SEBI may be planning to make compliance easier for PE and VC funds

29 May 2023 , 11:23 AM

The Indian capital market regulator is set to make life easier for venture capital (VC) and private equity (PE) firms, which have developed into significant risk financing sources for companies that are frequently overlooked by the public market and high-street banks.

To ‘simplify, ease, and reduce the cost of compliance’ for alternative investment funds (AIFs), the regulatory name for VC and PE funds, the Securities and Exchange Board of India (Sebi) informed numerous fund executives last Friday that it will conduct a ‘comprehensive review’ of the laws.

Aiming to reduce the compliance load on the funds, which many in the business say has resulted in regulatory overkill, Sebi sent an email to approximately 20 fund officials and senior professionals, two people told ET.

A company may turn to AIFs for equity for a variety of reasons: either it is not making enough money to draw investors in a first-ever stock offering, or it has chosen to stay off the public markets for a number of years for strategic reasons; or it is already over-leveraged and desperately needs new equity infusions, failing which banks will not make additional loans. 

The number of local AIFs in India has increased to about 1000 as a result of risk-averse banks and fluctuations in the primary stock market.

Some believe that while Sebi has implemented new regulations to maybe prevent any explosions in a quickly expanding industry, it also recognizes the need to reduce the burden of compliance for AIFs, which have developed into a reliable source of capital for many enterprises.

The consultation papers include topics such as valuation, blind pool theory, carryover of unliquidated investments, demat of AIF units, distribution commission payment method, investor consent for certain associate transactions, and mode of payment of distribution commissions.

Recently, Sebi looked into the idea of raising the minimum investment in an AIF for non-accredited investors (having lesser earnings and net worth) from Rs 1 crore to Rs 2-3 crore. This proposal would discourage less smart investors from investing in such funds.

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