SEBI proposes to regulate alternative investment funds

The Securities and Exchange Board of India (SEBI) on Monday proposed to create regulations for alternative investment funds under the title SEBI (Alternative Investment Fund) Regulations.

These funds raise capital from a number of high networth investors (HNIs) with a view to investing in accordance with a defined investment policy for the benefit of those investors.

The funds which would come under the proposed regulation include, Venture Capital Funds, PIPE Funds, Private Equity Fund, Debt Funds, Infrastructure Equity Fund, Real Estate Fund, SME Fund, Social Venture Funds, Strategy Fund (Residual Category, including all varieties of funds such as hedge funds, if any).

It would be mandatory for all types of private pools of capital or investment funds to seek registration with SEBI. The funds could be formed as companies, trusts or body corporate including LLP structure.

“Not all players in the Venture Capital Funds (VCF) or Private Equity (PE) industry are registered with SEBI. These unregistered entities are not subject to investment restrictions which are applicable to registered VCFs.

SEBI said that there was a need to recognise Alternative Investment Funds (AIF) such as PE or VC as a distinct asset class apart from promoter holdings, creditors and public investors.

The regulations would require that the fund manager/ asset management company or trustees of the fund be specified, and change of such entities be reported to the regulator. At the time of application, the fund would specify the category under which it is seeking registration, the targeted size of the proposed fund and its life cycle and the target investor.

SEBI proposed that the funds would be close-ended. Fund size can be revised upward up to XX per cent giving SEBI suitable reasons. Minimum investment amount would be specified as 0.1 per cent of fund size subject to a minimum floor of Rs.1 crore.

In case of an AIF constituted as company or LLP, the number of shareholders or partners shall not exceed 50. The size of units issued will not be less than Rs.10 lakh. Funds may be raised only through private placement through information memorandum.

For PE funds, investments would be mainly in unlisted companies or companies proposed to be listed. For debt funds, the entire investment would be made in unlisted debt instruments. There would be, however, facility of converting debt into equity in case of non-fulfilment of covenants. For infrastructure equity funds, minimum two-thirds of the investment would be in equity of infrastructure projects/companies.

For Real Estate Funds, investment could be in real estate projects or shares in the SPVs undertaking real estate projects.

For strategy funds, the fund would be guided by the strategy it specifies at the time of registration with no other restrictions. Any fund operating as hedge fund shall be required to be registered as Strategy Fund under AIF regulation. Social Venture Funds will be targeted towards social investors who are willing to accept muted returns.

SME funds would be for investing in unlisted entities in the SMEs in manufacturing services sector as also businesses providing infrastructure or other support to SMEs or SME companies which are listed or proposed to be listed in SME exchange or SME segment of RSE.

SEBI has also invited public comment on the proposed SEBI (AIF) Regulation 2011, draft by August 30, 2011.

Invites public comment on the proposed SEBI (AIF) Regulation 2011, draft by August 30

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