As a result of a host of regulatory changes announced by the capital markets regulator Securities and Exchange Board of India (Sebi), alternative investment fund (AIF) industry is feeling the heat, reported Business Standard.
Some of the fresh changes include standardised approach to valuation, treatment of unliquidated investments, mandatory dematerialisation of units and certification requirements for key employees.
Industry players say complying with the new framework will be a challenge, particularly the move that mandates all new schemes and existing AIFs with a corpus of more than ₹500 crore to dematerialise their units by October 31.
“Dematerialisation of AIF units should have been kept optional initially, based on limited partners’ (LP) requests, for the markets to adjust to operational challenges,” said Rajeev Saptarshi, chief operating officer, Kotak Investment Advisors.
“As AIFs are privately placed funds, they don’t currently issue units. Instead, they issue a statement of account, like mutual funds (MFs). Smaller funds and offshore investors may find this move cumbersome. While we will wait for a detailed circular, the benefits of this move are not apparent,” he added.
AIFs have so far received commitments worth over ₹7 trillion and have made investments worth more than ₹3 trillion.
Some have expressed surprise that the rules around dematerialising of units and certification are being applied to the AIF industry, which is relatively new, but not to the ₹40-trillion MF industry.
Sebi has maintained that the changes, to be enacted soon, are aimed at protecting investors from fraud.
To address the issue of investments that are not sold due to lack of liquidity during the winding-up process, Sebi has said that on the approval of 75 per cent investors by value, AIFs will be allowed to sell such investments to their own new scheme. Sebi has also introduced a provision for writing off investments for which the investors are not willing to take in-specie distribution.
Though the industry has welcomed some provisions, it has cited issues around higher tax outgo and challenges for assets under litigation.
Some believe the industry may face teething issues around the new norms but these will eventually improve its governance standards.
Besides this, Sebi is replacing the existing ‘minimum experience requirement’ with a ‘certification requirement’ for key investment managers as the eligibility criterion for AIF registration.