It wants to know who the investors are, where the money is coming from, and whether the PE and VC vehicles, known as alternative investment funds (AIFs) in regulatory parlance, are being misused.
At a meeting with select industry persons and domain experts a fortnight ago, senior officials of the Securities and Exchange Board of India (Sebi) said new regulations are being explored to monitor the investments in AIFs, two persons aware of the deliberations told ET.
Round tripping concerns
A domestic AIF can accept investments from local as well as foreign investors.
Besides, there is no broad-basing criteria for an AIF which can be formed with just a few or even a single local or offshore investor who are called limited partners (LPs). Since such funds are incorporated in India, AIF investment in a domestic company is treated as local investment. Even if an AIF has all overseas LPs, the fund’s equity holding in a company in India is not considered as foreign direct investment (FDI).
Thus, there have been occasional concerns that AIFs may have been used to sidestep FDI restrictions, or used by a local promoter to indirectly hold a stake in a company.
“While transparency around underlying investors in an investment vehicle seems to be the holy grail now, it would be important for Sebi to ensure that the KYC (know your customer) obligations are clear and non-complicated and should not lead to further friction from a fund-raising perspective,” said Siddharth Shah, senior partner with the law firm Khaitan & Co. “The more important part,” said Shah, “would be to see if and what additional restrictions Sebi is looking to propose in case of AIFs based on identification of beneficial owners.”
Last week, Sebi, in a consultation paper, proposed that FPIs which have aggregate investments of ₹25,000 crore or more, or have invested 50% or more of the fund corpus in stocks of companies belonging to a single corporate group, would have to disclose all their ultimate beneficial owners (UBOs) – or the last natural persons behind the funds. However, since most AIF investments are in unlisted companies (which have no stipulation on the minimum number of investors), the disclosure rules and the purpose behind tracking the data could be different for AIFs.
“As on date, as an AIF manager one is anyways obligated to undertake KYC on the LPs in accordance with standards prescribed by Sebi for intermediaries which technically may now also include identification of UBO for each client,” said Shah.
Spotting common investors
Sources said that data could be stored with fund custodians so that Sebi can at any point use analytics to find out common LPs across various funds or whether any AIF has been used to bypass the press note-3 restrictions on investments from China and other countries sharing land border with India. (Custodians are banks and non-banks which act as bookkeepers of funds).
Sebi, even today, has the right to seek all UBO details of a fund. What it probably wants, to begin with, is to have a system where the data can be revised periodically and readily analysed.
According to Tejesh Chitlangi, senior partner, IC Universal Legal, “As a part of certain AIF applications, Sebi has sought greater details on the overseas shareholders and ultimate beneficiaries of an applicant’s proposed investment manager and sponsor even beyond the general anti-money laundering regulations. This has been done to check if there is any beneficial ownership from India’s land border-sharing countries and/or to check on potential round tripping concerns. With respect to offshore investors in an AIF, it’s the authorised dealer banks who take the declarations of such investor’s beneficiary (10% criteria usually followed) not being from a land border-sharing country and the investment manager does the same as part of onboarding documentation whilst including the standard non round tripping declarations.”
While AIF investor details are not required to be shared with Sebi by default, as is the case with the regulators and such vehicles globally, the same may have to be provided if sought by a regulator in an extraordinary scenario, said Chitlangi. “Hence any kind of investor information sharing by law should not be made a default requirement as that may not be perceived positively by the international community for a variety of confidentiality issues and related concerns,” he said.
At the meeting, Sebi officials suggested a proposal where all LPs (like all FPIs) could be required to register with the regulator. However, this faced a pushback from the industry representatives amid fears it would impact fund raising by AIFs which bankroll startups that are not financed by banks. “We don’t know what exactly would be the additional disclosure rules for AIFs. But one thing is certain: Sebi wants more information on the money coming into AIFs,” said another person in the fund industry.