Private equity and venture capital firms operating in India will now have to reveal critical information such as their funds’ performance and cash flow as per new norms unveiled by the capital markets regulator on Thursday.
The Securities and Exchange Board of India said it is introducing mandatory benchmarking of the performance of alternative investment funds to help investors assess the industry’s performance and improve disclosure standards.
The regulator also introduced a framework to facilitate the use of data collected by benchmarking agencies to provide customised performance reports of the PE and VC funds.
The new guidelines come after SEBI floated a consultation paper seeking feedback on performance benchmarking in December last year.
SEBI said an association of AIFs that represents at least 51% of funds operating in India can notify one or more benchmarking agencies with whom each fund can enter into an agreement to carry out the benchmarking process. This agreement will cover the mode and manner of data reporting and other terms including data confidentiality.
AIFs that have completed at least one year from the date of the first close of their funds need to disclose scheme-wise valuation and cash flow data to the benchmarking agencies. The funds will also have to mention their performance versus the benchmark in any marketing or promotional material for new or existing investors.
SEBI said that the AIF association will have to appoint benchmarking agencies and set a timeline for reporting of requisite data to benchmarking agencies by all the registered AIFs. The first industry benchmark and AIF-level performance versus benchmark reports should be ready by July 1, 2020, for performance up to September 30, 2019.
SEBI had 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, more than 600 AIFs have registered with SEBI across all categories.
Under the AIF regulations, there are three categories of funds. Category-I AIFs include venture capital funds, infrastructure funds and social venture funds. 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.
The regulator also introduced guidelines for private placement memoranda that alternative investment funds use for soliciting funds from prospective investors. SEBI introduced templates for private placement memorandum, which would contain all the necessary information about the AIF, to improve disclosure standards.
The AIFs will also be required to carry out an annual audit of compliance with the private placement memorandum. However, the audit of sections of PPM relating to risk factors, legal, regulatory and tax considerations and track record of first-time managers will be optional.
However, SEBI exempted angel funds and AIFs in which each investor commits a minimum of Rs 70 crore ($10 million) from the requirements related to placement memoranda and audits. For all other funds, these disclosure norms come into effect from March 1, SEBI said.