 "SEBI")
The Securities and Exchange Board of India (Sebi) on Friday proposed several measures to enhance trust and ease of compliance for Alternative Investment Funds (AIFs) in specific cases at a time when it has found over Rs 30,000 crore worth of investments to be in circumvention of regulations.
In a consultation paper floated on Friday, the market regulator said that it has facilitated the setting up of a Standards Forum for AIFs (SFA) for the ease of implementation of AIF regulations.
For the first time, Sebi has identified the amount found under circumventions which stands at over Rs 30,000 crore. It has not yet completed its thematic inspections.
Circumventions of regulations like the evergreening of loans and FEMA regulations were mostly seen in cases with few or connected investors.
In December 2023, RBI issued a circular to its regulated entities like banks and NBFCs to liquidate investments in AIFs with downstream links to debtor firms within 30 days or make 100 per cent provisions.
Several banks such as HDFC Bank, and RBL Bank, and financial institutions like IIFL and Piramal Enterprises have already announced provisioning amounts for such exposures.
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Sebi noted that while there was a need to address these concerns, it was also necessary to ensure regulatory intervention should not take away the flexibility of AIFs to carry out genuine and legitimate investments.
In the fresh consultation paper, Sebi said that it would add a general obligation in the existing AIF norms that would require AIFs, managers, and their key officials to ensure that they do not facilitate circumvention of regulations.
Sebi has proposed ‘excluding’ an investor from participating in a particular investment of an AIF that may facilitate circumvention of any provision or specific regulation. This means, that the AIF will have the flexibility to exclude the said investor only from that particular investment and not the whole fund.
“The specific standards of verifiable due diligence (guided by the framework and principles enumerated by Sebi) accompanied by suitable standards of reporting by AIFs, shall be formulated by the pilot SFA, in consultation with Sebi,” the paper said.
Speaking at a summit in Mumbai on Friday, Sebi whole-time member Ananth Narayan said the regulator is planning to allow pledging in infrastructure assets with certain checks and balances.
“One of the pain points for the industry has been allowing pledge of investee company shares by the AIF. To allow borrowing to be done at the investee company level itself. We do propose to allow this at least for infrastructure companies with checks and balances,” said Narayan.
On the fresh consultation paper, Sebi has sought suggestions by February 11.
