SEBI is Considering Reducing Compliance Norms for PEs, VCs 20 fund officials received an email from the capital markets regulator last week asking for suggestions on how to lighten the burden of compliance.

The Securities and Exchange Board of India (SEBI) is considering streamlining the multiple rules that regulate the venture capital and private equity industry, with a particular emphasis on reducing the compliance cost, according to a report.

In an email to 20 fund officials and senior experts, SEBI said that it will conduct a thorough review of the regulations to make them easier for alternative investment funds (AIFs) — the regulatory term for VC and PE funds — to comply with and to do so at a lower cost. The ET report stated that it has asked these funds what steps could be made to ease the burden of compliance.

The Founder of 35North Ventures, a fund manager registered with SEBI, Milan Sharma, commented on the situation and said that the PE and VC industry is tightly regulated in terms of the compliance necessary to operate an AIF. "The entry of small VC (less than INR 100 crore) has been made prohibitive by the compliance cost as a percentage of overall cost. Any fund AUM below INR 500 crore in India is not financially viable for the sponsors. The compliance cost is high, even for larger players with fund sizes over INR 1000 crore.

"The VC and PE must select a trustee, custodian, etc., and each of them charges the fund based on how many compliance chores are required of the funds. The recurrent and frequent reporting of the same information raises the expense for AIFs. By addressing the enormous potential for rationalisation in the reporting of PE/VC, the regulator is acting appropriately. A lot of reporting can be simplified and reduced for compliance-related reasons, particularly in respect to valuation and benchmarking. Overall, it will be interesting to observe how the regulator's final draughts pans out."

In the last year, the SEBI has made a number of adjustments to the AIF regulations. The rules on fund closing, treating all investors equally, segregating the assets and liabilities of different schemes, limiting the tenure of funds to that specified in the fund document, and rules on disclosing and resolving investor complaints are a few of these.

The regulator has also recently released a number of consultation papers on a variety of subjects, including valuation, the blind pool principle, dematting AIF units, and carrying forward unliquidated investments.

A new guideline to increase the minimum investment in an AIF for non-accredited investors from INR 1 crore to INR 2-3 crore was also recently considered by SEBI. The non-accredited investors have up to INR 25 crore in net worth. Individuals should have a liquid net worth of up to INR 5 crore and a total yearly income of up to INR 50 lakh.

According to the report, there are now about 1,000 local AIFs, and they have invested more than INR 1.3 lakh crore over the last two years. There is a belief that SEBI wants to implement more regulations to stop a blow-up. As the AIFs have developed into a reliable source of investment, it also feels the need to make compliance easier.

Vishal Agarwal, Partner, Tax, Grant Thornton Bharat, said, "AIFs are designed for sophisticated investors. Knowing what they are getting into should be the starting point. SEBI's rules correctly put restrictions on who can act as an investment manager and sponsor. The heads of words are also laid forth. Beyond that, however, should be left up to the investors and managers to discuss and come to an agreement. A merchant banker or treating each investor equally is not always necessary. Transparency should continue to be prioritised over tightening rules because we have mutual fund options for that."