Over the past few months, SEBI has come across more than 40 cases involving over INR 30,000 crores, where AIFs appear to have been structured to facilitate circumvention of certain financial sector regulations
FinTech BizNews Service
Mumbai, January 27, 2024: The Securities Exchange Board of India (‘SEBI’) has released a consultation paper on 19 January 2024 which proposes to introduce a requirement that Alternative Investment Funds (‘AIFs’), Managers of AIFs and the Key Management Personnel (‘KMP’) of AIFs/ Managers ensure that AIFs do not facilitate circumvention of extant financial sector regulations.
SEBI, in its consultation paper, has stated that, in the recent past, several instances of AIFs being structured to circumvent extant financial sector regulations have emerged. Over the past few months, SEBI has come across more than 40 cases involving over INR 30,000 crores, where AIFs appear to have been structured to facilitate circumvention of certain financial sector regulations.
The consultation paper has identified a few areas of concern where there could be potential violation of extant regulations by certain AIFs under applicable laws. These include evergreening of loans, Indian Exchange Control laws, regulations pertaining to Qualified Institutional Buyers, etc.
To address these specific regulatory concerns, SEBI has proposed to introduce a general obligation in the existing AIF regulations that would require AIFs, Managers and their KMPs to ensure that their operations and investments do not facilitate circumvention of regulations administered by any financial sector regulator.
The consultation paper mentions that the specific verifiable standards to demonstrate adherence to this obligation are proposed to be formulated by the pilot Industry Standards Forum for AIFs, in consultation with SEBI.
In line with the ‘Trust, but verify’ principle, SEBI has indicated that the specific verifiable standards would be such that those that intend to stay within the letter and spirit of regulations should face no challenge in demonstrating adherence to them.
It is proposed that applying the proposed specific verifiable standards, the Manager of the AIF should be able to ascertain whether the participation of an investor in a particular investment of an AIF may facilitate circumvention of a specified regulations. Where such circumvention is ascertained, the manager of the AIF has the flexibility to either not make the said investment or exclude the investor from the particular investment.
While it is critical to take steps to ensure that such instances do not recur in other forms and that the issue of AIFs facilitating such structures is also addressed, at the same time it is necessary to ensure that these measures do not come in the way of genuine and legitimate investments.
Accordingly, it would be appropriate for SEBI (in discussions with market participants) to objectively specify the due diligence to be done by the AIF before accepting the investments. Such investments should be permitted as long as they are in accordance with the extant regulations, such as Indian Exchange Control Laws (including FDI guidelines).
SEBI has sought comments from public till 11 February on the proposals.
