🎯 SEBI's New Target: AIFs?
SEBI is increasing its regulatory hold over Alternative Investment Funds. Here's why.
Remember those times back in school when your parents got stricter with you after a parent teacher meeting or after an exam result was revealed?
Suddenly all the perks you enjoyed were gone. No more watching TV for hours or skipping veggies at mealtimes.
Something similar is happening in our country right now.
The RBI and the SEBI are getting stricter and stricter with companies and ventures after news of several frauds.
And the latest set of companies to face the wrath of regulatory bodies are Alternative Investment Funds.
🧐 What Are Alternative Investment Funds?
The rich truly lead different lives.
So their investments are also much different than the common man.
While regular folks opt in for mutual funds, high networth individuals (HNIs) often go for Alternative Investment Funds.
These funds are like mutual funds but for the rich. They are private vehicles that pool in money from investors to invest in alternative investments (hence the name).
They usually invest in startups, private equity, hedge funds, venture capital funds and so on.
Wondering why we said they are only for the rich?
Because the minimum ticket size (the minimum amount you have to pay to invest) is around Rs. 25 lakhs to Rs. 1 crore.
But despite this pricy investment, these funds have been gaining massive popularity in the last few years.
And when an industry starts growing at such a rapid pace it usually attracts a lot of regulatory interest.
That's exactly what is happening here as well.
SEBI has previously been criticised for not regulating these AIFs. But now it can't afford to do so anymore.
The first step towards this: fining Indgrowth Capital Advisors Rs. 10 lakhs!
Why?
AIFs have certain rules that they need to follow.
For instance, they cannot invest more than 10% of their investable capital in one particular company (not putting most of your eggs in one basket mitigates the risk after all).
Not only did Indgrowth violate this rule, it also misreported its investable capital.
Such offenses have often previously gone unnoticed. But SEBI's act of fining Indgrowth shows it is getting serious about this space.
It is also currently probing around 15 other AIFs.
🤔 Why So Much Scrutiny Suddenly?
Many of these AIFs have been routinely breaking rules and finding loopholes in laws.
How so?
You see, currently HNIs are not allowed to buy more than 5% (for small HNIs) or 10% (for big HNIs) of the issued shares in an IPO.
This was done to make sure that these HNIs don't gobble up a huge chunk of IPO shares, leaving nothing behind for retail investors. But these Alternative Investment Funds can invest in funding rounds of companies right before their IPO or even apply for IPOs.
So, HNIs can get a larger stake in IPOs through these funds making SEBI's new rules redundant.
Not just that, AIFs are also suspected of round-tripping money. Huh?
Round-Tripping is when your black money takes a trip around the world and comes back to you in white.
Indians usually send out their black money to foreign countries and then try to get it back as foreign investment to save taxes.
Many AIFs are also being used to do this.
Since foreign entities can also invest in Indian AIFs, this gives many HNIs a way to route their illegal money (which they had already transferred to a foreign country) back to India.
Tracking this illegal activity is difficult right now because there are no specific regulations or structure that AIFs have to follow.
It is because of these activities that SEBI feels the AIF space has grown so rapidly.
Now, we'll have to wait and see if this probe can actually find evidence of wrongdoing or not because SEBI's next step will depend on that.
Speaking of action, SEBI is taking a lot of steps to make trading safer for Indians. It is thinking of introducing insider trading laws for mutual funds and launching risk factor disclosures about market trends so that investors can take better-informed decisions.
Do you think these steps taken by the SEBI will make an actual difference?
⚡ In a line: SEBI is cracking down on more and more companies now trying to stop them from breaking the law or exploiting loopholes.
💡 Quick question: Is SEBI doing the right thing or is it over-regulating companies?
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