70 crore and requests a waiver. “This responsibility of the IC (investment committee) members could be done away with,” Shah said.

There are issues to be sorted out with regard to the Foreign Exchange Management Act (Fema). They had affected some members of such committees, according to Shah.

In Sebi’s view, certain non-residents appointed their nominees to the committees, because of which control provisions under Fema were being triggered.

Sebi has sought the views of the Reserve Bank of India and the government on this and has put all applications of members who are not “resident Indian citizens” on hold until clarification is received. This would mean that the definition of control under Fema could be expanded to tighten this aspect. Investment may consequently be subject to pricing norms, sectoral limits, and other applicable conditions. This is yet to be addressed, he said.

This has affected foreigners as well as non-resident Indians (NRIs), the minutes of the regulator’s board meeting in September had said.

“… in case of applications of AIFs where investment committees are empowered to take investment decisions, comprise other than Indian resident citizens (i.e. foreigners or NRIs) as external members, such applications may be processed after receipt of clarification from Government and RBI,” it said.

AIFs have invested over Rs 1.6 trillion as of September. This is nearly a third higher than the year-ago figure. The commitment raised has crossed Rs 4 trillion.