In September, the Securities and Exchange Board of India (Sebi) had issued a new set of rules for asset managers, which made investment committees of AIFs also liable for any regulatory lapses. Until then, only the fund managers and full-time employees of the AIFs were to be held accountable.
In government-sponsored AIFs, it is usually senior bureaucrats and external experts who are part of the investment committees, which are advisory bodies. These panels do not have a role in the daily operations of these asset managers. The government does not want its officials to face regulatory action for operational lapses. If there is no explicit exemption for government entities, these bureaucrats and experts will become liable for any violations by the AIF.
Emails sent to Sebi and the finance ministry remained unanswered until press time on Thursday.
The central government has been using the AIF route to float specialised funds that invest in infrastructure and real estate. The government is the sponsor of the three infrastructure funds floated by the National Investment and Infrastructure Fund (NIIF) which has a total fund corpus of $4.4 billion. It is also in the process of launching an AIF from the National Small Industries Corporation (NSIC) to create funding opportunities for smaller companies.
“Investment committee members are appointed by the government in these cases to take decisions on investment and divestment only and have nothing to do with the compliance of the fund with various norms,” said a person with knowledge of the matter. “You cannot hold them responsible unless it is established that the decisions were as a result of fraud, gross negligence or misrepresentation,”
Sebi has received several representations from industry bodies and AIFs requesting the regulator to go easy on investment committees. In its last board meeting held in December, Sebi took up the matter for discussion. The board had proposed that investment committees could be exempt from liability in cases where each investor of the AIF has a minimum ticket size of Rs 70 crore. However, it stopped short of providing any further clarity on the matter.
Lawyers said Sebi might provide an exemption for the government-sponsored funds in the final regulations.
“Sebi is likely to get back with clarifications on the scope of liability of the investment committee members,” said Tejesh Chitlangi, partner, IC Universal Legal.
“The proposed relaxations (from December board meeting) as such may benefit only a select few and hence the same warrants a reconsideration.”
One of the key issues that Sebi has not spelt out is how the Rs 70 crore threshold will be calculated. Government entities often put money through different departments or investment arms. In such a case, it is not known if the Rs 70 crore will be calculated based on each investor or if the investments of all associate entities will be clubbed for the purpose.
Regulations give freedom to AIFs to create innovative and efficient governance structures. For instance, the role of investment committees varies greatly from fund to fund. In some of the AIFs, the investment committees even get veto power on the investment decisions.