The Securities and Exchange Board of India (Sebi) on Tuesday issued fresh guidelines on due diligence for investors in alternative investment funds (AIFs) to prevent circumvention of norms and ever-greening of loans.
The due diligence specifically applies to investments by entities regulated by the Reserve Bank of India (RBI), investments from countries sharing land borders with India, and those availing benefits of qualified institutional buyer (QIB) status.
Click here to connect with us on WhatsApp
As per an earlier communication from Sebi in January, it had found nearly Rs 30,000 crore worth of investments circumventing regulations.
The RBI had last year raised concerns about instances of ever-greening of stressed loans through AIFs and temporarily restricted investments from its regulated entities. It directed banks and non-banking financial companies (NBFCs) to provision for their investments in debtor firms made through AIFs. However, the banking regulator later provided some relief.
Sebi had also previously pointed out instances of violation of the Foreign Exchange Management Act (FEMA) regulations.
Sebi has clarified that if specific investments do not satisfy the due diligence checks, then such investors can either be excluded from that investment, or the investment itself will not be made.
The market regulator has directed AIF managers to submit an undertaking by April 7, 2025, on the due diligence. If the investments do not satisfy these requirements, they must report such investments to custodians before the April 7, 2025 deadline.
The due diligence framework includes detailing investments in AIFs where the sponsor or manager is RBI-regulated or has investors who are regulated by RBI and contribute 25 per cent or more of the corpus.
“If an investor of the scheme is an AIF, or a fund set up outside India or in International Financial Services Centres in India, then the criteria check for investor(s) regulated by RBI shall be carried out on a look-through basis,” said Sebi.
Further, to curb misuse of the QIB route, the market watchdog has specified checks to prevent AIFs from facilitating QIB benefits to investors who would otherwise be ineligible for QIB status on their own.
Due diligence has been mandated for schemes where investors from the same group contribute 50 per cent or more to the corpus before availing the benefits of QIB status.
Sebi has also specified due diligence in cases where 50 per cent or more of the corpus comes from investors in countries bordering India, or where the beneficial owners are from land-bordering countries. If such an AIF scheme holds 10 per cent or more in equity or equity-linked securities of an investee company, this must also be reported to custodians within 30 days of the investment.
Investors from land-bordering countries are permitted to invest only after receiving government approval.
Additionally, custodians will be required to compile the data and submit it to Sebi by May 7, 2025.
First Published: Oct 08 2024 | 7:00 PM IST
