Sebi Resolves AIF Regulation Circumvention Issue

Mumbai, Mar 11 (PTI) Sebi's whole-time member Ananth Narayan G on Tuesday said the issue of alternative investment funds (AIFs) has been "resolved" after a year-long dialogue between the capital markets regulator and the industry.

Addressing an event organised by CII here, Narayan said Sebi was perturbed by "egregious cases" of circumventing important regulations including foreign exchange management and non-performing assets recognition.

"We have, to our satisfaction, resolved this issue of AIFs being used to circumvent regulations," Narayan said.

"Some of us are jugaadus. We saw egregious cases of AIFs being structured to circumvent NPA recognition, FEMA, Sarfaesi and other Sebi regulations as well," he added.

In the last few quarters, there has been intense focus on the role of AIFs and policy actions, including by regulators like the Reserve Bank to protect their core mandates.

Narayan said the Sebi did not get to know of the violations from the industry but from other stakeholders, adding that this created a trust deficit.

This is where it started interacting with the industry lobby grouping IVCA till it found the solution, the WTM said.

Sebi and IVCA worked together to co-create and put in place a framework with the concurrence of industry that takes care of all the loopholes.

He added that the solutions which have been found help avoid both type-1 and type-2 errors. Type-1 errors are the ones which are a "nightmare" for regulators including aspects like market manipulation, fraud etc, while type-2 errors are the ones which happen as a regulator attempts to prevent the type-1 errors, he explained.

Narayan also said that India cannot be a back office to the world, and will have to proactively take steps to refine the future for everyone.

"We can't be the back office of the world forever. It's a great job, don't get me wrong, but at some stages, we also have to start becoming frontline, much the way Korea or Taiwan has," he said.

The commercial banker turned capital markets regulator said India is capable of this task, but added that I will require us to recognize our potential and put money into Research and Development.