Market regulator Sebi slams AIF industry for circumvention of regulations

Sebi official did not disclose how widespread such practices are or whether the regulator has already begun enforcement action against them

The Securities and Exchange Board of India (Sebi) has discovered several instances of circumventing regulations through alternative investment funds (AIFs) and is discussing this with other regulators, said Ananth Narayan, whole-time member (WTM) of the market regulator.

Speaking at an AIF summit organised by the Confederation of Indian Industry, the Sebi official pointed out that while there have been no violations of the letter of the law, several entities have been found to be breaching the spirit of the law by investing in assets through AIFs that are otherwise not permitted.

“There are potential cases of sectoral cap breaches or entities investing in assets through AIFs where they are not allowed. For example, Entity A is prohibited from directly investing in Entity B but is investing through an AIF. This may not be a violation of the letter of the law, but it is a circuitous route,” said Narayan.

However, the Sebi official did not disclose how widespread such practices are or whether the regulator has already initiated enforcement actions against them.

While reiterating that AIF regulations need to be “light-touch”, Narayan urged the AIF industry to establish an “industry-standard forum” to gather suggestions and formulate a code of conduct for general obligation by AIFs.

“We attempted to do this two years ago but had to discontinue. This time we want specific standards set by the industry. You tell us what works. We will work on easing the pain points of the industry, such as allowing a junior tranche if they adhere to standards,” said Narayan.

The regulator has already established an ease of doing business committee — headed by former WTM S K Mohanty — to consider industry suggestions for easing compliance.

Addressing the AIF industry, Narayan added that Sebi may explore relaxing regulations that could hinder capital formation for the economy.

“We neither want bad things to happen in the industry nor do we wish to stop good things from happening. These are the two types of errors we are focusing on avoiding,” he added.

The Sebi official requested the industry for more transparent data disclosures while emphasising that the regulator aims to make the process as painless as possible.

Citing the example of the consultation approach with the Association of Mutual Funds in India, the regulator is also looking forward to an industry association so that there is one industry body to work with, which would serve as a quasi-self-regulatory body.

The AIF industry is utilised by the wealthy to invest in various asset classes and has gained popularity over the years.

As of June 30, the AIF industry has secured commitments worth Rs 8.44 trillion — a 21 per cent year-on-year (Y-o-Y) increase — and made Rs 3.5 trillion worth of investments, recording a 12.5 per cent Y-o-Y increase.

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