Sebi offers hand of friendship to PEs

Says it wants the sector to develop, assures changes in the framework

The Securities and Exchange Board of India (Sebi) has offered to address the concerns of the private equity (PE) and venture capital sector working closely to remove several tax and regulatory anomalies that arise from the new Alternative Investment Fund (AIF) regulations. The industry, hitherto unregulated, came within the fold of Sebi with the notification of these regulations in May last year.

Sebi Chairman U K Sinha assured that the regulator will reconsider the cap on investments that can be made by the employees of an alternative investment fund (AIF) in it.

According to the Sebi AIF regulations, Rs 25 lakh is the investment threshold for employees or directors of the AIF. “We have received representations asking why there is a ceiling of Rs 25 lakh for employees. We are open to reconsidering this provision,” Sinha told the fund managers.

According to the regulations, an AIF should have a minimum corpus of Rs 20 crore and should not have more than 1,000 investors.

In the first formal public interaction with the regulator at a conference of the Indian Private Equity and Venture Capital Association — IVCA Conclave 2013 — on Tuesday, the PE industry sought more encouragement for raising rupee funds, extension of tax pass through status for category I and category II funds and flexibility in capital structure for fund managers.

ALTERNATIVES NEEDED

• Tax pass through status not available for majority of funds
• Restrictions on investments in AIFs by insurance firms, banks, MFs etc
• Lock-in provisions in initial public offerings
• Stringent provisions in delisting regulations
• Cap on investment by employees and directors at Rs 2.5 million

At present, domestic institutions such as insurance companies, pensions and banks are not allowed to invest in AIFs. Also, although the government this year allowed the tax pass-through status for entities registered under the Sebi venture capital funds (VCF) regulations, this move fell in a grey area as the VCF regulations got replaced by the AIF regulations.

Sinha added that he was in favour of pass-through tax status for all categories of alternative funds. He offered to recommend the same to the government. “There is scope for all of us to approach the government,” he said.

Another problem faced by the fund managers was the apparent lack of co-ordination among the multiplicity of financial sector regulators. Both the finance minister and the Sebi chairman assured that the Financial Stability and Development Council, headed by the finance minister, would address such issues and meet once in three months.

PEs were told they could bring to the minister’s notice if there were any conflicting positions made by the regulators, which could, then, be taken up for discussion in the council.

Sinha also readily agreed to a proposal to bring out a joint study sponsored by the IVCA and the regulator to put forth the various aspects of the PE segment, which could help mitigate the great degree of pessimism in the government and regulatory circles. Sebi also assured the segment it would not push for safety net in initial public offers and was open for suggestions to changes in the de-listing guidelines. “We need to interact and understand each other’s concerns. We need to talk and move forward,” said Sinha.