SEBI Reconstitutes Advisory Committee on alternative investment Policy

SEBI reconstitutes advisory committee on alternative investment policy

What is the news:

• Sebi has reconstituted its alternative investment policy advisory committee, which advises the capital markets regulator on a range of issues that impact further development of the AIF space.

About the committee :-

• The committee has now 20 members, as per an update by the Securities and Exchange Board of India (Sebi).
• The panel, constituted by Sebi in March 2015, earlier had 22 members. Till now, the committee has submitted three reports on the AIF (Alternative Investment Fund) industry.
• The committee is chaired by Infosys co-founder N R Narayana Murthy. Apart from Murthy, the committee includes members from Sebi, Ministry of Finance, AIF players and industry associations.
• Gopal Srinivasan, chairman and managing director, TVS Capital Funds; Gopal Jain, co-founder and managing partner, Gaja Capital; Vipul Roongta, managing director and CEO, HDFC Capital Advisors; and Renuka Ramnath, chairperson, Indian Private Equity and Venture Capital Association (IVCA) are among the members, as per Sebi.

Committee’s role

• The panel is mandated to advise SEBI on any hurdles that might hinder the development of the alternative investment industry and any other item relevant to the segment as well as the development of the startup ecosystem in India. Also, the committee has been entrusted with the task of advising SEBI on any issues which need to be taken up with other regulators for development of the alternative investment industry.

What is an Alternate Investment Fund (“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.

Recent amendment :

In an attempt to streamline fund-raising activities and provide robust investor protection framework pertaining to the Alternative Investment Funds (“AIFs“), the Securities and Exchange Board of India (“SEBI“) in the past year has introduced a slew of amendments in SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations“).

SEBI,  has provided for certain conditions related to decision making powers of Investment Committee, introduction of a new concept of ‘accredited investors’ and certain exemptions related to the same, streamlining the investment restrictions applicable on Category I AIFs and provision of filing the private placement memorandum (“PPM“) by a Merchant Banker. In this edition of the digest, we have discussed the major amendments introduced in the AIF Regulations in the year 2021, below.

FIRST AMENDMENT

Exemption to AIFs on investment committee

• SEBI, vide its notification dated October 19, 2020¹had provided guidelines for the constitution of the Investment Committee(“ICOM“) by the AIF manager.
• The notification also provided that members of ICOM, along with the AIF manager, shall be liable for the investment decisions of the AIF. The members of the ICOM were obliged to ensure that investments by AIF are in compliance with the AIF Regulations.
• However, on January 08, 2021², SEBI amended Regulation 20(6) of AIF Regulations to provide for a waiver mechanism for certain AIFs from the requirement of being
• equally responsible as the AIF manager for investment decisions of the AIFs and
• jointly and severally responsible along with the AIF manager to ensure that the investments of the AIF are in compliance with the AIF Regulations, the terms of the PPM of the AIF, agreements made with the investors, any other fund documents and any other applicable law.
• The act of SEBI striking a middle ground with regard to the joint liabilities of the members of the ICOM and the AIF manager managed to provide some comfort to the AIF managers, especially those with large institutional investors. Notably, vide the aforementioned amendments SEBI encouraged qualified consultants to be a part of ICOM thereby further improving the overall governance of the AIF.
• However, SEBI has been putting on hold all such applications for registration of AIF where the proposed ICOM includes an external member who is not a ‘resident Indian citizen’ pending clarity from Reserve Bank of India (“RBI“) on the applicability of foreign exchange control laws on such AIF manager.For a detailed analysis of such amendments, please refer to our monthly digest for January 2021 which is available here.

SECOND AMENDMENT

Simultaneous investment in investee companies and other AIFs

• SEBI vide its amendments on May 05, 2021³permitted AIFs to invest in an investee company, directly or through other AIFs, subject to diversification limits of (a) 25% (of investible funds) for Category I and II AIFs; and (b) 10% (of investible funds) of Category III AIFs.
• The amendment allows an AIF to make investments into the portfolio companies directly and also act as fund of funds at the same time.
• While providing for such relaxations, SEBI has mandated that an AIF investing in other AIFs is not further permitted to have an AIF as its investor. In this regard, AIFs which is having another AIF as an investor will be required to seek a confirmation from the investor AIFs that such AIF does not have another AIF as its investor.

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 – Ajay Tyagi