Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.

Corporate Trends

11,828.25421.1
Stock Analysis, IPO, Mutual Funds, Bonds & More

Sebi tells PE and VC funds: No side deals with big investors

Sebi just asked these funds, which raise money from the rich, to stop unduly favouring rich investors.

, ET Bureau|
Updated: Mar 14, 2019, 03.41 PM IST
0Comments
Agencies
Sebi
Such warehousing transactions are common in the PE world and fund managers believe that these should not raise eyebrows as long as the fund and its investors are not made to overpay for such transfers.
Mumbai: In the club of big boys some investors are more equal than others. The norm — though a given in the world of private equity (PE) and venture capital (VC) funds — is under the scrutiny of the capital markets regulator.

The Securities and Exchange Board of India (Sebi) is asking these funds, which raise money from the rich and ultra-rich, to stop discriminating between investors and refrain from adding clauses in the investment documents that seem to favour certain investors.

Since alternative investment funds or AIFs in regulatory parlance is a pooled vehicle, Sebi believes that all investors in each class should enjoy uniform terms. But fund managers argue that it may be simplistic to equate PE and VC funds with mutual funds which attract retail investors.

“Sebi has been raising an issue with discretionary terms being offered to some outside investors who co-invest.

While the regulator has its concerns, the industry is trying to put across the message that these funds effectively raise money through private placement from sophisticated investors and special rights are given to bring large investors on board. The practice also helps to split the risk instead of letting risk concentrate within a fund,” said Siddharth Shah, partner, Khaitan & Co.

Indeed, ‘side letters’ to cover some of the differential terms are almost a norm for PE funds globally and, fund managers think, that if participating investors are aware of the existence of such rights, the funds should have the flexibility to negotiate certain commercial terms with large investors as long as the fiduciary duty to each investor remains intact.

“The regulator, though in a separate context, is also insisting on certain uniformity in the fund document.

Today, the format of the PPM (private placement memorandum) differs from fund to fund. Sebi wants some of the key information to be stated upfront,” said Shah.

The PPM, a confidential private offering document, is supposed to provide key information to let investors make an informed decision.

Under-scrutiny

Such information could be management and performance fee structure, risk factors etc.

Confirming the development, Tejesh Chitlangi, senior partner at IC Universal Legal, which is an advisor to several funds, said, “The regulator is looking at curtailing the discretion of investment managers in potential conflict scenarios, stressing on making more disclosures so that investors can take informed decisions.”

Sebi, sources said, has received complaints from investors alleging misselling by some funds. However, no confirmation on this was available from the regulator. ET’s email to Sebi spokesperson went unanswered till the time of going to press.

Rajat Tandon, president of Indian Private Equity & Venture Capital Association (IVCA) did not respond to text message and calls.
It is unclear how the debate would shape and whether the regulator would harden its stance — particularly, given the realities of the private equity universe, where the ability to rope in co-investor in many cases allows a fund to access a deal or negotiate terms which otherwise the fund would not have been able to get had it gone on its own. Also, a fund, which is yet to raise money from investors, makes proprietary investment or borrows funds to strike a deal and later transfers the asset to the fund once investors chip in.

Such warehousing transactions are common in the PE world and fund managers believe that these should not raise eyebrows as long as the fund and its investors are not made to overpay for such transfers.

Last year, Sebi had spelt out that sponsors and managers of AIFs are ‘covered by its regulations’ — a clarification that made it easier for local business houses and financial services groups to rope in foreign partners to carry out fund management activities in India. It spared the sponsors and managers of funds from a recent government rule that foreign direct investment (FDI) in ‘unregulated’ financial services cannot be less than $20 million.
0Comments
Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Share Market & More.

Other useful Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service