Alternative investment funds under Sebi lens as growth gathers pace; Assets up 42% so far this year

Annual compliances rise, regulator to ensure there is no misselling

The time taken for registrations has increased, taking anywhere between six to eight months in some cases, the lawyer said. However, some see this as a temporary blip and blame it on the backlog during Covid-19.
The time taken for registrations has increased, taking anywhere between six to eight months in some cases, the lawyer said. However, some see this as a temporary blip and blame it on the backlog during Covid-19.

By Ashley Coutinho

The Securities and Exchange Board of India (Sebi) is increasing its oversight on alternative investment funds (AIFs) — subject to light-touch regulations until now — given the pace of growth clocked by the industry.

AIF commitments have grown 42% year-on-year to Rs 6.94 trillion as of June 30, latest data from Sebi shows. The amount invested has risen 43% to Rs 3.1 trillion and the number of AIFs is inching towards the 1,000-mark. AIFs have a minimum ticket size of Rs 1 crore and are sold to wealthy investors.

“The AIF industry has seen a high growth rate. Sebi is bound to take cognisance of that and ensure that they are being properly operated and that there is no misselling. Now we see more questions being asked around leverage, warehousing terms, co-investment and press note 3 declarations, to name a few,” said Pallabi Ghosal, partner, Trilegal, a law firm.

Last month, the regulator directed investment managers of AIFs to appoint compliance officers and also issued guidelines for large value funds that collect money only from accredited investors with a ticket size of at least Rs 70 crore each. Until now, AIF regulations merely enumerated the roles and responsibilities for managers, sponsors and trustees, without thrusting compliance obligations on a specific individual.

“Annual compliances have significantly increased. There’s an annual PPM (private placement memorandum) audit and all filings now have to be done through the merchant banker. All these costs are ultimately loaded on to the fund (the investors), and there’s still a big question mark on whether any of these increased compliances aid or protect the investors in any way,” said another lawyer with a top law firm.

The time taken for registrations has increased, taking anywhere between six to eight months in some cases, the lawyer said. However, some see this as a temporary blip and blame it on the backlog during Covid-19.

An email sent to Sebi did not immediately get a response.

Last month, Sebi levied a fine of Rs 10 lakh on Indgrowth Capital Advisors as its fund had exceeded the 10% investment limit in Ugro Capital. The fund reported two different figures for its investible fund, attributing it to an error in calculation of the investable corpus. The regulator did not buy the argument and blamed the fund for trying to maximise its “investable funds”, defined as the AIF scheme corpus minus the estimated expenditure for the tenure of the fund.

“This is an interesting ruling because the issue of calculation of ‘investible funds’ has been a matter of debate and discussion in the AIF industry with multiple interpretations. Secondly, this is one of the first instances wherein Sebi has taken action on the complaint of investors and passed an order to that effect,” said Yashesh Ashar, partner, Bhuta Shah & Co.

Other funds could come in the regulatory cross-hairs for breaching the investment limit and miscalculating the investable corpus, especially in cases when investors back out, default or the final close does not happen at the expected size, noted Ashar.

“The Sebi order may provide clarity on the issue of investible funds and open the floodgates for redressal of complaints by investors for similar or other transgressions,” he said.

“Investor activism is on the rise but managers are being given plenty of opportunity to defend themselves,” Ghosal said.
In 2020, Sebi’s diktat that members of AIF investment committees would be required to be equally responsible as the fund manager for investment decisions had rattled the industry. Such committees are typically set up by fund managers to review and approve investment proposals before they can be implemented. Such independent or expert members also help enhance the governance standard of the funds.

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