The regulator wants a third-party intermediary, governed by capital market rules, to verify the information contained in a fund’s “private placement memorandum”. The PPM is the key document that potential investors go through before placing money in Alternative Investment Funds (AIFs) – the regulatory term for PE and VC funds.
The position taken by Sebi follows big funds, running multiple programs with thousands of crores in assets under management (AUM), submitting incomplete PPMs and often in violation of regulations.
The issue has been discussed and the flaws in the demands of several AIFs were shared by Sebi officials this month with the Alternative Investment Policy Advisory Committee, headed by NR Narayana Murthy, two people told ET. aware of the development.
“For example, one of the MPCs of a large fund said it would make temporary investments in instruments issued by entities in OECD countries,” said a person present at the meeting. Another said he would provide loans and guarantees, while another (yet) said he would allow indirect co-investments and extend the term of funds with the consent of the advisory committee. these are only allowed by regulation … do not come from small funds or beginners. ”
One of the MPCs talked about granting special rights to a selected category of investors to extend the commitment period (during which a fund is allowed to call on investors’ capital to make new investments).
There are around 700 AIFs in India with over Rs 4.5 lakh crore pledged by investors.
Sebi believes that the presence of an investment banker would help reduce irregularities in PPMs and speed up the processing of applications. But the regulator will have to allay the fears that feed the AIF.
“An AIF is much more of a bespoke product, and expecting an investment banker to oversee fund documents is based on being expected to understand the nuances of the product as well as the fund entity. itself, which may not be true, “said Siddharth Shah, senior partner of the law firm & Co.” Second, involving an intermediary will increase the cost of fundraising, which is already high in India compared to many other markets, in addition to adding to the complexity of the process. Finally, forcing the involvement of an investment banker and making him powerful could hamper product innovation as middlemen begin to dictate product offerings. ”
While AIFs should not lose their flexibility, Sebi, said a person familiar with the discussions, believes there must be a minimum set of information to be provided to investors. “It was pointed out that in some applications the illustration of the ‘waterfall’ was missing. One of the MPCs did not disclose the ‘related party’ and ‘warehousing’ transactions,” the person said. .
A “cascade” defines how the fund would distribute capital to various investors when it recognizes profit by selling underlying investments. “Most of the violations were committed by large funds – such as 74 regimes and AUMs of Rs 20,000 crore, 20 regimes managing Rs 14,000 crore, four regimes with Rs 7,000 crore, etc.,” he said. he declares.
Sebi’s recent move is unrelated to previous measures such as the introduction of a standardized PPM model and mandatory performance benchmarking by AIFs. According to Sebi officials, this is to speed up the processing of approvals, the person said. Sebi would receive 20 to 25 fundraising requests from AIF each month.