Sebi to frame regulation for alternative investments

In order to safeguard investors from falling prey to dubious schemes of portfolio managers, capital market regulator Sebi will soon come out with guidelines for alternative investments.

The issue was discussed at the Sebi board meeting here today, after which Chairman UK Sinha announced that the regulator will soon frame rules to govern alternative investments and portfolio wealth managers.

Although Sinha did not disclose the areas that will be included under the new regulation, alternative investment schemes generally cover art works, antiques, coins and stamps, as well as a host of other instruments besides popular avenues like stocks, commodities and derivatives.

The new rules would also apply to an estimated $1 trillion wealth management industry.

As part of the proposed regulatory framework for alternative investments, Sebi is already planning to set up an intermediary regulatory body with representation from among the wealth managers themselves.

The new rules would cover entities offering wealth management or investment advisory services across various asset classes irrespective of the different financial markets.

These would include stocks, commodities, fixed deposits, derivatives, insurance, mutual funds, private equity, pension funds as also alternative investment products such as funds investing in art works, antiques, coins and stamps.

For past few months, Sebi has been in consultation with the government, RBI and other financial regulators for framing a new set of rules for the wealth managers.

Given the size of the industry, and therefore a higher risk of large-scale frauds or manipulations, the new rules would also allow Sebi and RBI to impose strict penalties.

Although there are no official figures for it, the size of wealth management industry is pegged at about $1 trillion -- nearly double the size a couple of years ago.

While RBI and Sebi would be primarily responsible for compliance of the rules, help would be sought from other regulators, namely commodity regulator FMC, insurance watchdog IRDA and pension fund regulator PFRDA, whenever needed.

Sources said that Sebi also aims to frame a stringent set of rules for funds investing in art works, antiques, coins and stamps, with an aim to check black money flow into these products and safeguard the interest of genuine investors.

Sebi considers investment funds focused on art works, antiques, coins and stamps as "Collective Investment Schemes", which come under the ambit of the capital market regulator.

Fearing flow of illicit wealth into these funds and also a high level of risk posed by them to the general investors, Sebi is now considering framing a specific set of regulations for these funds.

Globally, art funds are very famous as alternative class of investments for rich investors and have started gaining ground in India over the past few years.

However, there are no specific rule in India for art and other such funds, which collect money from numerous investors, mostly high-networth individuals, to invest in art works, antique pieces as also old and rare coins and stamps.

The Sebi has already begun a consultation process with stakeholders, including the centre and RBI, with an aim to frame the specific regulations for alternative investment vehicles this fiscal.

In 2008, a time when the art funds first became visible in India, the regulator had issued a public notice to warn investors against putting their money into art funds or schemes of entities not registered with Sebi.

At that time, Sebi had said that its analysis of various art funds has found them to be 'collective investment schemes' and were being launched by various entities without registering with Sebi in accordance with the Sebi (Collective Investment Schemes) Regulations, 1999.

As per the existing rules, only an entity registered with Sebi as a Collective Investment Management Company is allowed to offer any collective investment fund or scheme, including those focused on art works.

However, there are no specific regulations for art funds and the need has been felt now to have a distinct set of rules for such investment vehicles.

Globally, alternative investment avenues are quite in vogue among rich investors, who are estimated to allocate 5-10% of their investment portfolio into these products.

As per the annual World Wealth Report of Capgemini and Merrill Lynch Wealth Management, alternative investments are expected to account for nearly 9% of high-networth individuals' financial assets in 2011.

These investments used to account for as much as 10% of HNIs' financial assets in 2006, but had fallen to as low as 6% by 2009 due to the economic slowdown.