India codifies PE rules

To the delight of GPs, India's regulators have unveiled a comprehensive framework for the country's alternative assets industry. New regulation will require all alternative investment funds, which includes real estate, to register with the Securities and Exchange Board of India.

After much anticipation the Securities and Exchange Board of India (SEBI) has laid out clear regulations for private equity, real estate and hedge funds that endeavour to provide stability, market efficiency and encourage the formation of new capital pools.

The rules also aim to protect high net worth individuals, a major source of capital for Indian fund managers, from becoming victims of fraud, unfair trade practices and conflicts of interest.

The regulation will require all alternative investment funds (AIFs) to register with SEBI, meaning real estate funds, fund of funds, private equity funds, hedge funds and so on. 

Early proposals indicated covered funds would fall into nine different registration categories, but this was later reduced to three following criticisms that too many categories was overly bureaucratic and inflexible. 

Despite the reduction there are still concerns within the industry. “This may still impede the ability of a private equity fund, for example, to invest in an early stage venture deal without registering a separate affiliate entity as a venture capital fund,” Vijay Sambamurthi, founding partner of Bangalore- and Singapore-based alternative asset-focused law firm, Lexygen, wrote on his firm’s blog.

In what some are calling a significant stride towards bringing India in line with international standards, the regulation says AIFs “shall not raise funds through Stock Exchange mechanisms” but units of AIFs may be listed on the stock exchange.

In recent times there has been a marked increase in cases of alternative investment firms preferring to list themselves on stock exchanges, but private equity firms in India were hindered by unclear regulations in this regard, added Sambamurthi.

India’s existing fund legislation, VCF Regulation, which covered only venture capital funds, will be repealed. But existing VCFs shall continue to be regulated by the VCF Regulations till the existing fund or scheme managed by the fund is wound up, said in a statement the SEBI.