BackSebi’s AIF rules get questioned
The PE/VC industry fears Sebi’s notification will add more responsibilities on AIF panel members
PremiumPrivate equity and venture capital industry body, Indian Venture Capital Association (IVCA) has asked the Securities and Exchange Board of India (Sebi) to reconsider its recent notification regarding members on an alternative investment fund’s (AIF) so-called investment committee, said three people, seeking anonymity. The industry fears that this move could disrupt the way these funds function, they said.
“The manager and members of the investment committee shall jointly and severally ensure that the investments of the AIF are in compliance with the provisions of these regulations, the terms of the placement memorandum, agreement made with the investor, fund documents and any other applicable law," said the market regulator’s amendment to the AIF regulations.
Investment committees are an integral part of the decision-making process in PE-VC funds and take the final call on the investment decision. However, the bulk of the investment-related work, such as sourcing deals, due diligence, regulatory compliance and investor relations, is the responsibility of the fund manager.
The committee acts as a sounding board and helps in governance. In addition to their own executives, investment committees also have external members with deep domain expertise in relevant industries.
The Sebi notification will add more fiduciary and regulatory responsibilities for committee members, especially external members who are there to help the fund make better investment decisions.
The industry is worried that this change in rules could lead to a problem in sourcing top industry experts to join their panels and could even lead to increased fund management costs, as higher perceived risks for an external member to join the committee will lead to a rise in compensation levels.
“IVCA has made representations to Sebi. How can you create liability for outside members at par with insiders? No law does that. There have to be some safeguards," said one of the persons mentioned above.
Sebi could come out with some clarifications as early as next month, the person said.
“The industry expects Sebi to clarify what it means by joint and several liability. Committee members cannot be responsible for documents and compliance. They play a limited role in investment or divestment decisions," said another person mentioned above.
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