Sebi likely to change rules to track investments in PE and VC funds

Securities and Exchange Board of India (Sebi) is likely to change the rules to start tracking investments flowing into local private equity (PE) and venture capital (VC) funds, The Economic Times (ET) reports.

The market regulator is doing this to identify the investors and the source of the money. In addition, Sebi also wants to check if PE and VC funds, also known as alternative investment funds (AIFs), are being misused, the report said.

To discuss the matter, a meeting was organised about two weeks ago, which saw the participation of select industry officials and domain experts. During this meeting, new regulations to monitor the investments in AIFs were explored, people aware of the development told ET.

What is Sebi concerned about?

A domestic AIF is allowed to receive investments from both local and foreign entities. In addition, there are no rules regarding how AIFs are constituted. A few or even a single local or offshore investor (limited partners) can establish an AIF.

In most cases, such funds are incorporated in India, and when such an AIF invests in a domestic company, it is considered a local investment. This is true even if an AIF has all overseas limited partners. In such a case, the fund's equity holding in a company in India is not considered a foreign direct investment (FDI), the ET report said.

By using this mechanism, AIFs can sidestep FDI restrictions. Also, this allows local promoters to indirectly hold a stake in a company.

As things stand, Sebi does not ask for AIF investor details by default. However, subsequent to these deliberations, Sebi may ask for these details in an extraordinary scenario, the ET report quotes Tejesh Chitlangi, a senior partner at IC Universal Legal, as saying.