Ananth Narayan G, whole-time member of Securities and Exchange Board of India (SEBI), said the regulator had come across multiple instances of entities using alternative investment funds to circumvent financial norms and urged the industry to form a quasi-self regulatory body.

Narayan said that the regulator doesn’t necessarily get the kind of data that we get for others like mutual funds and PMS. But it had come across multiple instances of entities using the AIF structure to circumvent other financial regulations based on market intelligence, focussed inspections and thematic inspections.

There are two sets of issues that bothered the regulator. First, AIF structures were being used to circumvent other regulations. “We have seen AIFs being used by certain financial institutions to avoid recognition of non-performing assets, to effectively evergreen some assets. AIFs are being used to have fresh funding come into a stressed borrower which is being used to repay the original lender, with a junior tranche being subscribed to in an AIF,” said Narayan.

AIFs are being used by entities to circumvent sectoral caps as well. “We have seen assets which ought not to be purchased directly being purchased through AIFs,” he said.

Narayan urged the industry to form a quasi-self regulatory body. “If we could have a code of conduct for AIFs, a very broad code of conduct, a general obligation that you will not use this vehicle to circumvent financial sector regulations. And then translate the general principles into specific requirements, with the industry itself setting those standards,” he said.

Narayan said that while the AIF industry globally is regulated with a light touch, there were issues that global regulators had pointed out recently. The latest IOSCO report, for example, speaks about opaque valuations, preferential treatment, continuation funds, limited transparency data.