Sebi keen on ring-fencing PE, VC schemes

The capital market regulator wants schemes of private equity (PE) and venture capital (VC) funds to be ring-fenced from each other so that any stress and liabilities in one pool of money do not spill over into another.

Wealthy foreign investors, offshore institutions and some non-resident Indians who bet on various local stories chased by these alternative investment funds (AIFs) – the regulatory term for PE and VC houses – prefer a ‘bankruptcy remote’ arrangement that segregates multiple fund schemes from each other.

The Securities and Exchange Board of India (Sebi) officials broached the subject in a meeting of the Alternative Investment Policy Advisory Committee which has members comprising fund industry officials and senior experts, a person familiar with the discussions told ET. The panel was formed by Sebi in 2015 under

founder NR Narayana Murthy.

Sebi is likely to bring about a change in AIF rules to formally shield each scheme under a fund, said an industry person.

“Whilst Sebi mutual fund (MF) regulations clearly mandate that the assets and liabilities of each scheme have to be segregated and ring-fenced from other schemes of the MF, there is no such similar regulatory prescription under Sebi AIF regulations,” said Tejesh Chitlangi, senior partner, IC Universal Legal.

On Weak Legal Footing

“Hence, in an AIF with multiple schemes, if there are legal and/or tax claims against a scheme which has insufficient assets and/or has already wound up with inability to call back distributions from its past investors, then such liabilities may potentially eat into the assets of any other scheme/s of the same AIF,” said Chitlangi.

A tax officer who is always chasing stiff revenue mobilisation targets may push an AIF to draw down the money in one scheme to meet the tax claim faced by another. And, under such circumstances, the fund is on a weak legal footing to refuse the demand as the rules are silent on the matter.

In the absence of a clear regulatory segregation mechanism for AIF schemes, many global institutional investors prohibit investment managers of funds from launching multiple schemes. “This leads to additional costs and timelines for procuring a new AIF licence every time when a new product is to be launched by such fund managers with global investors. Hence a provision similar to Mutual Funds Regulations is required to be inserted in AIF regulations,” said Chitlangi.

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