Sebi, RBI looking into alternate investment funds, transactions: Report

The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are probing about a dozen cases of alternate investment funds (AIFs), which are allegedly being used to circumvent regulations, including "evergreening" of stressed loans, a Reuters report said.

The capital market regulator has reportedly detected at least a dozen cases involving Rs 150 billion to Rs 200 billion ($1.8 billion to $2.4 billion) where AIFs have been misused to circumvent rules of other financial regulators including the Reserve Bank of India (RBI), the report said. 

The Alternative Investment Funds (AIF) space has grown more than ten times in the past five years to become a Rs 8.5 lakh crore-industry.  Of the total, Rs 3.5 lakh crore has already been invested and the rest is commitment from investors.

The cases under lens include instances of non-bank lenders selling stressed loans to AIFs partially set up by the lender itself, with the fresh funds being used to repay the original debt to prevent the loans from turning bad, the report said.

The probe can lead to disclosures and greater scrutiny for an investment category including private credit funds, which have drawn a lot of money from local and global high net-worth investors because of the flexibility they offer and liberal regulations.

While the amount is small in comparison to the Rs 8.4 lakh crore managed by AIFs, the number of cases of misuse detected are "material", a source quoted in the report said.

The RBI too has initiated enquiries into these cases. If proven, such instances of misuse of AIFs could eventually result in penalties or restrictions on business in extreme cases.

In other cases under investigation, AIFs have been used to evade caps on foreign investment in certain sectors, two sources said. Some cases where insolvency regulations are being evaded using AIFs are also under investigation, the sources told Reuters.

Last week, Sebi's whole-time member Ananth Narayan said that the Sebi has discovered several instances of circumventing regulations through alternative investment funds (AIFs) and is discussing this with other regulators.

He said while there have been no violations of the letter of the law, several entities have been found to be breaching the spirit of the law by investing in assets through AIFs that are otherwise not permitted.

“There are potential cases of sectoral cap breaches or entities investing in assets through AIFs where they are not allowed. For example, Entity A is prohibited from directly investing in Entity B but is investing through an AIF. This may not be a violation of the letter of the law, but it is a circuitous route,” said Narayan.

Earlier, Sebi had asked AIFs to report both assets and liabilities via India's share depositories starting at the end of this month. In a notification in June, Sebi asked the industry to self-regulate and put in place a code of conduct for its members.

A proposal made in June to stop priority payouts to investors in credit funds, however, has been put on hold after pushback from the industry, the Reuters report said.

(With agency inputs)

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