MUMBAI: Around Rs 1 trillion, or a fifth, of the total investments made by alternative investment funds (AIFs) are questionable in terms of the intent behind them and are under the scanner for regulatory circumvention, a senior Sebi official has said.
The AIF industry has a commitment in excess of Rs 12 trillion as of September 2024 while total investments are around Rs 4.5 trillion. Since AIF commitments are drawn down in tranches according to the investment demand, the commitments are higher than the actual investments.
AIFs are pooled investment vehicles that invest in a variety of assets including real estate, startups, unlisted companies and derivative strategies in the listed space. Sebi recently issued norms to bring clarity on on-boarding of accredited investors. However, the certification for the same has not picked up much.
“We have seen cases of funds being structured to circumvent existing financial sector regulations. Of the Rs 4.5-trillion of AIF investments, and of the Rs 5 trillion of actual drawdown, around Rs 1 trillion are questionable in terms of regulatory intent behind those investments,” Ananth Narayan, a whole-time member of Sebi, told an industry meet last night here.
“And this is not a small amount of money,” he added.
Instances of regulatory breaches include circumvention of extant norms on non-performing assets, the Insolvency and Bankruptcy Code, and FPI and Fema related circumventions, Narayan said, adding that Sebi had brought in a code of conduct to curb such practices.
Last year, the regulator had raised concerns on circumvention of several regulations through AIFs which also led to restrictions imposed by the Reserve Bank in December 2023 to curb ever greening of loans. At that time, the regulator had estimated such circumvention to be around Rs 30,000 crore.
On faster approvals of AIF applications, he said Sebi is training an in-house large language model (LLM) to reduce the processing times for fresh funds and schemes. The regulator aims to bring the approval time to less than a month and may soon have the results of the LLM model.
Narayan also called for a shift to the accredited investor model, similar to those followed globally for investors participating in hedge funds or private equity firms.
As of 2023, the total number of accredited investors was as low as 200.