SEBI plans to prevent misuse of alternative investment funds

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AIFs under scrutiny
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Alternative investment funds (AIFs) have come under regulatory scrutiny with the capital market watchdog being the latest to voice concerns.

The Securities and Exchange Board of India (SEBI) published a consultation paper in mid-January outlining proposals to enhance trust and promote ease of doing business in the AIF ecosystem while ensuring that the structure is not being misused to violate regulations.

The SEBI says there is a need to address concerns over AIFs being floated to avoid regulations. These include the evergreening of loans, circumventing FEMA regulations related to foreign exchange, and regulations on qualified institutional buyers.

The SEBI proposes to introduce a requirement that AIFs, managers of AIFs, and key management personnel of the funds should ensure they “do not facilitate the circumvention of extant financial sector regulations”.

The consultation paper suggested that the industry work with the regulator to establish specific, verifiable standards that demonstrate adherence. This will ensure that the regulatory intervention does not limit the ability of AIFs to carry out legitimate investments.

The SEBI’s concerns are not unfounded, given its discovery of 40 cases where the structure was misused to violate existing financial regulations, with assets under management in these cases worth more than INR300 billion (USD3.6 billion).

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