Ready to relook at some AIF norms if assured of no misuse: Sebi official

Ananth Narayan said that RBI has agreed with Sebi's assessment on circumvention by AIFs

The Securities and Exchange Board of India (Sebi) may relook at its norms restricting tranching and pledging, and those on liquidation in Alternative Investment Funds (AIFs), if the industry gives comfort on not misusing the relaxation and agrees to comply with a general obligation and standards, said Ananth Narayan, Whole-Time Member (WTM).

The Sebi official’s comments come at a time when the regulator has found cases of circumvention of financial sector regulations amounting to “tens and thousands of crores,” while the industry has raised concerns around increasing regulations affecting capital formation.

“There have been several cases where AIFs have been structured to enable evergreening of financial sector assets—to avoid Non-Performing Asset (NPA) recognition. We have shared this data with the Reserve Bank of India (RBI), and RBI agrees with our assessment. We have seen cases where AIFs have been used to circumvent FEMA regulations—where a particular entity not allowed to invest in another does so via an AIF,” said Narayan.

The former banker added that the market regulator intends to come out with a general obligations code of conduct for AIFs—where fund managers agree to not use AIFs as a route to circumvent other financial sector regulations. Further, standards and a framework may be defined to help managers evidence that they are acting in coherence with the general obligations.

To seek industry feedback, Sebi has constituted a Standards Setting Forum (SSF) for AIFs, chaired by S Ramann, who currently heads the Small Industries Development Bank of India (Sidbi). The standards will be set in consultation with Sebi, taking along suggestions from the industry.

Further, the member called for more data from the industry in an ‘unobtrusive’ manner.

“It is possible and probable that because we have such concerns we have adopted regulatory stances which come in the way of capital formation. If we have a code of conduct, standards for implementing it, and means to get the data in a painless manner, we are willing to open up regulations to make life easier for AIFs. We are willing to relook at norms on tranching of assets once we know it will not be misused. Currently, pledging is not allowed, but we are willing to relook at it when we have the comfort that this will not be misused in any fashion,” he added.

An ease of doing committee of Sebi is also looking at the challenges pointed out by the industry to facilitate capital formation.

Further, to facilitate investor participation in the AIF space, the Sebi official said that there might be some relaxations in the accredited investor certification process, on which a working group formed by the regulator is consulting.