As per the paper released last evening, Sebi has classified alternative investment funds or AIFs into 9 categories underwhich any fund operating as hedge fund is required to be registered as a strategy fund (under AIF regulation).
Hedge funds would be allowed to use leverage as well as invest in complex structural products and in derivatives -- subject to a maximum leverage specified by the board; and use long or short strategies. These funds will also have to disclose a fair amount of information, the note said.
Strategy funds would have to disclose ‘information regarding the overall level of leverage employed, the leverage arising from borrowing of cash or securities and the leverage arising from position held in derivatives, the reuse of assets and the main source of leverage in their fund,’ it said. Experts point out that this is the first time that Sebi has attempted to regulate India domiciled hedge funds, which has had free run till now.
In addition to hedge funds, Strategy funds would include all funds which would not fall under the eight other categories for alternative investment funds created by Sebi. Another first by Sebi is the creation of an official category of private equity funds who used to register themselves as venture capital funds at the time of registration. Other categories include PIPE (acronym for private investment in public equity) funds, venture capital funds, debt funds, infrastructure equity funds, real estate funds, SME funds, social venture funds.
The minimum size of the AIF shall be Rs 20 crore with a minimum investment of Rs 1 crore or 0.1 per cent of the fund size whichever is higher. At the same time, the AIF would not be allowed to invest in certain companies such as NBFCs and certain gold financing companies. PIPE investments would be restricted to shares of small sized listed companies which are not in any of the market indices.
They may be allowed access to non-public information while carrying out due diligence for PIPE transactions under a confidentiality agreement with restriction in dealing in securities for a particular time frame.
All the same, the total investment in venture capital funds cannot exceed Rs 250 crore and the fund is not allowed to invest in any company promoted by any of the top 500 listed companies by market capitalisation or by their promoters. Venture capital funds would be regulated under the AIF regulation, once it is in place while the earlier VCF Regulation would be repealed.
Foreign venture capital investor (FVCI) regime introduced in 2000 would also be retained but amended to invest in different categories of AIFs such as SME Fund and the social venture funds.
The former would invest primarily in unlisted small and medium enterprises while the latter is a category of funds which would invest in micro finance institutions. The requirement of lock-in period of one year for pre-IPO investments would not be applicable in respect of investments made by PE Funds, SVF and SME Funds on the same lines as for VCFs.