AIFs push for a tune-up: Simpler rules, lower barriers, faster approvals

Sebi expert group recommends reforms to streamline operations

In a bid to ease business operations, alternative investment funds (AIFs) have submitted a raft of suggestions aimed at expediting registrations and approvals, simplifying operations, validating performance, and lowering investment limits, among other recommendations, according to sources.

The expert committee formed under the Securities and Exchange Board of India (Sebi) to promote ease of doing business, which includes members from the AIF sector, submitted its report last month and discussed key suggestions with the regulatory body.

The industry has requested certain relaxations governing investment managers, a smoother registration process for existing AIFs launching schemes, and a reduction in approval timelines from the current 35 to 40 days. They have also sought clearer norms for continuing investments from insurance companies and banks, according to sources.

“Mutual funds (MFs) are registered with Sebi, and funds or schemes launched by them are approved as they are submitted. In contrast in AIFs, the Trusts are registered, not the fund managers, who are indirectly regulated. If fund managers receive a licence, similar to the International Financial Services Centres Authority regulations, only a one-time licence is required, allowing them to continue launching schemes. This would expedite the process,” said Venkatesh Prabhu, co-founder of MITCON Credentia Trusteeship Services.

While suggestions also include lowering the amounts required to pool funds from a broader base of investors, the market watchdog has recommended lower limits only for accredited investors. Sebi had previously specified eligibility criteria for seeking accreditation, including net worth and income requirements.

Among other relaxations, AIFs have requested relief from the mandate of a performance validation agency (PVA), which currently requires third-party validation of past performance before fund houses or investment advisors can claim performance.

“The industry is already subject to reports from a performance benchmarking agency, so we hope the regulator does not mandate a PVA for AIFs,” said an industry participant.

The regulator may also establish norms for the listing of AIFs for capital raising — something it has been advocating following the mandatory dematerialisation of AIF units, according to a source.

Sebi issued circulars last year to mandate the issuance of AIF units in dematerialised form and provided a glide path for the industry to comply.

Sebi will continue discussions at the next meeting of its alternative investment policy advisory committee scheduled for next month, according to sources. Following these discussions, a consultation paper may be released with the recommendations.

These suggestions come at a time when the regulator has proposed a new asset class for MFs — one that falls between portfolio management services (PMS) and MFs, designed for investors with a higher risk appetite and an inclination towards diverse investment strategies.

Some AIF players indicated that Category III AIFs, such as hedge funds, might face challenges once the new asset class is approved and gains traction. The new asset class will offer investment opportunities starting at Rs 10 lakh — much lower than the current minimum of Rs 50 lakh for PMS.

AIFs are niche investment products structured as pooled investments with higher entry barriers, allowing participation only from institutions, high-net-worth individuals, and accredited investors. These funds often explore segments that MFs cannot invest in, typically involving higher risks.

As of June, AIFs have reached Rs 4.3 trillion in total investments, while the industry’s commitments have approached Rs 12 trillion.

Over the past few years, Sebi has increased its interactions with the industry to address regulatory lacunae while implementing more stringent norms for investor protection and transparency, including regulations on valuation and dematerialisation.

REBOOT, RECHARGE, REIMAGINE:

Rolling the dice on AIF makeover

·         The expert committee on ease of doing business has submitted its report to Sebi

·         Discussions with Sebi will continue next month

·         Suggestions include simpler norms for reporting, registration, and faster approvals

·         A push for the listing of AIFs is on the horizon