A private equity (PE) fund may invest in unlisted equity or equity-linked instruments of companies and should invest at least half of the fund in equity shares or equity-linked instruments of an unlisted company, according to Securities and Exchange Board India (Sebi). Moreover, a PE fund shall not invest more than 50% in the equity or equity-linked instruments of a company which is proposed to be listed. That apart, a PE fund shall not invest more than 50% in unlisted debt of a company where the fund has already made equity investment. In its draft regulations, Sebi also said venture capital funds will be not be allowed to invest in any company promoted directly or indirectly by any of the top 500 listed companies by market capitalisation or by their promoters.
Sebi has also proposed to increase the minimum investment requirement in portfolio management schemes to R25 lakh from R5 lakh currently, which was making these products accessible to retail investors without the necessary protection. Also, portfolio managers would be required to segregate clients? funds and the former would be prohibited from pooling the fund or securities of clients. ?All portfolio managers who seek to pool assets such as for investing in unlisted securities should be required to register as an alternative investment fund (AIF),? Sebi said.
Draft regulations for AIF cover the entire gamut of investment activities of funds like venture capital fund, PIPE fund, private equity fund, infrastructure equity fund, debt fund, real estate fund, SME fund, social venture fund and strategy fund. According to the proposed norms, these funds will have to be mandatorily registered with the market regulator with a minimum corpus of R20 crore and will be not be allowed to pool money from retail investors.
However, they can solicit money from high net-worth investors (HNI), institutional Investors and corporates with a minimum contribution of Rs 1 crore from each investor. Additionally, there will be a minimum lock-in period of three years for investors in these funds with transfers allowed after the lock-in period.
These funds can be set up either as a trust, limited liability partnership or as a company.
In terms of benefits, the AIFs would be exempted from insider trading regulations for their due diligence prior to investing in listed companies.
Also, many of these funds would be allowed to participate in share qualified institutional placements and investments would be allowed in core investment companies, asset finance companies, infrastructure finance companies or companies engaged in microfinance activities.
The requirement of lock-in period of one year for pre-IPO investments would not be applicable in respect of investments made by many of these funds. Sebi has, however, also proposed some restrictions for different kinds of AIFs. For PIPE funds, the investments would be restricted to shares of small-sized listed companies, while PE funds would be allowed to invest mainly in unlisted or proposed to be listed companies.
For debt funds, the entire investment would be made in unlisted debt instruments, while infrastructure equity funds would have to put minimum two-third of their investment in equity of infrastructure projects/companies. For real estate funds, investment could be in real estate projects or shares in the SPVs undertaking real estate projects.
