SEBI increases AIF compliance burden


Indian markets regulator Sebi on Tuesday instructed domestic Alternative Investment Funds (AIFs) to secure a portfolio management services license if they want to enable co-investments from their limited partners. 

The SEBI board took a call to amend the Alternative Investment Funds Regulations, 2021 to facilitate co-investments through the portfolio management route.  This move is likely to impact foreign pension funds and sovereign funds as well as domestic institutions such as insurers, banks, the likes of SIDBI and NIIF who come in as limited partners in Indian AIFs.

“The recent SEBI board meeting has put an end to the ambiguity around the regulation of co-investments in the portfolio companies of an AIF by the investors (LPs) in AIFs. But by doing so, SEBI has increased the compliance burden on Indian AIF managers considerably,” Siddarth Pai, founder of 3one4 Capital and co-chair of the Regulatory Affairs Committee of the Indian Private Equity and Venture Capital Association said. 

Pai said that while there is a need for co-investment regulations, the industry was hopeful that these could be addressed within the AIF regulations itself, the way other geographies regulate such activities.

Asking AIFs to get a PMS license for co-investments has introduced a few other concerns including around the definition of what constitutes as a co-investment as limited partners can also take a decision to invest independently. 

It also raises a concern around the degree of compliance required by AIF managers, who would now have to balance both AIF regulations and PMS regulations, thereby increasing costs and compliance burden, Pai said. 

Further, there is another concern around the degree of operational freedom given to LPs taking up co-investments.  “PMS regulations require the PMS manager to accept the funds in a separate account and then invest the same, thereby eliminating direct co-investments, which LPs prefer,” Pai said. 

Both fund managers and limited partners prefer co-investments as it reduces the costs for limited partners and increases the availability of capital for fund managers.

“Disclosures and transparency could have been an option rather compelling AIF managers to comply with an altogether different set of regulations. The key to this issue would be to ascertain how SEBI will define co-investments and the relaxations that will be given to AIF managers with respect to the PMS regulations,” Pai said. 

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