SEBI identifies over 40 cases of AIFs circumventing regulations worth over Rs 30K cr

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The Securities and Exchange Board of India (SEBI) has found over 40 cases where AIFs, that is, alternative investment funds, appear to have been structured to facilitate circumvention of certain financial sector regulations, to the tune of over Rs 30,000 crore.

“This circumvents Reserve Bank of India regulations and disclosure requirements around asset restructuring and recognition of non-performing assets,” the market regulator said in a consultation paper on Saturday.

One such method is setting up these AIFs for evergreening of stressed loans of some regulated lenders.

In another method of AIF misuse, SEBI noted that some foreign investors appear to have set up AIFs with domestic managers or sponsors to invest in sectors prohibited for FDI or beyond the allowed FDI sectoral limit.

While the third modus operandi of AIF misuse, as listed by Sebi is when certain AIFs having single or very few investors invest in IPOs under QIB (qualified institutional buyer) quota and influence price discovery.

“Further, foreign investors may set up AIFs to invest foreign money in debt/debt securities where foreign investment is envisaged through the FPI/ECB route,” SEBI said.

“Note that such investors of AIFs would otherwise be ineligible for QIB status on their own,” it added.

SEBI has also proposed to introduce a general obligation in the existing AIF regulations that would require AIFs, managers and their key management personnel to ensure that their operations and investments do not facilitate circumvention of regulations administered by any financial sector regulator.

It is to be noted that last month, the Reserve Bank of India (RBI) ruled that banks and non-bank lenders cannot invest in AIFs with holdings in the banks’ current or recent borrowers, to avoid cases of “evergreening” bad loans, and asked lenders to sell existing investment within a month, or provision against them.