SEBI amends rules governing investment funds
What is the news :
Capital markets regulator Sebi has amended the rules pertaining to investment aspects of certain category of alternative investment funds (AIFs).
What is the amendment:
- Under the rules, Category III AIFs can invest not more than 10 per cent of the investable funds in an investee company, directly or through investment in units of other AIFs.
- Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs.
- Further, the large value funds for accredited investors of Category III AIFs can invest up to 20 per cent of the investable funds in an investee company, directly or through investment in units of other AIFs.
- This is provided that for investment in listed equity of an investee company, Category III AIFs may calculate the investment limit of 10 per cent of either the investable funds or the net asset value of the scheme, while large value funds for accredited investors of Category III AIFs may calculate the investment limit of 20 per cent of either the investable funds or the net asset value of the scheme.
- The new norms called Sebi’s AIF Regulations, 2022 has became effective.
What is AIF :
- Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
- AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.
- Further, certain exemptions from registration are provided under the AIF Regulations to family trusts set up for the benefit of ‘relatives‘ as defined under Companies Act, 1956, employee welfare trusts or gratuity trusts set up for the benefit of employees, ‘holding companies‘ within the meaning of Section 4 of the Companies Act, 1956 etc
- In November 2021, the regulator allowed category III AIFs, including large value funds for accredited investors of Category III AIFs, to calculate the concentration norm based on net asset value (NAV) of the fund for investment in listed equity of an investee company.
- AIFs, in market parlance, refers to a privately pooled investment vehicle which collects funds from investors whether Indian or foreign for investing these funds in India.
- Broadly, the AIF rules govern venture capital funds, private equity funds, SME funds, hedge funds among others.
Categories of AIF :
- Category I AIF:
- Venture capital funds (Including Angel Funds)
- SME Funds Social
- Venture Funds
- Infrastructure funds
- Category II AIF
- Category III AIF
What are Category I AIFs?
- AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified.
What are Category II AIFs?
- AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012.
- Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
What are Category III AIFs?
- AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.
- Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs.
What is ‘Angel Fund’?
- “Angel fund” is a sub-category of Venture Capital Fund under Category IAlternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of Chapter III-A of AIF Regulations. What is ‘debt fund’?
- Debt fund is an Alternative Investment Fund (AIF) which invests primarily in debt or debt securities of listed or unlisted investee companies according to the stated objectives of the Fund.
- These funds are registered under Category II. In this regard, it is clarified that, since Alternative Investment Fund is a privately pooled investment vehicle, the amount contributed by the investors shall not be utilised for purpose of giving loans.
What is Fund of Funds?
- Fund of Funds, in general parlance as gathered from publicly available sources s an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities.
- In the context of AIFs, a Fund of Fund is an AIF which invest in another AIF.
Previous Amendment :
- SEBI on January 8, 2021 amended the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) for providing certain relaxations to the provisions requiring the investment committee to be equally responsible as the manager for investment decisions, and for the investment committee and the manager to jointly and severally ensure that the investments are in compliance with the AIF Regulations, fund documents and other applicable law.
- Pursuant to the amendment, these provisions are not applicable to an alternative investment fund (‘AIF’) in which each investor other than the manager, sponsor, employees or directors of the AIF or employees or directors of the manager, has committed to invest not less than Rs 70 crores (approx. US$ 9.28 million) and has furnished a waiver to the AIF in respect of compliance with these provisions. SEBI had also prescribed the format for the aforesaid waiver through its Circular dated January 8, 2021.
Recent news :
SEBI eases algo trading rules for commodity derivatives segment
- Easing algorithm trading norms for commodity derivatives segment, capital markets regulator Sebi, on March 17, raised the limit for placing the number of orders per second to up to 120 by a user from the existing limit of 100.
- The new limit will be effective from April 1, the Securities and Exchange Board of India (Sebi) said in a circular. The new limit will be effective from April 1, the Securities and Exchange Board of India (Sebi) said in a circular.
- The decision was taken after receiving representations from exchanges along with the views of Sebi’s sub-committee — Commodity Derivatives Advisory Committee.
About SEBI:
- The Securities and Exchange Board of India (SEBI) is the regulatory body for securities and commodity market in Indiaunder the ownership of Ministry of Finance , Government of India
- It was established on 12 April 1988 and given Statutory Powers on 30 January 1992 through the SEBI Act, 1992
- Headquarters – Mumbai
- Chairman – Madhabi Puri Buch ( recently appointed)
Functions of SEBI:
The main primary three functions are-
- Protective Function
- Regulatory Function
- Development Function
1. Protective Functions
As the name suggests, these functions are performed by SEBI to protect the interest of investors and other financial participants.
It includes-
- Checking price rigging
- Prevent insider trading
- Promote fair practices
- Create awareness among investors
- Prohibit fraudulent and unfair trade practices
2. Regulatory Functions
These functions are basically performed to keep a check on the functioning of the business in the financial markets.
These functions include-
- Designing guidelines and code of conduct for the proper functioning of financial intermediaries and corporate.
- Regulation of takeover of companies
- Conducting inquiries and audit of exchanges
- Registration of brokers, sub-brokers, merchant bankers etc.
- Levying of fees
- Performing and exercising powers
- Register and regulate credit rating agency
3. Development Functions
This regulatory authority performs certain development functions also that include but they are not limited to-
- Imparting training to intermediaries
- Promotion of fair trading and reduction of malpractices
- Carry out research work
- Encouraging self-regulating organizations
- Buy-sell mutual funds directly from AMC through a broker
Objectives of SEBI:
- The objectives of the Stock Exchange Board of India are:
1. Protection to the investors
The primary objective of SEBI is to protect the interest of people in the stock market and provide a healthy environment for them.
2. Prevention of malpractices
This was the reason why SEBI was formed. Among the main objectives, preventing malpractices is one of them.
3. Fair and proper functioning
SEBI is responsible for the orderly functioning of the capital markets and keeps a close check over the activities of the financial intermediaries such as brokers, sub-brokers, etc.