India's SEBI keeps busy, unveils new fund rules

India’s securities regulator, the Securities and Exchange Board of India (SEBI), has introduced a swathe of new proposals over the country’s private equity industry as a way of meeting international best standards. 

The rules are being introduced as a way of distinguishing private equity investors from their cousins in venture capital. The SEBI said its venture capital rules, framed in 1996 to encourage investment in start-ups, are currently being used as an omnibus vehicle by buyout funds, venture capital, real estate and other private investment strategies – the effect of which has been a regulatory framework used by buyout shops that infix certain privileges and constraints more suitable for early-stage investors.  

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Importantly for foreign investors, the Foreign Venture Capital Investor (FVCI) regime introduced in 2000, is proposed to be retained and not subsumed in the new regulations for domestic funds.

Under the proposals a fund will be categorised under a distinct asset class and governed by its own tailored rules. For instance buyout funds are restricted from investing in unlisted companies, though if classified as a PIPE vehicle, would be permitted to invest in small listed companies not part of any market index. 

The SEBI, which will take comments on the proposals until the end of August, said its goal is to mitigate conflicts of interest in the private equity model and to monitor any risks the industry may pose.

The regulator cited a number of similar reform efforts underway in Europe (under the Alternative Investment Fund Managers Directive) and the US (under Dodd-Frank) as evidence of the need to supervise alternative investments. 

India’s private equity community will also need to digest recent reforms to the country’s Takeover Code. Just last week the SEBI amended the code, allowing firms to acquire 25 percent of a company before triggering takeover regulations. Under previous law acquiring a 15 percent stake would result in a mandatory offer for an additional 20 percent equity ownership – the latter figure has since been bumped to a 26 percent follow-up offer as part of the reforms.