Sebi bats for relaxed regulations for AIFs

Mumbai: The markets regulator has written to the Reserve Bank of India and the finance ministry to ease regulations for alternative investment funds (AIFs), in line with the suggestions of a committee headed by Infosys Ltd co-founder N.R. Narayana Murthy, two persons familiar with the development said.

The Securities and Exchange Board of India (Sebi) wants a relaxation of the stringent norms of safe harbour for offshore fund managers, parity of taxation on AIFs with equity investments and exempting the funds from paying withholding tax, one of the two persons said. Both spoke on condition of anonymity.

In January, the panel had suggested a slew of reforms to boost capital raising by AIFs. Although the report was welcomed by market participants, there has not been much movement.

The lack of action is mainly owing to the fact that most of the suggestions catered to changes in taxation policies and foreign direct investment rules—areas that are not in Sebi’s domain.

“We have passed on the major recommendations to (the finance) ministry for these reform measures. A meeting is scheduled at month-end,” said the first person cited above.

AIFs typically collect money from high-net-worth individuals to invest in unlisted companies and start-ups. Such funds had raised Rs.22,691 crore by the end of 31 March compared to Rs.9,504 crore a year earlier. At the end of June, as many as 235 AIFs were registered with Sebi.

An email sent to a Sebi spokesperson on Thursday did not elicit a response.

One of the key issues that Sebi has taken up with the ministry relates to relaxations of the safer harbour rules for offshore fund managers. The 2015-16 budget introduced safe harbour rules under which offshore funds will not be subject to business income taxation in India even if the investment manager operates in India, provided certain conditions are met.

Requirements such as a cap on the portion of profits that can accrue to the investment manager, a minimum of 25 investors, and a 20% limit on investments in a single entity have acted as roadblocks.

Apart from these, Sebi wants the ministry to accept recommendations on treating AIFs at par with equities. These include withdrawing a withholding tax and imposing a securities transaction tax, treating investment gains of AIFs as capital gains and allowing losses to be set off against other income.

Another suggestion was that an AIF investor be taxed only when receiving dividend or interest income during the holding period or when realizing capital gains at the time of exit.

“Sebi is also talking with RBI on the issue of allowing foreign investment through the automatic route in non-banking financial companies to include AIFs as well. Currently, it is allowed only for venture capital funds,” the second person said.

While most of the changes pertain to tax reform, experts say that Sebi could at least move on suggestions that it has powers to implement.

“Certain practical suggestions pertaining to sub-categorization of category III AIFs, clarifications on investible limits, etc., may be implemented by Sebi,” said Tejesh Chitlangi, Partner, IC Legal, a law firm. Category III AIFs are typically hedge funds.

“The other big-ticket suggestion of the panel—to repeal all investment management regulations of the likes of AIF regulations, PMS (portfolio management services) regulations, advisers regulations and replacing those with one AIF manager regulations—may be too early for Sebi to consider,” he added.