Sepulveda

Transparency and Transferability : New era for AIF's

Securities and exchange board of India (SEBI) came up with 5 consultation papers on Feb 3 ,2022 ,asking for input from various AIF industry participants on proposal of new regulatory norms.This shows SEBI’s contined focus and interest in developing AIF industry.

It has been a decade since SEBI proposed any major changes in regulations since the inception of AIF’s.This changes if implemented would increase transparency,transferability and credability of AIF’s.

The proposed 5 changes are :

1.Option to provide AIF and their investors to carryforward unliquidated investments of a scheme upon end of tenure

2.To provide direct plan of investment to investors and trail model for distribution of commission in AIF’s

3.75% of investor consent for buying/selling to close associates,where there is a conflict of interest.

4.Eligibility criteria of AIF mangers  and must complete SEBI accredited course,and also every AIF must have a compliance officer ,who is also qualified and complete a course suggested by SEBI.

5.Dematerilisation of AIF units

The recent papers seeking feedback from industry participants include a two-fold objective ,AIFs to offer the option of a direct plan to its investors and creating trail model for distributor commissions in AIFs.

 

Similar practices have already been implemented in the mutual fund industry and which has received positive feedback from both investors and the mutual fund community. Mutual funds offer both regular plans and direct plans. In the case of a regular plan, the investor invests via an intermediary and has to bear a higher expense ratio than if he would have directly invested in the schemes due to the additional fee charged by the intermediary. The direct plan entails no distribution or placement fee.

Conflict of interest

AIFs are allowed to deal with their associates for investing in associates, buying/selling securities to/from, availing services of them, etc. However, such related party transactions could give rise to conflicts of interest. While current regulations already have provisions to address such conflicts of interest, SEBI in the consultation paper has proposed specifically that AIFs cannot undertake such related party transactions without the approval of 75% of investors, calculated by the value of their investment in the AIF, in (a) associates; or (b) units of AIFs managed or sponsored by its Manager, Sponsor or associates of its Manager or Sponsor.

The larger point of this proposal is to ensure that investors are not left in a state of oblivion by the asset manager for any investments in bad assets of the associates. 

Dematerilisation of units

Marketability of any unit is affected if it is maintained in physical form,it is important for a secondary market in AIF,as this maintains liquidity in the industry.The supply and demand mechanism would enable a price discovery. This could also provide investors with easy exit option

Eligibity criteria and compliance officer

Key investment team must accredited with a certificate course suggested by SEBI,the previous regulations mentioned team containg atleast one person who has relevant expereince in finance this is being replaced for widening the aspect of eligibility

Further, it is proposed that the compliance officer of the Manager of an AIF may also be required to obtain relevant certification from an institution
notified by SEBI.