SEBI’s New Guidelines for Traditional Equity Market

Vijay Balsana

09 Sep, 2024

The Securities and Exchange Board of India (SEBI) has a major role in regulating the securities market, protecting investors, guaranteeing transparency, and creating a stable and efficient financial ecosystem. As the financial landscape develops, SEBI revises and introduces new rules and regulations to maintain the pace with new evolving trends and hurdles.

The recent development of the latest guidelines for Alternative Investment Funds (AIFs), large value funds, and Venture Capital (VC) funds is evidence of SEBI’s proactive approach to handling the intricacies of contemporary investment vehicles.

These new guidelines aim to improve regulatory oversight, encourage investor protection, and ensure these funds run more accountable and transparently. By doing all these things, SEBI protects investors’ interests while promoting a more stable investment climate that encourages innovation and sustainable growth. Fund managers and investors must comprehend these new rules to effectively navigate the changing financial world.

Discover the Power of Alternative Investment Funds

SEBI collectively refers to investment avenues or vehicles that are privately pooled and engage in venture capital, private equity, or hedge funds as alternative investment funds. These funds can be established or incorporated in India.

One of the AIF categories is category I, which consists of investments in SMEs, infrastructure, social ventures, venture capital, or angel funds. AIFs classified as Category II may invest in debt, real estate, distressed assets, or private equity funds; AIFs classified as Category III may invest in hedge funds or directly in PPFs (public equity funds). The phrase “co-investment” describes an investment made in investee enterprises when the AIF invests by a sponsor, investor, or management of Category I and II AIFs.

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Understanding Large-Value Funds: What are They?

An Alternative Investment Fund (AIF) or scheme of an AIF in which each investor is an authorised investor and contributes a minimum of Rupees 70 crore is known as a Large Value Fund (LVF) for accredited investors. In this case, the term “investor” does not refer to the management, the manager’s staff or directors, sponsors, or employees of the AIF. 

Following the introduction of the concept of “Accredited Investors” in the securities market, the SEBI (Alternative Investment Funds) Regulations 2012 were revised to provide a “Large Value Fund for Accredited Investors (LVF)” with some regulatory standards being relaxed.

What is Venture Capital and How it Works?

Venture capital (VC) is a niche type of funding that gives high-potential, early-stage companies the money, resources, and guidance they need. Venture capital funds are often organised similarly to private equity (PE) funds, which include selling ownership interests to a restricted number of investors, known as limited partnerships (LPs).

 In addition to providing financial support, venture capitalists are essential to the development and prosperity of these new businesses.

Venture capital (VC) firms give small and beginning companies with substantial development potential funding. Private equity (PE) is the usual method of financing. Ownership stakes are sold to a select group of investors (LPs) through independent limited partnerships. Whereas PE often funds established businesses looking for an equity injection, venture capital typically concentrates on developing businesses. A crucial source of finance for startups that lack access to capital markets, bank loans, or other types of debt is venture capital (VC).

Unlock growth for your high-potential startups with seamless venture capital registration to secure essential funding and resources.

SEBI New Guidelines for AIFs, LVFs and VCs

To facilitate business transactions and give AIFs more operational flexibility, the Securities and Exchange Board of India (SEBI) has released updated regulations for Category I and II alternative investment funds (AIFs) that plan to borrow money to cover short-term funding gaps and ongoing operating expenses.

These AIFs are permitted to borrow money for a maximum of four times within a year and a maximum of 30 days, with a 30-day interval between loans, as of August 19. The maximum amount borrowed is 20% of the proposed investment in the investee organisation, 10% from the investable capital of the AIF scheme, or, if less, the commitment that has yet to be withdrawn from financiers other than those investor(s) who have neglected to pay back the drawdown amount.

In cases of emergency, for instance, when a chance for investment presents itself but the necessary cash from investors is still not acquired, borrowing is allowed. The Private Placement Memorandum (PPM) and scheme documentation for the fund must disclose this borrowing. Expenses cannot be applied to prolong withdrawal timeframes; instead, they must be borne exclusively by the investors who missed payments. Furthermore, the AIF management must regularly inform all investors of the terms and conditions of the borrowing.

AIFs classified as Category I concentrate their investments on small and medium-sized businesses, startups, positive social activities, and infrastructure projects like airports and railroads. Private equity funds that finance unlisted companies and debt funds that purchase the debt instruments of these businesses are included in Category II AIFs.

Borrowing was formerly restricted to operating expenditures and short-term finance needs, with a 30-day cap and a maximum of four borrowing periods each year. In addition to laying out the terms of the AIFS borrowing, the aforementioned Large Value Funds (LVFs) would now be able to prolong their duration by up to five years with consent from three-quarters of unit owners. A written commitment to SEBI and investor consent are needed for term changes. By November 18, LVFs with ambiguous or lengthy tenures must amend their quarterly reports and match term expansions with these guidelines.

SEBI has laid out a methodology to facilitate the transformation of Venture Capital Funds (VCFs) to Alternative Investment Funds (AIFs) and allow for the administration of unliquidated investments till July 19, 2025. Under Category I AIF, VCFs must be included, and their original membership document must be presented.

Schemes still in operation may do so for an extended time, while those whose liquidation deadlines are till July 19, 2025, to settle their outstanding concerns. When a VCF scheme expires, registration must be given up by March 31, 2025, and non-migrating VCFs will be subject to more stringent reporting requirements or regulatory steps.

Obtain SEBI consulting and regulatory services to ensure seamless compliance with SEBI’s updated AIF, LVF, and VC regulations and keep your funds aligned and secure.

To Wrap Up

Overall, regarding AIFs, big-value funds, and venture capital funds, SEBI’s new guidelines represent a significant advancement in accountability, transparency, and the general strength of India’s investment ecosystem. SEBI wishes to safeguard investors, guarantee compliance, and foster sustainable expansion in the alternative investment market by strengthening regulatory control and establishing more precise guidelines. These adjustments promote creativity and strategic cooperation across the sector, aiding in risk mitigation.

Following these rules is essential for fund investors and managers to be credible and competitive in a changing market. Long-term success will depend on remaining knowledgeable and abiding by SEBI’s rules as the financial sector changes. Ultimately, SEBI’s dedication to creating a safe and active investment environment that is advantageous to all parties concerned is reflected in these rules.

Stay ahead of SEBI’s evolving regulations by visiting our website www.enterslice.com/ and getting seamless compliance to secure your fund’s future with our specialized SEBI consulting services today.

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