Sebi mulling exemptions in AIF norms, may allow pledging of infra assets

The Securities and Exchange Board of India (Sebi) is planning to allow alternative investment funds (AIFs) to pledge their infrastructure assets, in a boost to stimulate capital formation.

Sebi whole-time member Ananth Narayan said that there is a legitimate demand to allow certain funds to pledge infrastructure so that regulations do not come in the way of capital formation.

“One of the pain points for the industry has been allowing pledge of investee company shares by the AIF. To allow borrowing to be done at the investee company level itself. We do propose to allow this at least for infrastructure companies, with checks and balances,” said Narayan.

Sebi has been consulting with the Reserve Bank of India (RBI) too, he added, to discuss the potential ‘financial stability ramifications’.

The market regulator will be issuing a consultation paper on the proposed exemptions and the checks and balances within a few days.

Meanwhile, sources said AIFs are expecting some exemptions from the RBI on the directive to banks and non-banking finance companies (NBFCs) restricting them from investing in AIFs with downstream links to a debtor firm. RBI regulated entities were given a 30-day timeline to liquidate such assets, which lapsed on Friday. After the timeline, banks and NBFCs would have to do 100 per cent provisioning for such assets.

The industry had suggested that such provisioning could be mandated only for exposure in ‘stressed assets’ and not all investments for addressing evergreening of loans. Some had also recommended imposing a threshold for NBFCs to invest in AIFs, like the 10 per cent limit for banks. Legal players have also suggested grandfathering for existing assets.

Further, Sebi will also be issuing a code of conduct for the AIF industry.

“We propose to come out with a code of conduct or general obligation on the fund and its key managerial personnel, which will enjoin them to a specific set of rules of dos and don’ts to ensure that the fund is not being structured to circumvent the existing regulations," said Narayan.

The initial proposals have been discussed with the Alternate Investment Policy Advisory Committee (AIPAC), a committee under Sebi with members from the industry.

Earlier this month, Sebi issued a paper to make liquidation easier by allowing a dissolution process and one-time exemption.