SEBI Whole Time Member Hints At Relaxing AIF Curbs

In an address on Tuesday, Ananth Narayan, a whole time member at SEBI hinted at relaxing curbs for Alternative Investment Funds in India.

“We have these checks and balances in place, I think some of the regulatory restrictions that we put in earlier because we were afraid of circumventions can now be relaxed,” Narayan said at the CII AIF Summit 2024.

The whole time member mentioned the impressive growth of the industry, with commitments now surpassing Rs 12.5 lakh crore, and actual investments reaching over Rs 5 lakh crore. Over the past five years, the compounded annual growth rate of investments in AIFs has been an extraordinary 30%.

This growth trajectory, he noted, reflects the maturity of the sector, which has now become a mainstream industry.

In the speech, Narayan mentioned that the regulator is striving to strike a delicate balance between excessive regulation and insufficient oversight.

The industry is a valuable asset, he said, calling it a "goose that lays golden eggs". Caution must be exercised to avoid being overly ambitious in trying to extract more than is sustainable, Narayan said.

The aim is to ensure that this valuable asset is not stifled, and at the same time, it must not be burdened with excessive checks and balances that could hinder its functioning, he said.

However, he also mentioned challenges surrounding the debate on light-touch regulations. While some in the industry have requested relaxed investor protection standards to facilitate greater flexibility, the SEBI official mentioned that the regulator's main focus is investor protection, which complicates such requests.

The push for eased regulations largely comes from industry managers rather than investors, who are generally more cautious and prefer maintaining current standards of regulation, he said.

Narayan also made an argument for adopting a model focused on accredited investors. Accredited investors are those who are both financially capable and aware of the risks involved in high-stakes investments, he explained. By targeting this investor base, Narayan suggested, the industry could advocate for lighter regulatory oversight while still ensuring some level of investor protection.

Drawing comparisons to global practices in hedge funds and private equity, he urged India to align with international standards by adopting an AI-only model for such investments.

He also addressed concerns regarding the cost of becoming an accredited investor, acknowledging that the high costs associated with the process might be a barrier. However, once a larger pool of accredited investors enters the market, these costs would decrease, making the process more accessible, he said.

Another critical issue discussed by Narayan was the challenge of valuations in AIFs. He likened the process of asset valuation to an art rather than a science, acknowledging that conflicts of interest could arise when fund managers themselves are responsible for valuations.

To mitigate this, Narayan proposed introducing greater transparency in the valuation process, including clear disclosure of the assumptions used and the range of possible valuations. He also suggested establishing accountability mechanisms for valuation agencies, similar to those used by credit rating agencies.

Narayan also touched on the idea of streamlining the regulatory framework by considering the registration of managers rather than individual funds. This proposal aims to reduce redundancy, improve efficiency, and allow fund managers more operational flexibility.

Drawing from similar models in global financial systems, he noted that such an approach could foster economies of scale, while maintaining the necessary regulatory checks.

On the topic of technology, Narayan spoke about the progress made by the industry with tools like the D-mat system and the potential for future improvements in data processing. SEBI was also exploring the use of large language models to improve efficiency in regulatory functions, he noted.

Lastly, Narayan acknowledged macro-level issues that could affect the AIF sector’s stability. Despite the industry's overall success, he noted that approximately Rs 1 lakh crore of investments have raised concerns due to potential circumventions of existing financial sector regulations.

He mentioned instances where fund structures had been used to bypass regulations set by entities like the Reserve Bank of India and the Foreign Exchange Management Act.

However, he applauded the industry for adopting a code of conduct to address these concerns and stressed the importance of maintaining a balance between regulation and industry growth.