PE funds likely to be regulated

Private equity (PE) funds may come under the regulatory scanner in India.

Though the ultimate regulator has not been decided upon, both Securities and Exchange Board of India (SEBI) and Reserve Bank of India have formed study groups to analyse the structure and impact of such funds on the investors, the companies in which they invest in and their effect on corporate governance.

The issue has gained importance as a working group of International Organisation of Securities Commission (IOSCO) has been set up to study the impact of private equity funds on emerging markets.

Incidentally, the Indian market regulator is the chairman of IOSCO's emerging market committee. The Indian regulators will also have consultative discussions with other regulators during the 32nd annual conference of IOSCO to be hosted by SEBI in India this year.

Based on the joint findings of the study, the regulators may issue guidelines for listing and registration of such funds, for ensuring better monitoring.

According to sources, the purpose of the study is to ascertain if the actual investors in a private equity fund are loosing out during leveraged buyouts, de-listing and re-listing of the company.

Post buy-outs, these PE firms become virtual conglomerates and have a larger say in management decisions, thus raising issues of corporate governance, said sources.

The impact of such funds on market volatility is yet another issue that will be addressed by the regulators. The idea is to have a detailed study before framing the final guidelines.

At present, private equity funds operate in an unregulated manner. They have thus come under the scanner of the regulators post the volatility seen in the Indian equity markets in the recent past.

Private equity funds raise money through private markets including passive institutions. The money is then used for investing in listed companies, making them private or bringing new management teams so as to enhancing valuations. Thereafter, the private firms usually exit through a public offer.

Foreign private equity investments reached $ 5.4 billion in 2006. Some of the PEs active in India are Actis, TPG Westbridge, Providence equity partners, Blackstone, Temasek Holdings, Warburg Pincus etc.