Sebi takes over regulation of private equity industry

Sets compulsory registration, investment holding limit & norms governing managers

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.

THUS SAYS THE RULE BOOK

• The fund or any of its scheme shall not have more than 1,000 investors
• AIF shall not accept investment of value less than Rs 1 crore from an investor
• AIF shall have a minimum corpus of Rs 20 crore
• Not to invest more than 25% of funds in one investee company 
• AIFs shall not invest in associate companies
• Launches under an AIF will be subject to filing of an information memorandum with Sebi
• Funds to give investors financial information of portfolio companies 
• Units of AIF may be listed on stock exchanges subject to a minimum tradable lot of Rs 1 crore

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.

Siddharth Shah of Nishith Desai Associates said, “The categorisation of funds has brought relief to the industry as it won’t be unnecessarily taking away the flexibility of investments.”

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.”