SEBI seeks all private equity (PE) and venture capital (VC) funds to issue cash flows in order to attain investment banks, a proposal which the fund houses are avoiding.
Regulators require the core in the fund’s “Private Placement Memorandum” to be validated by a third-party intermediary which follows capital market standards. The PPM is a crucial document that prospective investors will review before investing in alternative investment funds (AIFs). This is a regulatory term for private equity and venture capital funds.
SEBI’s role is to oversee huge funds, implement various schemes with thousands of crores in assets under management (AUM), and submit PPMs that are frequently incomplete and uncontrolled.
The problem was discussed, and SEBI officials communicated the revocation of several AIF applications with the Alternative Investment Policy Advisory Board, led by NR Narayana Murthy, this month.
Approval in Less Time
Some PPMs stated that they would make a temporary investment in products issued by firms in OECD countries. Others indicated they’d issue loans and guarantees, but enable indirect co-investment with the advisory board’s permission and expand the funds’ holdings.
One of the PPMs discussed granting special rights to certain types of investors to prolong their commitment time (while the fund calls capital from investors to make new investments).
There are over 700 AIFs in India, with investors paying more than Rs. 4.5 lakh crores. The presence of merchant bankers, according to SEBI, helps decrease PPM anomalies and expedite application processing. Regulators, on the other hand, must dispel AIF’s anxieties.
Turning the Tables
Because an AIF is a considerably more unique product, expecting a merchant banker to manage the fund’s paperwork presumes that the merchant banker understands the product’s peculiarities as well as the fund itself. However, this isn’t always the case.
Involving intermediaries raises the cost of borrowing, which not only adds to the process’s complexity but is already high in India in comparison to many other markets. Finally, as middlemen begin to direct product offerings, strengthening merchant bankers and them may stifle product innovation.
SEBI stated that the AIF should not be rigid, but those familiar with the argument believe that a sequence of minimal investor disclosures is required. When a fund makes a profit by selling its underlying assets, it uses a “waterfall” to disburse funds to a range of investors.
Previous initiatives, including the implementation of standardised PPM templates and obligatory performance targets by AIF, have had little bearing on SEBI’s subsequent actions. Each month, SEBI is said to receive 20-25 AIF funding proposals.
SEBI Introduces Accredited Investors as a New Source of Capital
The Securities and Exchange Board of India (SEBI) took bold but incremental moves to develop and recognise a new category of high net worth/income investors – Accredited Investors — during its June Board meeting. This should offer up a new and broad route for obtaining capital from knowledgeable and capable investors, especially in sectors where current restrictions are overly restrictive.
Accredited Investors are believed to be sophisticated high-net-worth individuals who do not require regulatory oversight or micro-level protection. They can assess complex, high-risk/high-reward products/services and negotiate agreements to safeguard their interests in a flexible manner.
SEBI’s regulations are, in general, micromanagement schemes. The rules in capital markets tend to provide for complex controls, owing to the repeated suffering of small investors and, possibly, also due to the reality of Indian markets. Even if the parties agree, such obligations cannot be waived.
Alternative Investment Funds, Investment Advisers, and other entities are subject to similar regulations. As a result, needy issuers are denied financing, while well-informed investors are denied opportunities to earn higher profits.
Further Key Takeaways
In February, SEBI published a consultation document proposing a framework for Accredited Investors, which kicked off the process. While the regulations with the small print should be available soon, much of the specifics may be found in the paper and the SEBI’s summarised conclusion, which was just disclosed.
Is SEBI still available as an arbitration in cases of fraud or disputes between Accredited Investors and issuers/intermediaries? Or will the parties be forced to go to civil courts, which are both costly and time-consuming? One hopes that, in the event of frauds, manipulations, or the like, SEBI will still be able to intervene, as it is a knowledgeable and generally quick-witted regulator. Despite its flaws, the decision is still a significant stock market reform. Let’s see if and how SEBI addresses these issues and questions in the specific regulations that are likely to be released soon.