China’s quickly growing private equity industry was given a foundation for national fundraising regulation in late 2011. The country’s National Development and Reform Commission (NDRC) released a measure that requires onshore private equity funds in Beijing, Shanghai, Tianjin, Jiangsu Province, Zhejiang Province and Hubei Province with more than RMB500 million ($79 million; €59 million) of assets under management to register and submit fund information for review.
One upside for China’s GPs in that disclosure to the NDRC clears them for due diligence from the country’s largest LP – the $132 billion Social Security Fund. With an allocation to private equity of up to 10 percent, SSF has the capacity to deploy about $13 billion to the asset class.
In line with the new rules, private equity firms can no longer use websites, publications, messages or conferences to market their funds to the general public – similar to the US Securities and Exchange Commission’s ‘Regulation D’ – nor can they use commercial banks or securities companies to transmit the fund information for them. They are not allowed to make specific promises about returns to investors and should only raise money from LPs who “recognise and have the ability to shoulder the risk” – although the NDRC has yet to clarify who those LPs are.
The rules are also expected to be tightened further still: China recorded 1,059 cases of private equity funds breaching regulations this year, according to a financial official at the NDRC quoted in the Chinese press. Exploitation of the existing rules has caught the attention of the NDRC, which is drafting new regulations for private equity firms in China.
Some industry watchers welcome tighter regulation, like Maurice Hoo, Hong Kong-based partner at law firm Orrick, Herrington & Sutcliffe, who notes that insufficient regulation has led to the proliferation of local funds raised by unqualified managers.
“A lot of people are putting money into what they think is private equity and there is a real risk of a major scandal,” Hoo says. “Right now there isn’t a lot of regulation and more experienced GPs are actually worried.”
Institutionalising India
India’s private equity practitioners have equally worried about a lack of a defining structure to the country’s private equity legislation.
In August, the Securities and Exchange Board of India (SEBI), attempted to remedy the situation by releasing a comprehensive set of concept papers. It proposed to extend the coverage of investment management regulations by bringing all alternative investment fund structures and private pools of capital under the regulatory umbrella by separating them into sub-categories like real estate funds, PIPE funds, private equity funds and SME funds. All domestic funds would need to register with the agency; currently not all funds are required to.
SEBI says the move is also a step toward protecting high net worth individuals (HNIs), a major source of capital for Indian fund managers, from becoming victims of fraud, unfair trade practices and conflicts of interest.
Not everyone is thrilled by SEBI’s proposals, however. “There are too many categories of AIFs sought to be created with separate registrations for each of the categories and a restriction that an entity registered in one category may not undertake other types of deals,” Vijay Sambamurthi, founding partner of Bangalore- and Singapore-based alternative asset-focused law firm, Lexygen, wrote on his firm’s blog.
As with China’s changing regulatory landscape, it is unclear when India’s final proposals will be unveiled.
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