Market  regulator  shifts focus to monitoring AIFs

The Securities and Exchange Board of India (Sebi) is often criticised for failing to enforce regulations on alternative investment funds (AIFs) with consistency. However, a recent Sebi order indicates a change in approach and shows that perhaps monitoring, investigation, and enforcement with regard to such funds is increasing.

In a recent ruling, the capital market regulator imposed a penalty of ₹10 lakh on Indgrowth Capital Advisors LLP with respect to violations of AIF rules. Sebi observed that the firm tried to maximise its 'investable funds’ and adopted a convenient way to do so, disregarding AIF regulations.

 “It is important to note that section 15 EA of Sebi Act, 1992, was inserted by way of a recent amendment in 2019, by the ministry of finance and not many orders have been passed imposing penalties on AIFs. This order is an indication that Sebi has increased its surveillance, inspection, and enforcement in relation to the well-regulated but unenforced regime of AIF regulations. A consortium or industry body for AIFs such as the Indian Association of Alternative Investment Funds perhaps could come up with guidance notes for bringing uniformity in the industry,” said Sumit Agrawal, founder, Regstreet Law Advisors.

Indgrowth AIF in its two separate letters in February 2020 provided two different figures for its investable funds, ₹429 crore and ₹456.76 crore, said the regulator.

Sebi observed that Indgrowth AIF had actively breached and exceeded the permissible investment limit of 10% of investable funds while investing in the shares of Ugro Capital and Indgrowth AIF.

It also furnished wrong figures under ‘investable funds’ in its monthly and quarterly reports to the regulator, thus failing to comply with the provisions in Sebi circulars of July 2013 and 2017.

Based on its investigation, Sebi observed from the details submitted by Indgrowth AIF that the ‘investable funds’ of ₹456.76 crore were calculated by deducting an estimated expenditure of ₹20 crore. This ₹20 crore included the management fees of the fund that was arrived at after deducting the estimated dividend income of ₹11.3 crore and short-term mutual fund income of ₹11.7 crore from the total estimated expenditure of ₹43 crore for the tenure of the fund. Therefore, the 10% investment limit in a single investee company was calculated at ₹45.67 crore.

According to the calculation, the order showed that between August 2018 and April 2021, Indgrowth had invested ₹44.99 crore in Ugro.

This was higher than the actual computation, according to the AIF regulations. According to the 10% norm, Indgrowth should have restricted the investment to ₹43.41 crore. The breach was to the extent of ₹1.58 crore.