Circumventions of rules industry-wide problem in AIFs: Sebi member Narayan



Narayan asked the industry to take up its concerns with the respective regulators, and also explained the workings as per the consultation paper launched by Sebi in January

Sebi’s Whole Time Member Ananth Narayan on Tuesday said circumvention of regulations is an industry-wide and generic issue with the Alternate Investment Fund ecosystem.

Narayan stressed that the capital markets regulator wants to learn from the industry and work in close collaboration with it to frame the rules going ahead.


Speaking at an event organised by industry body IVCA here, Narayan said a recent consultation paper is an attempt on the same and added that Sebi has already decided to make some relaxations like equity pledging by an AIF to borrow in the case of an infrastructure company.


However, Narayan made it clear that when it comes to circumventing regulations like evergreening of loans or foreign exchange management, Sebi will have to act.


He said the estimate of 40 funds involving investments of over Rs 30,000 crore circumventing norms is a “conservative” one, and actual numbers are far higher.


“Structure to circumvent has been an industry-wide problem. You can argue about whether it is endemic or one-off, we think it is more than one-off. It’s definitely a generic issue we are grappling with,” Narayan told the audience largely composed of fund managers.


It can be noted that the RBI has also come up with a regulation increasing the provisioning for banks’ investments in AIFs over fears of the route being used for evergreening of loans.


Industry veteran Srini Sriniwasan from Kotak Alternate Asset Managers said the RBI’s move has put the sector in a “tizzy” and many public sector banks are not honouring the capital calls now. He also feared that the insurance watchdog Irdai is also mulling a similar move on the lines of RBI.


Narayan asked the industry to take up its concerns with the respective regulators, and also explained the workings as per the consultation paper launched by Sebi in January.


The first step is an obligation on the key management personnel and fund managers to adhere to mandated process set by Sebi, the second stage is a framework which will explicitly mention the need not to circumvent any regulations like forex management while the third focuses on a body of industry preparing a list of “Do’s and Don’t’s” which will have to be followed by all.


Without elaborating much, Narayan also said that the Sebi management will be taking the regulation to its board “soon” and also conceded that the Sebi is fraught with risks because it is prescriptive and not principle-based.


“We are going to tweak the regulations itself in such a manner that there will be no ambiguity at all that this is very, very specific in terms of dos and don’ts and very specific in terms of which regulations are sought to be circumvented,” he said.


Stressing the need for dialogue between the industry and the regulator, Narayan said, “You understand what our concerns are. Either you give us an alternative that works, or explain to us how you tweak the proposal you have so that it works for you. If you want to be like a baby, and say this doesn’t work and life is unfair to me, we won’t make progress. Neither will you, nor will I.” He said the overall interactions between the AIF industry and the regulator have gone up in the last year and also assured the industry that Sebi will not take more than one month to clear an AIF proposal by March this year.


The commitments for AIFs have risen 44 per cent to over Rs 10 lakh crore in 2023, he said, adding the actual investments have also gone up. However, the share of actual investments has been at less than 65 per cent of the commitments, he said, adding that Sebi would like to explore this aspect more.


“We are seeing a series of valuations that are kind of stale and remain the same for a long period of time. Sometimes more than a year, sometimes a couple of years. We are also seeing a sharp drop in valuations as a fund comes close to its maturity,” he said.

First Published: Feb 27 2024 | 6:06 PM IST


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