SEBI Regulations 2012: Broadening the Horizon for Private Equity Funds

By Sofia Liska

Posted: 7th June 2012 09:58

The fund industry in India will soon enter the next phase of its evolution now that the Securities and Exchange Board of India (SEBI) has released the 2012 alternative investment fund (AIF) regulations, which they aligned to work with both international developments and the Indian economy.

Little will change for funds currently governed by the venture capital fund (VCF) regulations except that they will be unable to increase their targeted corpus. Of course, all new and unregistered funds will have to register under the new AIF Regulations.

SEBI has created the following three categories of AIFs:

The AIF Regulations will also open the door to domestic hedge funds and “fund of funds” in India. The “fund of funds” program will require a raised minimum capital commitment of Rs. 1 crore, rather than the Rs. 500,000 required by the SEBI VCF Regulations. The higher rate is meant to facilitate risk diversification by spreading investments across various AIFs in different categories.

Although the Finance Budget 2012 reinstated the complete tax pass through to funds registered under the VCF regulations from 1996, under the new AIF Regulations, only Category I VCFs will receive the benefits of the tax pass through.

On the bright side, SEBI has removed itself from over-regulating the LP-GP relationship, recognizing that there are complex dynamics to consider, such as conflict of interest, change in control, reporting and valuation and the custodian.

Rather than make itself responsible for judging these relationships, SEBI has created disclosure standards, a welcome development that will encourage transparency within the market.

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