Draft AIF Regulations: A Welcome Change
SEBI has at long last put an end to various half debates and grey areas in the area of fund regulation. The draft Alternate Investment Fund Regulations cull out the various kinds of fund operators in India and the different strategies adopted by them in gathering good money for needful corporates. The well worded concept paper also shows that the Market Regulator has been quite well aware of the market practices and has been supporting the active role played by Private Equity Funds across all sectors of Industry.
If the Alternate Investment Fund Regulations are adopted after a little tweaking here and there, India could see a very comprehensive umbrella under which all funds operate. And, this is a much better manner of addressing fund activities rather than an earlier fragmented attempt (as seen in earlier REIT regulations). The present registered and unregistered venture capital funds, foreign venture capital Investors, as well as unregistered private equity funds whether they gather moneys from within India or outside India. Additional carve outs for Hedge funds, funds investing particularly into SMEs, smaller listed companies (PIPE funds) social funds etc. have been provided in the draft regulations. This clarity will be very good for industry.
The only glitches or rather areas where a more progressive approach could have been taken is that more flexibility could have been provided to Private Equity Funds investing in unlisted entities since unlisted companies are not strictly the domain of SEBI. Of course it may be argued by the Regulator that once a fund gathering entity is registered as an intermediary, SEBI jurisdiction applies. However, the investment restrictions imposed on the Private Equity funds as intermediaries infringes on unlisted company’s financing freedom. For instance almost all unlisted private or public companies keep a future IPO, so for the regulations to require that A PE fund shall not invest more than 50% in the equity or equity linked instruments of a company which is proposed to be listed, may be restrictive. Further, to this, the debt – equity breakup could have been left out of the regulations, this is regulated by the requirement that a PE fund shall not invest more than 50% in unlisted debt of a company where the fund has already made equity investment.
Other than this, the focus of the regulations is pretty clear. The idea is to ensure that the smaller players get a bigger piece of the pie, evidenced by the prohibition that a VCF shall not invest in any company that is that is promoted, directly or indirectly by any of the top 500 listed companies by market capitalization or by their promoters.
The other thing which may be eased out is the requirement that no multiple schemes are allowed under one registration. Each registration can have only one close ended scheme under it. This may be ok in a smaller market or where there is a glut of financing available. But to put this restriction where there are a few operators/ funds will add to costs.
All in all this is good. Lets see how the fine tuning ends out.
