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Market regulator Sebi today proposed new rules for Alternative Investment Funds AIFs and other private equity funds,pooling in capital from HNIs and corporates,but suggested keeping retail investors out of their ambit.
As per the guidelines proposed by Sebi,AIFs can pool in the money from High Networth Individuals,institutional investors or corporates through private placement,but should not solicit money from retail investors.
The regulator has suggested a minimum contribution from investors for such funds at Rs one crore to keep retail investor out of these funds due to a higher level of risks attached to them.
Inviting public comments on its proposed regulations for AIFs,Sebi said it intends to regulate private pools of capital where institutions or HNIs invest as AIFs.
8220;While institutions and HNIs are expected to be savvy investors and need not be protected from market and credit risk,there is need for a framework to deter from fraud,unfair trade practices and minimise conflicts of interest.
8220;Mitigation of potential conflict and deterrence to fraud etc,will be addressed through disclosure,incentive structures,reporting requirement and legal agreements,8221; it said.
Sebi said a more comprehensive legal framework was necessary to promote growth of private pools of capital such as PE Private Equity,VC Venture Capital,PE Private Investment in Public Equity and Real Estate Funds.
8220;There is a need to recognise AIFs such as PE or VC,as a distinct asset class apart from promoter holdings,creditors and public investors,8221; it said,while adding that the alternate asset industry also needed to be regulated for fair and efficient functioning of financial market.
The decision to frame separate regulations for AIFs was taken at Sebi8217;s board meeting on Friday last week.
Sebi said it proposes to create a structure where regulatory framework is available for all shades of private pool of capital or investment vehicles so that such funds are channelised in the desired space in a regulated manner without posing systemic risk.
8220;At one end of the spectrum,there will be Mutual Funds or Collective Investment Scheme CIS which are for retail investors with prudential regulation seeking to regulate all kinds of risks.
8220;On the other end there are private pools of capital of institutions or sophisticated investors who entrust pooled funds to a manager who himself needs to have own funds forming part of the corpus8221;.
Sebi has also proposed to increase the minimum investment requirement in Portfolio Management Schemes to Rs 25 lakh,from Rs 5 lakh currently,which was making these products accessible to retail investors without necessary protection.
Also,portfolio managers would be required to segregate the clients8217; funds and the former would be prohibited to pool the fund or securities of clients.
8220;All portfolio managers who seek to pool assets such as for investing in unlisted securities should be required to register as an alternative investment fund,8221; Sebi said.
All such funds would have to be close ended and investors might be locked in for a minimum period of three years.
Sebi said that the minimum investment amount would be specified as 0.1 per cent of fund size subject to a minimum floor of Rs 1 crore.
8220;The minimum investment criterion would prevent retail investors from straying into funds and the granularity would ensure a maximum number of investors as 1000 precluding the possibility that some funds might disguise themselves as private pools while approaching a large number of retail investors,8221; it noted.
8220;Funds may be raised only through private placement through information memorandum,8221; it added.
In terms of benefits,the AIFs would be exempted from insider trading regulations for their due diligence prior to investing in listed companies.
Also,many of these funds would be allowed to participate in share QIPs Qualified Institutional Placements and investments would be allowed in Core Investment Companies,Asset Finance Companies,Infrastructure Finance Companies or companies engaged in Micro Finance activities.
The requirement of lock-in period of one year for pre-IPO investments would not be applicable in respect of investments made by many of these funds.
Sebi has,however,also proposed some restrictions for different kinds of AIFs.
For PIPE funds,the investments would be restricted to shares of small sized listed companies,while PE funds would be allowed to invest mainly in unlisted or proposed to be listed companies.
For debt funds,the entire investment would be made in unlisted debt instruments,while infrastructure equity funds would have to put minimum two-third of their investment in equity of infrastructure projects/companies.
For Real Estate Funds,investment could be in Real Estate Projects or shares in the SPVs undertaking Real Estate Projects.
For Social Venture Funds,the investments would be made primarily in social enterprises such as micro finance sector.
The SME funds would be for investing in unlisted SME entities in manufacturing services sector as also businesses providing infrastructure or other support to SMEs or SME companies which are listed or proposed to be listed in SME exchange or SME segment of stock exchanges.
The new rules would also apply to venture capital funds VCFs,but the foreign venture capital investors would continue to be regulated by the existing regulations for them.
The Fund Managers or Investment Managers of AIFs are proposed to be regulated under a framework for regulation of Investment Advisors,which would cover various types of fund managers such as fund or asset managers to mutual funds and wealth managers.
Sebi said that AIFs would be allowed to make a variety of investments,such as funds focused on venture capital,PIPE,PE,debt,infrastructure equity,real estate,SMEs,social venture and hedge funds.
It would be mandatory for all types of private pools of capital or investment funds to seek registration with Sebi.
But,they can operate as companies,trusts or body corporate including the Limited Liability Partnership LLP structure.
However,the fund would have to specify the category under which it is seeking registration,the targeted size of the proposed fund,its life cycle and the target investor.
Sebi said a clear distinction among the various types of private pooled investment funds would also help the government and regulator to tailor-make any concessions or relaxations for individual kinds of funds such as VCF or SME funds,Social Venture Funds etc.
