The Securities and Exchange Board of India (Sebi) could soon allow alternative investment funds (AIFs) to pledge their infrastructure assets to give a fillip to capital formation, Sebi whole-time member Ananth Narayan G said at the sidelines of the AIBI conclave on Friday.
The motive is to ensure regulations do not come in the way of capital formation, he said. The AIF industry has seen `9.5 trillion worth of commitments, at a CAGR of 35-40% in the past five years, Narayan said.
The regulator has been tightening the noose around AIFs that helped regulated lenders hide stressed assets, and is now working on a code of conduct for funds. “The biggest case of Type 1 error in AIFs is that funds are being structured to circumvent existing regulations. Type 1 errors are when we allow bad things to happen,” Narayan said.
“We have seen cases of circumvention of FEMA and SARFAESI guidelines, around QIBs, investments into IPOs. While we could come up with a set of regulations for each of these, these will result in Type 2 errors, which means we stand in the way of good things happening.”
Sebi is thus proposing to come up with a code of conduct for funds and the KMPs “which will ensure they do due diligence to prevent funds from being used to circumvent financial sector regulations”.
He said, “One of the challenges has been allowing a pledge of investee company shares by the AIF, to allow borrowing to be done at the investee firm’s level. We do propose to allow this at least for infrastructure companies, with checks and balances.” Sebi has been in discussions with the RBI too, he added, to discuss potential financial stability ramifications.