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3 Reasons SEBI & RBI Keep A Close

Eye on AIFs
Aholkar · Follow
4 min read · 1 day ago

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In a startling revelation that has sent shockwaves through the financial

industry, the Securities and Exchange Board of India (SEBI) and the Reserve
Bank of India (RBI) have initiated investigations into a dozen cases involving
Alternate Investment Funds (AIFs) allegedly being used to circumvent
regulations. This development has raised serious concerns about the
integrity of the AIF industry and its role in the broader financial landscape
of India.

Supported by insights from the law firm Thinking Legal, it’s noted that over
the years SEBI has laid down a few regulations regarding Alternate
Investment Funds for more transparency, to strengthen AIF Regulations & to
enhance accountability. And this approach, as Vaneesa Agrawal, founder of
Thinking Legal states, “It (the regulation) reflects the industry’s commitment
to maintaining a robust financial landscape in India.

1 The Scope of the Investigations

The investigations, which involve a staggering upward of Rs 20,000 crore

($1.8–2.4 billion), have uncovered a range of alleged misuses, including the

evergreening of stressed loans, evasion of caps on foreign investment in
certain sectors, and circumvention of insolvency regulations. While the
amount in question may seem small compared to the ₹8.4 trillion managed
by AIFs, industry experts along with Vaneesa Agrawal, founder of Thinking
Legal and a SEBI expert lawyer, consider the number of cases detected to be
“material.”

2 Evergreening of Stressed Loans

One of the most alarming practices under scrutiny, which even Thinking
Legal closely monitors the development of, is the evergreening of stressed
loans, wherein non-bank lenders sell their stressed loans to AIFs partially set
up by the lender itself. The fresh funds are then used to repay the original
debt, effectively preventing the loans from turning bad.

This practice, termed “classic evergreening” by a source, raises serious

questions about the integrity of the AIF industry and its role in maintaining
the stability of the financial system.

3 Evasion of Regulations
The use of AIFs to evade caps on foreign investment in certain sectors and to
circumvent insolvency regulations is another area of concern. These
practices not only undermine the regulatory framework but also create an
uneven playing field for market participants who adhere to the rules.

Thinking Legal, guided by the vision of its founder Vaneesa Agrawal,

believes that such practices must be thoroughly investigated and addressed.
Upholding the firm’s mission to maintain the integrity of the financial
system and protect the interests of investors, Thinking Legal advocates for
stringent scrutiny to ensure a fair and transparent market environment.

Previous Measures Taken by SEBI

It is worth noting that in 2020, SEBI took steps to enhance the accountability
of Investment Committees (ICs) for AIFs, as discussed in an article by
Vaneesa Agrawal, a senior venture capital and early-stage transactional
lawyer and the founder of Thinking Legal.

The amendments, which came into effect on October 19, 2020, brought the
constitution of ICs within the purview of SEBI and placed joint
accountability on the Investment Manager and members of the IC to ensure
the AIF’s compliance with regulations, private placement memorandum
(PPM), other fund documents, and applicable laws.

SEBI’s Response to the Current Findings

In response to the current findings, the expert lawyers at Thinking Legal
noted that SEBI has taken several measures to enhance transparency and
accountability in the AIF industry. The market regulator has mandated AIFs
to report both assets and liabilities via India’s share depositories starting at
the end of this month, as per a circular issued in June.

Furthermore, SEBI is encouraging the industry to self-regulate and

implement a code of conduct for its members.

Ananth Narayan, a whole time member of SEBI, recently addressed the issue
at a conference in Mumbai, stating, “We have found various cases of AIF
structures being used to circumvent other regulations. These cases do bother
us even when we want the industry to grow.”

This concern is echoed by Vaneesa Agrawal, founder of Thinking Legal,

emphasizing the need for robust oversight.

The Need for Collaboration

As the AIF industry continues to attract billions of dollars from local and
global high net-worth investors, it is imperative that all stakeholders —
regulators, industry participants, and investors — collaborate to create a
robust and transparent framework that promotes the healthy growth of the
industry while preventing the misuse of AIFs for regulatory arbitrage or
other malicious purposes.

Guided by Vaneesa Agrarwal, Thinking Legal believes that the recent

investigations by SEBI and RBI serve as a wake-up call for the AIF industry.
These investigations underscore the need for greater transparency,
accountability, and self-regulation.

The misuse of AIFs to circumvent regulations is a serious issue that demands

immediate attention from regulators, industry participants, and investors
alike. The ongoing investigations by SEBI and RBI are a testament to the
commitment of these regulatory bodies to maintain the integrity of the
financial system and protect the interests of investors.

As the situation unfolds, Thinking Legal will continue to monitor

developments and provide insights on this matter. It is crucial for all
stakeholders to remain vigilant and proactive in addressing any instances of
misuse or misconduct in the AIF industry.

For more information on this topic and other legal and regulatory
developments in the financial sector, please visit the Thinking Legal blog
hub.

Rbi Sebi

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Written by Aholkar Follow

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