Sebi allows co-investment window inside alternative investment funds

The Securities and Exchange Board of India (Sebi) will let Category I and II alternative investment funds (AIFs) run a dedicated “co-investment” (CIV) scheme for accredited investors, doing away with an earlier requirement of a separate portfolio-manager licence.

 

The rules notified on Monday are aimed at reducing compliance burden for the AIF managers.

 

Accredited investor refers to those who meet certain financial criteria like net worth and get certification of the same under the regulatory norms.

 

Co-investment will allow an accredited investor to take direct exposure to the unlisted asset where the AIF is also investing.

 

The market regulator said that assets of each CIV scheme will be ring-fenced from assets of other schemes. Further, each CIV scheme will have a separate bank account and demat account.

 

Sanchit Kapoor, partner at IC RegFin Legal, said that the definition of “co-investment” continues to remain broad, potentially covering situations where an investor and the fund invest in different rounds of the same company. He added that a clarity from the regulator on what would not fall within co-investment scope is awaited. 

 

“Co-investments of an investor in an investee company across CIV schemes shall not exceed three times of the contribution made by such investor in the total investment made in the said investee company through the scheme of the AIF to which aforesaid CIV schemes are affiliated,” said Sebi.

 

According to the circular issued on Tuesday, AIF managers can opt for either of the routes- CIV scheme or the current PMS route for offering co-investment.

 

“CIV scheme is restricted to accredited investors (AI) and each scheme must draw from the same investor pool as the main AIF scheme, which immediately narrows participation when compared to CPM, which can have participation from an investor of any scheme managed/sponsored by the same manager/sponsor and not necessarily being an AI,” added Kapoor.

 

Legal experts further stated that capping co-investments at three times the investor's pro-rata interest may also act as a deterrence when compared to CPM where no such limit is prescribed.

 

The regulator has also included norms to prevent any misuse of the framework. For instance, it will be the manager's responsibility to ensure that the scheme does make an investment which may lead to its investors holding exposure in an investee company indirectly where they cannot hold or acquire directly. Further, co-investments which may necessitate additional regulatory disclosures if the investor had investment directly are also not permitted.

 

The CIV schemes will not be allowed to borrow funds or engage in any kind of leverage.

 

The AIF industry associations may come up with implementation standards on the co-investments in consultation with Sebi.