Individual investors taking the alternative investment fund (AIF) route to obtain the ‘qualified institutional buyer’ (QIB) status might find the going tough.
Amid concerns around circumventions of rules, the Indian Venture and Alternate Capital Association (IVCA), an industry association for AIFs, has proposed stricter thresholds for achieving QIB status.
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QIBs are essentially institutional investors such as mutual funds, foreign portfolio investors (FPIs) and AIFs. They have separate quotas in initial public offerings (IPOs) and offer for sales (OFS). There are concerns that some wealthy investors were taking the AIF route to qualify as institutional investors.
Last month, the Securities and Exchange Board of India (Sebi) floated a consultation paper to enhance trust in the AIF ecosystem.
Submitting its recommendations on the paper, IVCA has suggested minimum assets under management (AUM) of Rs 500 crore for AIFs to qualify as QIBs.
Further it has suggested excluding sponsor and related parties’ commitments for calculating the asset size.
Additionally, the AIF must also have a minimum of 50 investors to remove the risk of non-genuine investors obtaining the QIB status.
The IVCA has also suggested that FPIs seeking QIB status should be made subject to granular disclosures on beneficial ownership.
“FPIs or other foreign investors investing in an AIF and seeking a status of a QIB must subject themselves to the ultimate beneficial ownership test like FPIs. If satisfied, Sebi may grant QIB status,” IVCA said in a note submitted to Sebi.
The association said that the Sebi’s proposed curbs around misuse of AIF structures needs to be examined in the context of who the beneficiaries are.
“Looking at the pattern of abuse, and a root cause analysis, it appears that the QIB status and its benefits have attracted unscrupulous elements. If this is addressed, a substantial number of such issues will get filtered out,” it notes.
AIF industry body has said NBFC too can be stripped off the QIB status.
“NBFCs which are not regulated by Sebi were accorded QIB status by Sebi on the justification of a weak IPO market as per Sebi’s own notification. This may no longer be relevant. Sebi may consider revisiting QIB status for NBFCs now that some of them have disclosed the evergreening numbers,” IVCA added.
In the consultation paper floated on January 19, Sebi had proposed a code of conduct and due diligence to be followed by AIF investment managers to avoid circumvention. Sebi has also proposed to allow investment managers to exclude such investors from certain investments which could lead to circumvention of any other regulation.
Following instances of evergreening through the AIF route, the Reserve Bank of India (RBI) has restricted banks and non-banking financial companies (NBFCs) from investing in funds which invest in a firm to which they have already lent to in the preceding 12 months. This meant that RBI regulated entities could not go ahead with investments in AIFs with debtor firm link.
With the lapse of the 30-day timeline provided for liquidation of such assets, many NBFCs and banks have made provisions for their exposure in AIFs.
In the on-going thematic inspections, Sebi has until now found investments worth Rs 30,000 crore in circumvention of various financial regulations including those of RBI and the insurance regulator IRDAI.