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Mumbai: India’s capital market regulator is looking to plug loopholes in its so-called alternative investment funds (AIF) regulations, following the sale of a 420 crore fund by Milestone Religare Investment Advisors Pvt. Ltd to a relatively new fund house in April without the regulator’s approval, said two persons familiar with the development.

Milestone’s India Build Out fund, with about 2,000 investors, including retail ones, was sold to Quadria Capital, owned by Amit Varma without the Securities Exchange Board of India’s (Sebi) approval, added the two, who did not want to be named.

They said Sebi has referred the matter to its legal department to check whether Milestone had taken the consent of its unitholders for the sale.

Quadria Capital acquired Milestone Religare, an equal joint venture PE firm between financial services major Religare Enterprises Ltd and Milestone Capital Advisors Ltd, according to a 21 March report by venture capital portal, VCCircle.

Milestone Capital Advisors has been trying to sell its assets after its promoter Ved Prakash Arya died in 2011. With about 20,000 investors, Milestone is the largest domestic venture capital fund in India, in terms of number of investors, registered with Sebi.

An e-mail sent to Sebi last Thursday did not elicit any response and Milestone denied any irregularity in the transaction.

“The fund has followed the guidelines and has intimated Sebi on the same and has provided relevant details pertaining to the transaction. ....the fund has simultaneously informed all the unitholders on the ...transaction," said a Milestone spokesman.

Regulations for venture capital funds were changed in June but older funds could continue without registering themselves under AIF unless they raise new funds.

Quadria is a new fund and such takeovers have not happened in the industry earlier, said one of the two persons, who is familiar with Sebi’s policymaking processes, forcing the market regulator to refer the matter to its legal department to review the existing regulations.

“It is a grey area. The AIF norms are new. While the earlier norms are silent on such takeovers, AIF norms require firms to take Sebi’s prior approval before such deals. The legal department will recommend Sebi ways to deal with such transactions. Sebi has to ensure whether the buyer of the fund qualifies the ‘fit and proper’ criterion for protection of the unitholders’ interest," this person added.

While Milestone Capital Advisors is registered as a venture capital fund with Sebi, Quadria’s name does not appear on the list of either venture capital funds or AIFs.

Under the older venture capital norms there was no provision to question a fund over sale of investments if the deal had the consent of unitholders. Milestone did not seek Sebi’s approval ahead of the deal, the two persons said.

“The older norms have been repealed with the new AIF regulations and mandate clearance before buyouts of funds; Sebi has to examine if it can be applied to this (Milestone) deal or not and how best similar deals can be handled in future," said one of them.

The Milestone spokesman said the company “has transferred ownership rights of its 50% share held in Milestone Religare Investment Advisors to Quadria Capital, which is a company sponsored by Religare Group".

“We would like to mention here that Amit Varma (founder of Quadria Capital and formerly president, healthcare initiatives—Religare) continues to be the fund manager without any change in the core management team and the investment committee," he said, adding, “we continue to be in constant touch with Sebi to do the needful as may be required by the regulator in this regard."

Varma of Quadria said his firm’s advisors have consistently maintained and advised that they needed to keep Sebi informed. He said his firm did intimate Sebi about the deal on the day of the transaction. “We informed every single contributor of the fund the same day of the transaction," Varma said.

Securities market lawyers, meanwhile, say that though old venture funds regulation are silent on the procedure to be followed in case of such takeovers, the regulator has the right to ask for information and specific compliances as it deems necessary.

“Sebi can ask for information and ask them to do more than what is laid down in the regulations," said Sandeep Parekh, a former Sebi executive director and founder of Mumbai-based Finsec Law Advisors.

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