In the span of a week, the Securities and Exchange Board of
India (Sebi) has made two significant changes. It has finally
notified the SEBI (Alternative Investment Funds) Regulations,
2012, and has overhauled its mechanism for settlement of
offences by consent of Sebi and the alleged offender (the
Consent Order Scheme).
The Regulations regulate nearly all private pools of capital
or investment vehicles (private equity, real estate funds,
hedge funds, and so on) that were hitherto largely unregulated.
The intention is to ensure that funds are channelled in the
desired space in a regulated manner. The Regulations target
funds incorporated or established in India in any form subject
to certain exemptions.
Sebi has categorised Alternate Investment Funds (AIFs) into
three mutually exclusive categories – funds with
positive spillover on the economy, those employing diverse or
complex trading strategies and a third residuary category
(which is actually named as Category II). It is now mandatory
for all AIFs to register in at least one of the three
categories depending on their objectives. Multiple schemes can
be launched by any AIF, under the same category. However, if a
scheme falls under a different category, AIF will be required
to obtain fresh registration under such other category.
The new Regulations also contemplate certain additional
qualifications such as minimum corpus, continuing minimum
interest of the manager/sponsor in an AIF, maximum number of
investors, and so on, for registration. Some of these
provisions are resulting in over-regulation by Sebi which may
drive funds out of India. The tax treatment for most AIFs is
still not clear. Even though the Regulations have already been
notified, relevant foreign investment laws need consequential
Another important change brought in by Sebi is the
modification of its earlier circular of 2007 containing the
Consent Order Scheme. The amendment has been brought about with
"a purpose of providing more clarity on its scope and
applicability". One of the strongest criticisms against the
scheme until now has been its lack of transparency and leniency
in certain cases.
The most significant change contemplated by Sebi is the near
exclusion of certain types of violations from the consent order
process. These exclusions include insider trading, front
running, failure to make an open offer for a takeover,
manipulation of net asset value by mutual funds, and failure to
make disclosures in offering documents for issuances of
securities. Certain other offences materially affecting
investors' interests have also been included. The intention
here clearly seems to be to exclude those offences "which in
the opinion of SEBI are very serious and/or have caused
substantial losses to the investors". Sebi has, however,
retained the power to settle serious offences at its discretion
under the Consent Order Scheme. Consent orders, containing the
alleged misconduct, legal provisions alleged to have been
violated, facts and circumstances of the case and the consent
terms, will be hosted on Sebi's website.
Other important changes are the introduction of a period of
limitation for filing a consent application, conditions under
which such applications can be rejected and detailed guidelines
for computing settlement fees payable for particular offences.
These provisions do seem to make the procedure less arbitrary
and more transparent.
Whether the above amendments qualify as reforms in the
truest sense of the term will only become clear with time.
Nitu Agarwal and Manali Gogate