BackStrict norms for registration of hedge funds on the cards
Strict norms for registration of hedge funds on the cards
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Mumbai: India’s capital market regulator will announce regulations governing hedge funds in the next fortnight, according to a Securities and Exchange Board of India (Sebi) official.
Earlier this month, Sebi released norms for alternative investment funds (AIFs), but these do not explicitly cover hedge funds. The regulator is now drafting the rules which, once in place, will require hedge funds to review their investment strategy in India.
Hedge funds are investment vehicles structured to fetch high returns. They make extensive use of short-selling—selling a security they do not own in the expectation that its price will fall—and derivatives. Their aggressive approach often means that they stack up liabilities. This may not only pose a liquidity risk for a given stock, but may also adversely affect investors in a fund, though, in general, only certain types of investors are allowed by stock market regulators around the world to invest in hedge funds.
Most such funds are open-ended, which means investors can take out their money at any time.
The regulations will allow existing hedge funds to continue their exposure without an AIF registration through the existing FII or sub-account route as long as they do not increase their exposure in India.
Any incremental investment will require a Sebi registration under the AIF rules. New hedge funds looking to enter India will need a registration and local offices.
Currently, hedge funds such as ADM Capital, LIM Advisors Ltd, Union Bancaire Privée, Ward Ferry Management Ltd and Lionhart Investments Ltd are registered as FIIs. Union Bancaire Privée is the oldest among them and was registered in December 1995. ADM Capital has an India office, but others do not have one.
Mails sent to these funds regarding their India plans did not elicit a response.
Hedge funds manage around $4 billion (around ₹ 20,600 crore) in India currently, nearly half of what they did in 2007 before the global credit crisis broke. Hedge funds’ exposure has mainly been through portfolio management services.
The mandated registration may affect some of these deep-pocketed foreign investors, as some of them use complex structures and investment routes to mask illegal cross-border fund transfers, about which the government and Sebi are concerned.
Though the new regulations may discourage foreign hedge fund investors, they will allow domestic companies wanting to enter the business tap the market. In the absence of regulations, even serious domestic companies have not been allowed to launch hedge funds in India.
Experts expect the regulations to likely be stringent, but say they will effectively legitimize the functioning of hedge funds in India, thereby, helping the cause of serious investors.
Mahendra Swarup, president of the Indian Private Equity and Venture Capital Association, said just like the venture capital or private equity industry, which was created nearly seven years ago by expats returning to India, hedge funds will also be started by Indians who have been exposed to these investment vehicles in foreign markets.
According to Swarup, half a dozen such funds could be launched in the next year, and half of these could come in the next six months. “People have the appetite for hedge funds. All limited partners have allocation for hedge funds and that allocation could find its way to India. There are a few hedge funds from Singapore which are looking at India," he said. Limited partners are investors who invest in private equity and hedge funds and who do not usually have a say in how the fund is managed.
Still, the magnitude of corpus required may mean it could take time for local hedge funds to emerge, according to Vikram Utamsingh, partner (transactions and restructuring, and private equity advisory) at audit and consulting firm KPMG.
“Private wealth managers in India could turn into hedge funds, but we have not seen much of an interest. Raising capital is difficult. Such funds need big corpus…at least a couple of thousand crore rupees," he said.
India has stringent rules for foreign investors wanting to invest through FII or the sub-account route. Sebi has recently made it mandatory for these entities to disclose identities of end beneficiaries, or limited partners, to enhance transparency. Still, stringent as the registration process may be, analysts say many investment routes are often misused after approval.
While details on rules for hedge funds will only emerge in the coming weeks, Sebi will probably be more comfortable in registering the funds locally and overseeing their operations directly unlike what it does for FII or sub-account registrations, add analysts.
anirudh.l@livemint.com
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