Alternative investment fund route to obtain 'QIB' status may get tough

Individual investors taking the alternative investment fund (AIF) route to obtain the ‘qualified institutional buyer’ (QIB) status might find the going tough.

Amid concerns around circumvention of rules, sources said the market regulator is in talks with industry participants to plug the loopholes. A possible solution being discussed is prescribing stricter thresholds on AIFs for achieving QIB status, said people in the know.

QIBs are essentially institutional investors such as mutual funds, foreign portfolio investors (FPIs) and AIFs. They have separate quotas in initial public offerings (IPOs) and offer for sales (OFS). There are concerns that some wealthy investors were taking the AIF route to qualify as institutional investors.

Last month, the Securities and Exchange Board of India (Sebi) floated a consultation paper to enhance trust in the AIF ecosystem.

Among the suggestions given to the regulator by industry players is setting a minimum asset under management (AUM) threshold of Rs 500 crore for AIFs to qualify as QIBs. By doing so, only large and genuine AIFs will qualify as QIBs.

Further it has suggested excluding sponsor and related parties’ commitments for calculating the asset size.

Additionally, the AIF must also have a minimum of 50 investors to remove the risk of non-genuine investors obtaining the QIB status. 

Also, FPIs seeking QIB status may be made subject to granular disclosures on beneficial ownership. 

Industry players have also told Sebi that the proposed curbs around misuse of AIF structures needs to be examined in the context of who the beneficiaries are.

Emailed queries sent to Sebi on the issue remained unanswered.

Some industry players believe the QIB status granted to non-banking finance companies (NBFCs) can also be done away with.

“NBFCs were accorded QIB status when the IPO markets were weak. As that’s no longer the case, this position can be revisited to ensure that both the AIF and the NBFC routes are not misused for obtaining the QIB status,” said a leading official with an AIF.

In the consultation paper floated on January 19, Sebi had proposed a code of conduct and due diligence to be followed by AIF investment managers to avoid circumvention. Sebi has also proposed to allow investment managers to exclude such investors from certain investments which could lead to circumvention of any other regulation.

Following instances of evergreening through the AIF route, the Reserve Bank of India (RBI) has restricted banks and non-banking financial companies (NBFCs) from investing in funds which invest in a firm to which they have already lent to in the preceding 12 months. This meant that RBI regulated entities could not go ahead with investments in AIFs with debtor firm link.

With the lapse of the 30-day timeline provided for liquidation of such assets, many NBFCs and banks have made provisions for their exposure in AIFs.

In the on-going thematic inspections, Sebi has until now found investments worth Rs 30,000 crore in circumvention of various financial regulations including those of RBI and the insurance regulator IRDAI.

- QIBs enjoy separate quotas in IPOs and OFS

- Certain AIFs, with single or very few investors, were found to be circumventing regulations

- Suggestions to bring thresholds on minimum investors, AUM for AIFs to participate as QIBs

- Sebi wants only genuine institutional investors to obtain QIB status