ALTERNATIVE INVESTMENTS REGULATIONS Picture Abhi Baaki hai Dost

Considering the strong growth of Private Equity and Venture Capital fund activity in India over last few years (Grant Thornton India report suggests the total investment by these funds to be in excess of USD 50 Billion over last six months) and rising participation by High Net worth Indian investors (HNI s) in these investment asset classes Securities and Exchange Board of India (SEBI) have recently suggested Alternative Investments Regulations, 2011. These are aimed to supersede the existing Domestic Venture Capital Fund (DVCF) Regulations, 1996 which were till now governing the various investment policies and monitoring the PE/VC activity in the country. While this is a definitive acknowledgement by SEBI to bring itself at par with evolving trends in this domain and is a progressive step to encourage greater transparency for investors but however, a close analysis of the draft regulations (currently open for public views till August 30, 2011) does indicate that a lot more is still desired. On Target 1. Better Transparency: While the existing regulations just generalized any VC Fund and also did not necessitated all funds to be registered under it - the new proposed AIF regulations make it essential for any nature of Fund or Fund pooling activity for the purpose of common investing to now get registered with SEBI. Further, the proposed regulations does acknowledge the existence of different kind of funds (PE/VC/SME Fund/Social Sector Fund/Strategic Fund and more) and an openness from SEBI to consider that each of these may not necessarily work under a common set of investment guidelines and hence may require customization. The draft also incorporates different guidelines for some of the different funds it has so far identified. Both these are steps to create strong protection buffer for investors as well as educate him on what could he expect from different funds which vouch for his investments. 2. Syncing with some of best global fund management practices: The new proposed regulations seem to have drawn inspiration from some ongoing global practices, experiences and proposals with respect to management of alternative investments. These include G-30 Report, proposed Directive on Alternative Investment Fund Manager by European Parliament & Committee, besides few others. This signals growing impact of PE/VC Funds in Indian economy and hence a proactive regulatory approach, basis the global learnings in this domain. 3. Intention to support Start-ups: The proposed regulations acknowledge that Venture Capital Funds should be investing to promote start-ups or ventures promoting new technology and have attempted to accordingly suggest its investment guidelines as well as differentiate it from other funds such as PE Funds or even SME Funds.

and the Misses! 1. Restrictions on Investment decisions: The new proposed AIF Regulations, by attempting to strictly compartmentalize Funds into distinct investment categories and henceforth determining their operational guidelines could adversely impact their ability to spread risks which they so far managed through having a diversified investment portfolio. Indeed, with evolution of the industry and presence of several funds clamoring for limited Investors monies so far, the market and competitive forces itself forced funds to have their own distinct investment focus; in an attempt to differentiate themselves from other similar funds and hence attempting to attract investors. Furthermore, a diversified portfolio also ultimately buffered risks for the investors. The new AIF regulations could put a dampener to all this forcing funds and investors to now operate within strictly defined investment categories, possibly making them prone to higher domain-specific risks, delaying investment decisions as well as exits. 2. Still not filling the investment gap for start-ups: The new proposed AIF regulations again seek to set the minimum investment limit for any Fund to INR 1 Crore. Unfortunately, this fails to answer a growing need for regulated capital support for early stage ventures who need much lesser investment support to atleast help them cross the Death-Valley of initial formation and market build-up ; before they are even ready to seek investments upwards of INR 1 Crore. And until & unless there is a strong ecosystem support for early stage ventures at this Bottom of Entrepreneurial Pyramid the larger funds will find it even more difficult to source attractive deals down the line. 3. Overseeing emerging funding platforms: While the proposed regulations attempt to catch up with global trends in alternative investment space, it could have been even better if it would have considered emerging funding platforms such as crowd-funding which operate at a different mechanism; have now been even acknowledged by global regulators such as SEC, and perhaps is a potent tool to actually assist early stage ventures if done with right intention and team. 4. Limiting the power of new corporate structures: While on one hand the regulatory bodies are encouraging adoption of new corporate structures such as LLP (Limited Liability Partnership); the same has been restricted while being considered as part of new proposed AIF Regulations. These propose that even if an alternative investment fund is structured as an LLP, the members should be limited to 50 which actually restricts its purpose and original scope wherein an LLP does not have any upper limit on its members. 5. Silent on Taxation and fiscal benefits: While the proposed regulations have attempted to limit risk and protect investors interests it doesn t comment on considering the growing need of PE/VC Industry for certain fiscal/taxation benefits which would then have encouraged a higher level of investments and further boost to entrepreneurship.

Concludingly while the intent and timing for new AIF regulations is sincerely appreciated, we only hope that these also cover some other pressing challenges the Alternative Investment industry as well as targeted investments/entrepreneurs are facing and this thus leads to a robust start-up culture in the country.

Satish Kataria Managing Director Springboard Ventures Private Limited +919967972553