Securities And Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulation, 2021[I]
Securities And Exchange Board of India (SEBI) recently has made amendments in (Alternative Investment Funds). SEBI with its recent amendment “SEBI (Alternative Investment Funds) (Second Amendment) Regulation, 2021” aims to amends SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulation).
Following were the amendments introduced in the SEBI (Alternative Investment Funds) (Second Amendment) Regulation, 2021:
Start-ups has been defined to means, an entity which fulfils the criteria for start-up as specified by the “Dept. for promotion of Industry and Internal Trade”[ii], or such other policy of the Central Government issued in this regard from time to time. Earlier SEBI (AIF) Regulations, 2012 did not define start-ups separately and it was defined differently by different government organization, hence this lack of clarity has created confusions which increased compliance cost.
Venture Capital Undertaking (VCU), the scope of the definition of VCUs has been broadened for Category I AIF’s by removal of the list of restricted activities in the definitions of VCU. This should enable Category I AIFs to now allocate monies towards NBFC’s which was earlier prohibited.
The scope of the definition of venture capital undertaking (VCU) has been widened for category I Alternative Investment Funds by removal of the list of restricted activities in the definitions of a VCU.
As per the new amendments, SEBI has made certain restrictions on AIFs for making bulk investment of their funds into single company.
Category I and II of AIFs cannot invest more than 25% of the investable funds in an investee company directly or through investment in the units of the other AIFs.
Category III of AIFs cannot invest more than 10% of the investable funds in an investee company directly or through investments in units of other AIFs.
The new amendment to the AIF Regulations, 2021 introduce a code of conduct for Alternative Funds Investment, AIFs managers their KMP, AIFs trustee, directors and other members of investment committee (ICOM).
It can be concluded that this latest amendment SEBI (Alternative Investments Funds) Amendment Regulations, 2021 brings more clarity on the part of Venture capital (VC) and Start-ups, introducing the code of conduct for AIFs will bring more transparency, accountability and clarity in start-up investment culture with the focus on AIFs.
However, a point of concern can be raise is to add a similar code of conduct for the investors, because many a times it has been seen that do not release the funds committed by them initially, therefore if multiple investors starts to default then the further responsibility of AIFs come to stake affecting the goodwill of AIFs and interest of other investors. Therefore a similar code of conduct should be introduce for investors too.
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[i] Securities And Exchange Board of India (Alternative Investment Funds) (Second Amendment) Regulation 2021, Also available: https://www.sebi.gov.in/legal/regulations/may-2021/securities-and-exchange-board-of-india-alternative-investment-funds-second-amendment-regulations-2021_50089.html
[ii] Department of Promotion of Industry and Internal Trade (DPIIT), Notification No. G.S.R. 127(E), dated February 19, 2019, Also Available: https://www.startupindia.gov.in/content/dam/invest-india/Templates/public/198117.pdf
