SEBI proposes mandatory performance benchmarking of Private Equity and Venture Capital funds

SEBI has floated a consultation paper, seeking the industry and public feedback on the regulatory proposal of mandatory performance benchmarking of alternative investment funds on investment returns. It also seeks to implement disclosure of necessary information by investment managers in private placement memorandum (PPM) to investors. The draft templates for PPM focuses on clarifying the risk of investment in AIFs, the sequence of presentation of information, and the list of minimum information to be provided under each heading in the PPM.
 
The objective is to create a conducive environment for a sound AIF asset class in India. One such initiative is to enhance disclosure standards in this space and two initiatives are proposed.
 
However, there is no disclosure by AIFs indicating returns on their investments and in turn their performance available in the public domain.
AIF regulations, as SEBI said, are based on the premise that AIFs are a high-risk asset class, in which only sophisticated and well-informed investors participate. AIF regulations emphasize the investors being informed of all material information about the AIFs and whenever any material changes are introduced, investor consent is sought before executing such changes.
 
The surge in AIF assets is a result of a simplified regulatory framework, options for customization in AIF products, investment flexibility, and robust returns.
 
SEBI introduced its AIF regulations in 2012 to supervise the unregulated fund market in India, comprising private equity funds, real estate funds, and hedge funds, besides encouraging new capital formation and protecting investors. Since then, 628 AIFs have registered with SEBI across all categories as of December 2, 2019.
 
Total investments through AIF rose to Rs 1.09 lakh crores at the end of the fiscal year 2019 compared with Rs. 61,401.57 crores at the end of March 2018 and Rs. 35,099.15 crores at the end of March 2017.
 
Industry observers praised SEBI’s proposal to introduce mandatory benchmarking and PPM disclosures as it would strengthen the AIF industry for the long-term and such modifications would require changes in industry-wide practices and processes.
 
Siddharth Shah, partner (Corporate and Commercial Practice Group) at Khaitan & Co law firm, said the proposals in SEBI’s consultation paper is the beginning of maturity of India’s AIF industry to a more regulated investment regime.
 
“The objectives of SEBI are laudable and are directed to further strengthen the platform from long term growth and sustainability perspective,” Shah said.
 

A three-way approach that may be considered by SEBI, in this regard, should be to find the perfect balance between (a) not compromising on the flexibility of the AIF regime wherein lies its beauty and success, (b) establish best practices for the industry to build a solid growth platform for this asset class, and (c) not get too prescriptive and respect the distinction between a product for retail investors and more sophisticated investors, who are expected to participate in the alternative asset class.