AIF applications pile up due to rejig at Sebi, even as regulator turns wary

Longer-than-expected wait time leads to delay in fund launches

Applications for setting up an Alternate Investment Fund (AIF) have piled up before the Securities and Exchange Board of India (Sebi). Bulk of the over two dozen applications filed with the regulator between August 2022 and December 2022 are yet to get the green signal.

A cautious approach and an internal rejig has led to stretched timelines, say industry players and legal experts.

As of February 28, a total of 54 applications for AIFs were under process. Of this, 24 applications were made before December 2022 including that from WhiteOak Capital, ICICI Securities AIF Trust, Piramal Alternatives India Access Trust, Chiratae Trust, Dalton India, among others.

Of the pending applications, 28 are for category II AIFs, 11 for category I AIFs, and 15 from category III which caters to retail.

In cases where the management, desirous of setting up a fund, without sufficient fund management experience, the market watchdog has been sending several enquiries, said legal experts.

“This segment is growing at a very high pace and involves a higher ticket size. Sebi would want to ensure that it is managed and regulated properly. Even though the investors are sophisticated and understand the risk associated with their investment; it doesn't absolve the regulator from its responsibilities,” said Neha Malviya Kulkarni, chief growth officer, SuperNAV.

“Now the regulator is inspecting every minute detail in the application document, even on the internal research,” she added.

Several high-profile fund managers have left their mutual fund houses to set up an AIF. Some are yet to solicit investments due to delays in the regulatory approvals.

As of June 2022, total commitments raised in AIFs stood at Rs 6.94 trillion, recording a nearly seven-fold jump from what it was in June 2017. Of this, Rs 5.61 trillion is for category II AIFs and nearly Rs 74,500 crore for category III AIFs. Category I AIFs invest in startups, early-stage ventures and social ventures; category II AIFs are private equity and debt funds; while category III AIFs are hedge funds.

Sebi’s queries have been related to the structure, investment management, sponsors, investment strategy and background of the directors and key managerial persons (KMPs).

“We believe that the regulator is also treading cautiously and asking for a lot more clarifications on experience and qualification requirements in case of first-time managers for investor protection,” said Sahil Shah, counsel, Khaitan & Co.

However, the delay is also due to an internal reallocation of roles and responsibilities among Sebi officials which has led enquiries in some cases afresh.

“The wait time now is much longer than what was taken in the past. We understand that there has been an internal rejig within Sebi with reallocation of roles and responsibilities amongst the officers and hence the delay,” added Shah.

Sebi also has been doing a lot of due-diligence on its side to ensure that the parties who are applying have a clear background.

“Sebi is in the process of reviewing the application filed by us for obtaining a Category II AIF licence. Typically, queries are sent by Sebi seeking clarifications on the information memorandum and documents submitted by applicants. We believe the process is moving at a good pace and we look forward to receiving the licence,” said Nikhil Aggarwal, Founder & CEO at Grip which has applied for a category II AIF. This is their first application under the segment which they had applied for over two months back.

Industry experts said that prior to this the average time taken to process first time applications used to be between 60-75 days while a cooling period of around 30 days was followed for players which already had a registration but were applying for a new fund.

Queries sent to Sebi on the delays remained unanswered.

The market watchdog has inclined towards regulatory tightening on AIFs where some instances of mis-selling have also been noticed. Sebi has also proposed norms for standard approach for valuing the investment portfolio, appointment of independent valuers, and restrictions from raising fresh capital from foreign investors who do not meet specified conditions.

Queuing Up

• Clearance for nearly 24 AIF applications filed between August and December still pending
• Some of these include WhiteOak Capital, ICICI Securities AIF Trust, Piramal Alternatives India Access Trust, Chiratae Trust
• For first time managers, Sebi is seeking more clarity and information for AIF aspirants
• Longer-than-expected approval time due to internal rejig on roles and responsibilities, say experts
• With AIF industry growing exponentially, Sebi has tightened regulatory screws over the last three months