The AIF Dilemma
Forbes India|December 4, 2020
While some fund managers believe the new sebi regulations about investment committees increase accountability, others say the rules will scare away experts
POOJA SARKAR

It was an easy day for Malini Sharma (name changed) who is an external advisor and investment committee member to private equity (PE) funds in India. But in the evening of October 19, a circular on the website of markets regulator Securities and Exchange Board of India (Sebi) brought in a series of amendments to the Alternative Investment Funds (AIF) Regulations of 2012. This is not unusual, but of late, Sebi is on a spree of issuing circulars on AIF guidelines, and tightening regulations around this largely independent sector, which is usually less-understood by the common folk.

Sharma, however, is not common folk. A PE investor for the last two decades, she sits on the boards of some of the largest homegrown funds in India. Yet, she is worried. To know why we have to first understand how Indian PE funds work.

PE and venture capital (VC) funds in India register themselves as AIFs and are governed by AIF regulations that came into effect in 2012 after Sebi repealed the Venture Capital Fund (VCF) regulation of 1996.

Fund managers have to raise a minimum of ₹1 crore from each investor and they cannot have more than 1,000 investors in each fund. Sebi has specified that fund managers, as part of their skin the game, have to invest 2.5 percent of the fund value or $1 million, whichever is lower. But Sebi has not specified the rules for internal fund structures or for penalising members in the fund.

Globally, PE and VC funds usually have very lean teams and they constitute an investment committee (IC), comprising the decision-makers of the fund, experienced professionals and marquee names from the industry. In most fund constructs, the IC has a final say in whether a fund manager should go ahead with the deal or not. Almost all homegrown Indian funds follow this structure.

The Sebi circular on October 19 stated, firstly, that the fund manager shall be responsible for investment decisions of AIFs. Usually, the investment manager is the name of the firm under which the fund is registered, and the firm is liable for any cases against them, and not individuals.

The second part of the Sebi circular, which has the likes of Sharma worried, is where it states that the members of the IC shall be equally (jointly and personally) responsible as the fund manager for investment decisions. This is the first time the Sebi has referred to the IC since 2012.

Sharma says, “Our job is predominantly to oversee if the deal that the fund manager has brought is a good deal or not on an economic and financial basis. But this circular says that we will be personally and severally responsible for everything that the fund does, apart from just investing. I would go bankrupt if I have to defend myself in the large funds that I serve, and it is a genuine concern for everyone in the ecosystem.”

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