Reforms and market development seem to be high on the agenda of UK Sinha, who was appointed the chairman of the market regulator Securities and Exchange Board of India (SEBI) in February this year. Only last week, the SEBI has announced changes to the takeover code and the new draft regulations for Alternative Investment Funds (AIFs) are expected to bring the industry under one regulator.

Compared to FII (foreign institutional investors) investments, AIFs are considered more trusted form of long-term capital and they have a critical role to play in feeding the voracious demand for investments in the world’s second fastest-growing economy.

The proposed guidelines have created a lot of confusion in the industry as there are nine different categories under which General Partners (GPs) need to register their funds, as compared to one VCF registration earlier. While the guidelines, in effect, rules out PIPE investments in many of the Indian listed firms, there is also no clarity if the private equity funds can simply continue to invest via the FII route, as many do at present. The proposals are still in the draft stage and will surely witness relevant changes after public comments come in.

Although most fund managers are waiting for their legal and business advisors to make more sense of what the SEBI is looking to implement, as the dust settles and experts read between the lines of the more-than-two-dozen-page docket, VCCircle brings forth the views of various stakeholders on the guidelines and their possible impact upon the industry.

Satish Mandana, Managing Partner, IDFC PE

It appears that any effort to compartmentalise or create silos within the private equity industry may not augur well for risk mitigation. We are risk investors and risk mitigation happens by investing across various sectors, geographies and stages of the company. Unless there is a specific reward/incentive attached to each of these risk compartments, it is not such a meaningful exercise. If the government has certain benefits or incentives for these asset classes, it is still acceptable, but then getting them to necessarily compartmentalise may not be a good idea.

Gopal Srinivasan, Chairman & Managing Director, TVS Capital Funds

I think the SEBI is really moving fast on market development, and UK Sinha and CB Bhave deserve credit for recognising Alternate Investments as an AMC business. While in India, private equity contributes 0.8 per cent of the GDP, in developed markets like the USA, PE accounts for 2 per cent of the GDP.

For a long time, this industry didn’t have one owner and one regulator because some of the investments come under VCF, some take the FDI route and some others take the FII route. There is a need for alternative investment management industry in the country and it must conform to a safe framework, so that investors can gain confidence.

There are several positive notes regarding these norms. For instance, SEBI is recognising that there are 4,000 semi-liquid companies which need attention. It is also removing archaic restrictions on NBFC investments, making sure that all funds come under registration, raising ticket sizes to Rs 1 crore and also ensuring that hedge funds can operate out of India.

However, SEBI should be careful about what’s the level of fund strategy that it is looking to regulate. Getting into strategy and segregating different sectors very narrowly should be something that SEBI must consider carefully. Also, there’s not enough clarity whether it allows secondary purchases when preferential issue is made (especially when the open offer is triggered).

Hetal Gandhi, Managing Director, Tano India Advisors

The guidelines seek to compartmentalise funds, based on some investment strategies. But it is not clear how the funds with multi-investment strategy should operate. For example, a fund may want to do PIPEs, listed secondaries, PE, infrastructure and real estate. Larger funds need this flexibility. So, you cannot regulate the investment strategy of a fund. Again, you may invest in an unlisted company and may want to enhance shareholding when it gets listed.

Also, sponsor commitment of 5 per cent is huge. This will put independent fund managers like us out of business. You cannot regulate sponsor commitment. If investors (especially, institutional investors) are happy with 1 per cent-2 per cent of commitment, that should be fine. At best, you can place some conditions for funds raising domestic retail monies. But again, you put them at the end of queue, i.e., distribution after full redemption is grossly unfair.

The PE fund conditions are not well-drafted (item 18, page 24). Point No. 2 and point No. 3 actually contradict each other. Point No. 2 states that PE funds have to invest more than 50 per cent in unlisted companies. Point No. 3, on the other hand, states that PE funds cannot invest more than 50 per cent in companies which are going to be listed. However, all the companies may be listed. It is possible that the intent of point No. 3 is to allow 50 per cent investment in listed companies. But the current draft is poor and impractical.

The guidelines do not address bonus shares received by a fund in relation to an investment within one year before the IPO. This should be also exempt, if original investment is held for more than 12 months.

The SME exchange is a new thing and we do not how it will evolve. Therefore, making it mandatory for SME funds to list their companies on the SME exchange is unnecessary.

The guidelines also stipulate fund tenors. This is unnecessary as PIPE funds may have five years’ tenor and infrastructure funds may have 12 years. So, this flexibility should be with the manager.

Jayanta Banerjee, Managing Director, Pravi Capital

Conceptually, it is great. Around 2-3 years ago, SEBI had nothing called PE and now at least the regulatory body has recognised it as a separate asset class. But the approach to fine-tune it further across nine subsets is meaningless. Also, for independent fund managers who have a unified structure and are trying to follow a clean route of pooling in international money, the recommendations pose a lot of unnecessary restrictions. PE is a very sophisticated asset class, based on the relationship between Local Partners (LPs) and General Partners (GPs). A regulator’s job is to ensure investor protection and not get into terms, which is a negotiated agreement between the LPs and the GPs. Now, even if my LPs think that I can raise a Rs 1,000 crore fund, I can’t do it, because I have to put 5 per cent of my personal commitment there. In a way, such recommendations encourage you to raise funds of smaller sizes.

Srinivas Baratam, Managing Partner, Milestone Religare Investors

Overall, the proposed regulations seem forward-looking and the general intent seems to be aimed at improving transparency and reducing conflicts.

The restriction on the number of investors is not a challenge, once read along with the new definition of HNIs eligible to invest into AIFs. Yes, this will definitely restrict AIFs’ access to a smaller group of investors and thus, the investors who are not able to commit the minimum investment requirement (which, as per the draft regulations, is Rs 1 crore), will not be able to participate in AIFs. However, this, along with the necessity for the investment manager/sponsor to contribute at least 5 per cent of the fund, will help a great deal in reducing frauds and fly-by-night operators in the industry.

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