SEBI Starts Surprise Visits At Private Equity Funds & AIFs To Examine Compliance

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Only last year, SEBI made a slew of changes, including updating the definitions of venture capital undertakings and the conduct of find managers

This time, it has implored the flouting of structures by AIFs to give HNIs an edge in private equity investments

The surprise crackdown means an increased compliance burden on AIFs who are much less regulated than mutual funds and brokerage funds

The Securities and Exchange Board of India (SEBI) has reportedly made surprise visits to the offices of 20+ AIFs including private equity (PE) funds and hedge funds, to check if they were in compliance with certain aspects of the securities laws.

While previously it was customary to provide a 10-day notice, in the last few weeks, SEBI officials have visited these alternative investment funds (AIFs) over complaints against them. According to the sources cited in the ET report, the market regulator has changed its tactics and has been exercising its powers to show up at the registered offices of market participants without giving any prior notice.

Before this, too, SEBI made a crackdown on AIFs over malpractice issues and the creation of hybrid structures. One of the alleged hybrid structures was amid tightened norms on IPO investments, AIFs reportedly allowed HNIs to bet on the primary market issuances via pre-IPO placements. This gave the HNIs an edge and the motive for dubious deals, the BL report had said.  

The move comes almost a year into the changes brought about by SEBI for PE and VC funds. In March 2021, SEBI made a slew of changes, including updating the definitions of venture capital undertakings and startups to introducing a new code of conduct for fund managers.

Other measures were undertaken to bring more clarity, transparency and accountability to the startup investment culture, with the focus on AIFs and their operations.

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For the uninitiated, AIFs are generally set up in the form of a trust. They include private equity, venture capital, hedge funds, and angel funds. Indians, including non-resident Indians (NRI), Persons of Indian Origin (PIO), and overseas citizens of India (OCI), are eligible to invest in AIFs subject to eligibility criteria. 

Real estate funds, private equity funds and funds for distressed assets are registered as Category II AIFs while hedge funds are registered under the Category III AIFs.

As the Indian startup ecosystem and market movement toward alternate (of stocks) investments such as mutual funds have increased, market participants have reportedly stated that SEBI is adopting a more proactive approach toward surveillance of AIFs.

It is also noteworthy that as SEBI used the ‘surprise inspection’ power, the move means an increased compliance burden on these AIFs, who are much less regulated than mutual funds and brokerage funds. 

The crackdown comes at a time when more HNIs and UHNIs have started exploring diversification through AIFs and participating in private markets.

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