The Securities and Exchange Board of India (SEBI) plans to overhaul its regulation of investment funds that pool private capital from institutions and high net worth investors. To that end, SEBI has invited comments on a set of draft 'Alternative Investment Fund Regulations' that it intends to introduce in the coming months.
At present, SEBI has adequate rules in place to regulate mutual funds and collective investment schemes. However, its rules for other types of investment funds are quite inadequate. In fact, SEBI's venture capital fund regulations, which were drafted in 1996 to encourage early stage investment, are now being used for private equity, private investment in public equity, and real estate funds.
Consequently, SEBI's current venture capital regulations treat all of these different types of private funds in the same way—even though these funds might have different economic objectives, require different regulatory incentives and present different regulatory concerns.
In addition, under the current rules these other private funds are not subject to mandatory securities regulation (the SEBI venture capital fund regulations only apply to private funds that voluntarily register themselves as 'venture capital funds' with SEBI).
Therefore, based on the recommendations of global bodies like the International Organization of Securities Commissions (IOSCO) and the Group of Thirty (G-30), SEBI now plans to introduce regulations that will cover all types of private pools of capital and that will also allow SEBI to tailor its regulation of different types of private funds.
SEBI proposes that its new regulations would apply to any pooling of capital from institutional or high net worth investors (i.e. any person or entity investing more than Rs. 10 million in a pooled investment vehicle), if such pooling of capital is not covered by SEBI's mutual fund or collective investment scheme regulations. In addition, these new regulations would apply to such pooling of capital if the funds source capital in India or if the fund's manager manages the fund for investments in India.
In effect, the proposed regulations would cover and make it mandatory for the following types of funds to register with SEBI if they either pool capital from or invest in India—venture capital funds, private equity funds, hedge funds, real estate funds, private funds that invest in the secondary market or in unlisted debt instruments, and any other class of funds that is either notified by SEBI or that is not covered by SEBI's mutual fund or collective investment scheme regulations. Even individual portfolio managers who pool assets from high net worth investors would have to register as an alternative investment fund under and comply with the proposed rules.
Under the proposed regulations, all alternative investment funds would be subject to certain common rules. These common rules would regulate their minimum fund size, individual investment size, number of investors, sponsor (or manager or designated partner) contribution and lock in, disclosure requirements, and minimum fund duration.
In addition, there would also be separate regulations specified for each of the different categories of funds. For instance, venture capital funds would be prohibited from investing in a company if the company has been promoted by any of the top 500 listed companies (by market capitalization) or by their promoters, but the same restriction would not apply to a private equity fund.
Once the new rules come into effect, SEBI intends that the existing venture capital fund regulations would be subsumed within the new rules. Funds registered under the existing venture capital fund regulations would continue to be regulated under the existing regulations until the funds or the schemes managed by those funds are wound up.