For light touch regulation of aifs

For light touch regulation of aifs

The recent move by capital markets regulator Sebi to tighten oversight norms for Alternative Investment Funds (AIF) seems excessive, unwarranted and more likely to affect fund governance. The members of investment committees (IC) of AIFs are now mandated to ‘be equally responsible as the manager for investment decisions’. The implications are onerous. What constitutes an investment decision has been left undefined, and so can include making an investment, its ongoing asset management or disinvestment, as pointed out by Tejesh Chitlangi on this page on Tuesday.

A lighter-touch regulation is surely called for. AIFs are privately pooled investment vehicles, and their investment managers follow a predetermined investment strategy, akin to private equity, venture capital or for investment in public debt and equity markets. Further, ICs are typically set up by AIFs’ fund managers to review and approve investment proposals. The practice is for the managers to appoint independent experts to ICs, to shore up governance standards of their funds. Typically, members of ICs merely vet and okay investment proposals, which are then sourced, evaluated and executed by the fund managers. For, despite independent assessment by ICs on a good faith basis, the overall control of an AIF would clearly rest with concerned managers.

The Sebi move to make IC members jointly and severally responsible for AIFs’ investment decisions seems an act of regulatory overreach. After all, no institutional investor or external professional on an IC would like to be taken to task in regulatory proceedings or, worse, taken to court by a dissatisfied investor. The new rules would only deter independent experts from accepting IC appointments.