Sebi pulls alternative funds into its net

The Securities and Exchange Board of India (Sebi) has approved the Sebi (Alternative Investment Funds - AIF) Regulations, 2012, bringing unregulated funds under its regulation.

All AIFs, whether operating as private equity funds, real estate funds, or hedge funds, will now have to be registered with Sebi.

While the Sebi (Venture Capital Funds) Regulations, 1996 will be repealed, existing VCFs will continue to be regulated by the regulations till the existing fund or scheme managed by them are wound up.

Existing VCFs, however, will not be allowed to raise any fresh funds except for commitments already made by investors as on date.

“Such VCFs may also seek re-registration under AIF regulations subject to approval of 66.67% of their investors by value,” the Sebi note said. “However, schemes floated by such funds before coming into force of AIF Regulations, shall be allowed to continue to be governed till maturity by the contractual terms, except that no rollover/ extension or raising of any fresh funds shall be allowed.”

Existing funds not registered under the VCF Regulations will not be allowed to float any new scheme without registration under the AIF Regulations.

The new regulation will cover all types of funds broadly under three categories.

Venture Capital Funds, SME Funds, Social Venture Funds and Infrastructure Funds will fall in Category I AIF and will have to be closed ended. These funds will not be allowed to engage in leverage and will have to follow investment restrictions as prescribed for each category.

Private Equity Funds, Debt Funds, Fund of Funds and such other funds that are not classified as category I or III have been put in Category II AIF.

The Category III AIF will have funds including hedge funds that are considered to have negative externalities such as exacerbating systemic risk through leverage or complex trading strategies. These funds can be open ended or closed ended.