The Securities and Exchange Board of India (Sebi) has recommended that the certificate of registration of eight alternative investment funds (AIFs) be cancelled for non-compliance of AIF regulations and failure to file periodic reports.
The eight funds — Quant First Alternate Investment Trust, IREO Advantage Fund I, Paranjape Plustus Fund 1, Saveda Venture Capital Fund, SRS Alternative Investment Fund, GSF Venture Capital Fund, Investmaxima Trust and Golden Bird AIF – failed to adhere to Section 28 of AIF regulations, which require funds to file periodic reports with regard to activities as called upon by the Sebi Board. This came to light while preparing investment data for the quarter ended December 2020 and the subsequent three quarters.
AIFs must submit periodic reports about their activities and operations, including details of funds raised and invested under various schemes as well as categories of investors under the schemes.
“Non-compliance with such periodic reporting is being viewed seriously. Robust reporting and disclosure frameworks are a cornerstone for any mature and developed securities and financial market, and Sebi’s show-cause notice in this case reflects the importance of such frameworks,” said Saurabh Tiwari, partner, DSK Legal.
“Even if the funds had registered five years back without collecting any capital, they had an obligation to file nil reports and keep the accounts active. This particular episode shows that Sebi is taking compliance seriously and does not want dormant or ‘khokha’ funds to run in perpetuity. Last year, too, the regulator had come out with a circular defining a period of 12 months for first close, after which funds have to refile with Sebi and pay registration fees,” said Divaspati Singh, partner, Khaitan & Co.
AIF fund managers have recently been witnessing regular inspections and scrutiny by Sebi regarding regulatory compliances.
Around September last year, the authorities conducted an inquiry with respect to the eight Sebi-registered AIFs regarding alleged violation of reporting requirements. In the report submitted subsequently, the designated authority had recommended cancellation of AIF registration and passing of appropriate directions, including imposing penalty, for breach of AIF regulations.
Following that, show-cause notices were sent to AIFs in November last year and subsequently monetary penalties were slapped. Most of these funds were non-operational and fund managers contended that in the absence of any operations, they were not required to make any filing in the form of quarterly reports.
“It is important for fund managers to ensure a robust compliance mechanism right from the date of registration of the fund. While investor interest may be the ultimate objective, fund managers should not be overburdened with hefty compliance requirements. In this direction, we have seen regulators put in constant efforts to standardise reporting requirements and enhance transparency,” said Roopal Bajaj, leader — private client and funds, Singhania & Co.
“Once a registration certificate is cancelled or denied by Sebi, it has serious implications on the intermediary’s ability to conduct itself in the securities market. Re-registration is often not possible, as the prior disqualification affects the reputation of the intermediary to the point of a complete bar on its ability to practice in future,” said Ashutosh K Srivastava, counsel, SKV Law Offices.