In May 2012, capital market regulator SEBI (Securities and Exchange Board of India) notified alternative investment funds (AIFs) regulations to monitor unregulated funds, encourage formation of new capital and consumer protection.
The regulator had classified private pool of capital into three categories such as venture capital, private equity and hedge funds. Besides making the unregulated funds more transparent for investors, SEBI aims to keep a watch on the growing fund pools with exposures to real-estate business which, regulators perceive, carry a higher risk.
But now at least two asset management companies (AMCs) with the guidance of law firms are raising money without applying for SEBI registration under the new AIF regulations, according to media reports.
While the offerings of these fund houses essentially refer to AIFs, the products pretend to be as the portfolio management schemes (PMS) sold by stock brokers and mutual funds, the reports added.
But these products are not PMS which refer to managing an individual’s investments in the form of bonds, shares, cash, mutual funds, etc so that he earns maximum profits within the stipulated time frame. PMS refers to managing money of an individual under the expert guidance of portfolio managers.
The portfolios and returns a PMS generate vary from one investor to another depending on the kind of assets they choose. But in the schemes that are being sold as PMS, the portfolios are the same and their returns would also be identical. Hence, these are nothing but AIFs, the media reports pointed out.
Money raised from the schemes will be invested in assets like secured debentures of entities directly or indirectly linked to realty and asset-generating stable rental income. Of the two AMCs, one fund house has already raised Rs. 2 billion. The proposed investment structure elaborated in the presentation of a fund house highlighted that every investor will have a demat account to hold units issued by the special purpose vehicles (SPVs) created by the AMC for investing in various realty assets.
As money is transferred from an investor's bank account to an SPV account, units are credited to the former's demat account. The transaction, which is the same for every investor, is being sold as a PMS. Some fund houses and a few property funds are also trying to develop structures to sidestep the AIF regulations, the reports said.
Vivek Chaurasia, senior research analyst, Personal FN, said, “At present, the Indian real-estate sector lacks regulatory control, so the sector carries a lot of uncertainty, malpractices and mis-selling. There seems to be no control over the pricing in the real-estate sector across the country, which can highly deviate any time from the fair level and can vary anytime due to unforeseen reasons. By raising funds for the real-estate sector, through such SPVs, these investment managers are putting the hard earned money of the investors at stake.”
Pankaaj Maalde, head-financial planning, ApnaPaisa.com said, “Before investing in such scheme one should take necessary steps to assess the risk involved and tax implications. Investment in realty sector has its own problems and the sector itself is not regulated. We do not advise our clients to invest in such schemes. We hope market regulator will take necessary steps to protect investors’ hard earned money.”
Mr Chaurasia further elaborated, “For any investment managers, AIFs and mutual funds to launch a real-estate fund, there needs to be a proper guideline and more clarity is needed on the regulations that must be strictly followed by the asset managers as well as the players in the real-estate sector. Despite SEBI placed some regulations governing the real-estate mutual funds, mutual fund industry has been unable to launch any dedicated real-estate mutual fund scheme due to lack of ‘clarity’, want of transparency and uncertainty prevailing in the real-estate sector. Moreover, there being no regulatory framework for the real-estate sector for its efficient functioning, have also refrained mutual fund houses from launching such funds.”