Capital markets regulator Securities and Exchange Board of India (SEBI) has floated a consultation paper, seeking the industry and public feedback on regulatory proposal of mandatory performance benchmarking of alternative investment funds (AIFs) on investment returns.
SEBI, in its proposal, also seeks to implement disclosure of necessary information by investment managers in private placement memorandum (PPM) to investors. The draft templates for PPM focuses on clarifying the riskiness of investment in AIFs, sequence of presentation of information and the list of minimum information to be provided under each heading in the PPM.
With an objective to create a conducive environment for a sound AIF asset class in India, the regulator has been taking several initiatives. One such initiative is to enhance disclosure standards in this space and the two initiatives are proposed, said SEBI, which seeks public comments by December 25, 2019.
However, there is no disclosure by AIFs indicating returns on their investments and in turn their performance available in the public domain.
AIF regulations, as SEBI said, are based on the premise that AIFs are a high-risk asset class, in which only sophisticated and well-informed investors participate. AIF regulations, therefore, emphasize the investors being informed of all material information with regard to the AIFs and whenever any material changes are introduced, investor consent is sought prior to executing such changes.
The surge in AIF assets is a result of a simplified regulatory framework, options for customization in AIF products, investment flexibility, and robust returns.
SEBI introduced its AIF regulations in 2012 to supervise the unregulated fund market in India comprising private equity funds, real estate funds and hedge funds, besides encouraging new capital formation and protecting investors. Since then, 628 AIFs have registered with SEBI across all categories as on December 2, 2019.
Under the AIF regulations, there are three categories of funds. Category-I AIFs include venture capital funds, infrastructure funds, and social venture funds, while Category-II funds comprise PE funds and debt funds. Category-III AIFs include PIPE funds, which make private investments in public equities, and hedge funds that use complex trading strategies in stock markets.
Total investments through all three categories of AIF rose to Rs 1.09 lakh crore at the end of fiscal year 2019 compared with Rs 61,401.57 crore at the end of March 2018 and Rs 35,099.15 crore at the end of March 2017, according to SEBI data.
Industry observers praised SEBI’s proposal to introduce mandatory benchmarking and PPM disclosures as it would strengthen the AIF industry for the long-term and such modifications would require changes in industry-wide practices and processes.
Siddharth Shah, partner (Corporate and Commercial Practice Group) at Khaitan & Co law firm, said the proposals in SEBI’s consultation paper is the beginning of maturity of India’s AIF industry to a more regulated investment regime.
“While the objectives of SEBI are laudable and with a view to further strengthen the platform from long term growth and sustainability perspective,” Shah said.
A three-way approach that may be considered by SEBI in this regard, should be to find the perfect balance between (a) not compromising on the flexibility of the AIF regime wherein lies its beauty and success, (b) establish best practices for the industry to build a solid growth platform for this asset class, and (c) not to get too prescriptive and respect the distinction between a product for retail investors vs. more sophisticated investors expected to participate in the alternative asset class.