In a move that may put some check on speculative trading by alternative investment funds, market regulator Securities and Exchange Board of India (Sebi) tightened the norms for Alternative Investment Funds (AIFs) such as hedge funds that use complex trading strategies and employ leverage.
The regulator through a circular issued on Monday has asked them to have comprehensive risk management, strong compliance, maintain records of their trades and provide full disclosure of any conflict of interest.
Sebi had notified its AIF regulations in May 2012 and issued the new directions under Operational, Prudential and Reporting Norms for Alternative Investment Funds.
Bringing in some nominal changes on disclosure for the AIFs falling in category I (those investing in start ups, social ventures, infrastructure and SME’s etc) and Category II (PE funds debt funds that don’t undertake leverage), the disclosure norms were tightened mostly for those falling in Category III (hedge funds that employ diverse or complex trading strategies and may employ leverage).
While the regulator asked funds that do not undertake leverage to submit their periodical reports on a quarterly basis, it asked those that undertake leverage to do so on a monthly basis.
The regulator has also called for open ended Category III AIFs to maintain sufficient liquidity to meet redemption obligations and other liabilities.
AIFs will also have to provide full disclosure and transparency about conflict of interest and how they manage them from time to time to investors.
“Such conflicts shall be disclosed to the investors in the placement memorandum and by separate correspondences as and when such conflicts may arise. Such information shall also be disclosed to Sebi as and when required,” the circular said.
Sebi has also directed the Category III AIFs to follow its system for calculating the leverage, calculation of exposure and net asset value (NAV) and to have systems to monitor their exposures.
While AIFs shall ensure that leverage does not exceed the prescribed limit, they will also have to report the leverage at the end of the day to the custodian and also report if there was any breach of limit during the day.