Sebi Proposes Stricter Norms For Alternative Investment Funds To Avoid Misuse

This move by SEBI aims to strengthen the trust in the Alternative Investment Funds ecosystem to facilitate ease of doing business measures, as per the consultation paper issued by Sebi.

Securities and Exchange Board of India

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The Securities and Exchange Board of India (Sebi), on Friday proposed stricter norms for Alternative Investment Funds, its managers and key personnel to avoid the instrument being used to facilitate the evergreening of stressed loans and circumvention of other financial sector regulations. This move by SEBI aims to strengthen the trust in the Alternative Investment Funds ecosystem to facilitate ease of doing business measures, as per the consultation paper issued by Sebi.

"While the AIF industry has registered robust growth over the years, a number of instances of AIFs being structured to facilitate circumvention of different financial sector regulations have come to light, thereby eroding trust in the system," said Sebi.

It is crucial to take action to restore trust and stop such circumvention to ensure sustainable capital formation while also ensuring that there is as little of an impact as possible on the legitimacy of AIF investments, it added.

In the consultation paper, Sebi also proposed to introduce a general obligation in the existing AIF regulations that would require AIFs, managers and their key management personnel to ensure that their operations and investments do not facilitate circumvention of regulations administered by any financial sector regulator.

Along with a procedure to confirm compliance with the corresponding criteria, the approach should increase trust, which would give regulators confidence to evaluate additional ease-of-doing business suggestions pertaining to AIFs that are under examination with Sebi, the regulator said.

The Securities and Exchange Board of India has sought comments from the public till February 11 on these proposals.

"Over the past few months, Sebi has come across more than 40 cases involving over Rs 30,000 crores (out of investments of approximately Rs 3.5 lakh crore) where AIFs appear to have been structured to facilitate circumvention of certain financial sector regulations," it said.

Some identified modus operandi where AIFs are being structured to facilitate circumvention of financial sector regulatory frameworks include the ever-greening of loans by regulated lenders and the circumvention of FEMA and qualified institutional buyer norms.

AIFs have been set up, resulting in the ever-greening of stressed loans of some regulated lenders, thereby circumventing RBI regulations and disclosure requirements around asset restructuring and recognition of non-performing assets.

"The identified circumventions have already assumed significant levels (over Rs 30,000 crore out of investments of approximately Rs 3.5 lakh crore), and Sebi has not yet completed its thematic inspections. Such practices seriously impact the overall trust and integrity of the AIF ecosystem," remarked Sebi.