IDBI Trusteeship Services, a subsidiary of IDBI bank, has been served a show cause notice by the Securities & Exchange Board of India (Sebi) in connection with investments by one of the venture capital funds (VCFs), market sources told ET. A notice has also been issued to Vistra, another company offering trusteeship services.
Even though trustees have no role in the day to day functioning of VC and alternative investment funds (AIFs), the regulator seems to be taking a stance where trustee companies should play a more active part in stepping in to prevent oversight, violations, and slip-ups by fund managers.
While the compliance lapse by the fund connected to IDBI Trustee relates to investment norms, the VCF where Vistra was the trustee faced complaints from investors who did not get an exit following an extension of the fund life.
Asked about the notice from the regulator, Pradeep Malhotra, CEO and MD of IDBI Trusteeship Services, said, “There is an interpretational issue and the same has been responded adequately and the same does not exist.”
Shikha Bagai, MD of Vistra, did not respond to ET’s text messages.
Discover the stories of your interest
According to Tejesh Chitlangi, Senior Partner at IC Universal Legal, “Whilst a few trustees seem to have been made a party to show cause notices issued to certain investment managers of funds, the concern is arising on account of such notices being issued under certain specified sections of the Sebi Act due to which any new registration application by an entity who is a party to such SCN cannot be processed until one year or the conclusion of proceedings (whichever is earlier). However, this provision of SEBI Intermediaries Regulations which vitiates the fit and proper status of the noticee to such SCNs, should only apply to applications where an applicant is applying for a new licence in its personal capacity. Since AIF licence comes in the name of the Trust where the investment manager of the AIF is the key party and Trustee practically plays a limited role, it should be considered business as usual for the trustee which should not come under the ambit of such a restriction as trustee is not seeking a licence in its personal capacity. Else this would lead to a situation wherein very few external third party trustees will be left to cater to AIFs, which otherwise is the preferred and prominent time tested industry model.” The IDBI Trusteeship head, however, categorically denied that the company would be debarred from accepting trusteeship of new funds for a year. “We have no such communication from Sebi,” said Malhotra.
Most AIFs – the regulatory term for private equity and VC funds which privately pool in investments from local and foreign investors for deploying the money in accordance with a defined investment policy – have external trustees to avoid possible issues of conflict.
A trustee’s job includes, among other things, facilitating AIF registration, executing investment management agreement and vetting private placement memorandum, overseeing functions like appointment of auditors, attending to investor grievances, signing of financials, and filing tax returns. Unlike mutual funds which as per law must have a trust format, AIFs can be set up as a company or limited liability partnership or trust. However, a predominant number of AIFs are formed as trust.
Over the past one year Sebi has brought about a string of changes in AIF regulations. These include: a code of conduct for fund directors, manager and intermediaries; rules on closing of funds; treating all investors on a par; segregation of assets and liabilities of various schemes; confining the tenure of funds to what’s stated in the fund document; and rules on disclosing and addressing investor grievances.