The Securities and Exchange Board of India (SEBI) may relax regulations for alternative investment funds (AIF) as recent regulatory measures have reassured the watchdog about reduced circumvention practices, a senior SEBI official said.
Speaking at the CII AIF Summit, SEBI whole-time-member Ananth Narayan said, “Now that we have these checks and balances in place, I think some of the regulatory restrictions that we put in earlier because we were afraid of circumventions can now be relaxed.”
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Earlier this year, the regulator had tightened regulations governing the due diligence of AIFs after it uncovered that some of these funds were being structured to bypass certain financial sector regulations, including IBC, FEMA, and RBI regulations.
In January, the regulator had said that it came across cases worth over Rs 30,000 crores of circumventions by AIFs compared to total investments of Rs 3.5 lakh crore. Now, Narayan said that over 20% or Rs 1 lakh crore of the total AIF investments of Rs 4.5 lakh crore have been structured to bypass regulations.
Narayan said that SEBI has been trying to tackle these in a focused manner, so that the good guys are not burdened. He said the code of conduct laid down last year, which lists the do’s and don’t for the AIF industry, is working reasonably well and there is a case for offering greater flexibility to the industry.
Further, some of the restrictions put in place earlier due to fears of circumventions, for instance tranching of junior tranches, have been allowed for government and multilateral agencies, and can be further expanded once there is collective comfort of no misuse, he said.
He also hinted at broadening the framework for share pledges beyond the infrastructure sector, provided these checks and balances work.
“…As a regulator, we are walking a fine path between too much regulation and not enough regulation. We are conscious that this is a goose that’s laying golden eggs. We can’t be greedy and try to produce more eggs than is sustainable,” Narayan said.
In order to address SEBI’s concerns and make way for light-touch regulations, Narayan urged industry participants to adopt the concept of accredited investors, where an investor declares that he or she is aware of the risks that bets on AIFs entail.
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