SEBI permits co-investment window in AIFs
The new norms will reduce compliance burden
The Securities and Exchange Board of India (SEBI) has decided to forego an earlier requirement of a separate portfolio-manager licence. Thus, it will let Category I and II alternative investment funds (AIFs) run a dedicated ‘co-investment’ (CIV) scheme for accredited investors.
Accredited investors are those who meet certain financial criteria, such as net worth and get certification under the regulatory norms. Co-investment will allow them to take direct exposure to the unlisted asset where the AIF is also investing.
The new norms will reduce the compliance burden for AIF managers.
SEBI’s circular stated that assets of each CIV scheme would be protected from the assets of other schemes, and each scheme would have a separate bank account and demat account.
Sanchit Kapoor, partner at IC RegFin Legal, expressed that the definition of ‘co-investment was broad. It covered matters where an investor and the fund, invested in different rounds of the same company. A clarity on what would not fall within the co-investment scope was awaited.
SEBI clarified, “Co-investments of an investor in an investee company across CIV schemes shall not exceed three times of the contribution made by such investor in the total investment made in the company through the scheme of the AIF to which the CIV schemes are affiliated.”
The circular added that AIF managers could opt for the CIV scheme or the current PMS route for offering co-investment.
Kapoor added, “The CIV scheme is restricted to accredited investors (AI) and each scheme must draw from the same investor pool as the main AIF scheme. It immediately narrows participation when compared to CPM, which can have participation from an investor of any scheme managed by the same sponsor and not necessarily being an AI.”
Meanwhile, experts felt that capping co-investments at three times the investor’s pro-rata interest may also act as a deterrence when compared to CPM, where no such limit was prescribed.
The market regulator has also included norms to prevent any misuse of the framework. For instance, it will be the manager’s responsibility to ensure the scheme makes an investment leading to its holding exposure in an investee company indirectly where they cannot hold or acquire directly. Moreover, co-investments necessitating additional regulatory disclosures if the investor had investment directly, will not be allowed.
Since the CIV schemes will not be allowed to borrow funds or engage in any kind of leverage, the AIF industry associations may come up with implementation standards on the co-investments in consultation with the regulator.