No regulatory vacuums, says SEBI

‘If you are raising money in India, you need to submit to our regulations.' That is the guiding principle behind SEBI's recent moves to regulate portfolio managers, venture funds and other investment entities, says the SEBI Chairman, Mr U.K. Sinha. Excerpts from an interview.

Your recent regulation was on alternative investment funds such as private equity, venture capital funds and so on. These are vehicles for informed investors. Why the regulation?

SEBI has two guiding principles. One is investor protection and the other is containing systemic risk. In 2008, large pools of money were used to play the stock market, without anybody even having an idea of the dimension of the problem. If we had the data on these funds, we may have been alerted to the crash. That is why we would like to regulate alternative investment funds. If you are setting up a PE, VC or hedge fund, you cannot collect less than Rs 1 crore. And anyone collecting above Rs 1 crore per investor has to register with us and be regulated.

On investor protection, we are looking at a hierarchy of regulations. For mutual funds, where one can invest Rs 500-1,000, regulations will be tight, as these are uninformed investors. Alternative investments will have light-touch regulations. We have set the threshold at Rs 1 crore. The idea is that the uninformed retail investor will be permitted to invest only in areas where regulation is tight.

So was there a regulatory vacuum in terms of large entities raising money and not being regulated?

Yes. Previously there was no requirement that all venture funds must register with SEBI. Now that has been changed. All venture capital funds which raise domestic money need to be registered with us. The concept is that if anyone is raising money in India they need to be registered with us. If they don't register, they are violating rules.

To give an example, in 2005, 2006 and 2007, many firms raised money for real-estate. They pooled small sums of money such as Rs 5 lakh and that went into real-estate funds. Now, even for activities like that, the minimum investment is Rs 1 crore. Now, some people may not be happy with that. But we feel that these vehicles are not suitable for small investors.

The original concept paper asked alternative funds to register under seven categories. You have now reduced that to three broader categories. Why?

We felt that administrating the seven categories will pose a problem. Besides, the firms felt that water-tight compartments will restrict their mandate.

Therefore, we tweaked this based on whether alternate funds get some concessions from the government. Venture funds invest mainly in unlisted securities. They get regulatory forbearance, for instance, a pass-through status on taxes because we feel they are a good means to promote entrepreneurship. The second category is private equity, which can invest in public securities. They too get certain facilities from the government. These two categories need to accept restrictions, they can't use leverage.

The third category is hedge funds, which don't get any facilities from the government and are allowed to leverage. Hedge funds globally do rely on leverage and to restrict this would be not be in keeping with trends across the world.

However having said this, we have to watch the extent to which they are allowed to borrow and the size of such funds in the Indian market. For this they need to be registered. For instance in 2006, 2007, many such firms raised $ 1-2 billion funds and nobody did much about them. But this applies only to funds raising money from Indian investors. Hedge funds and others who raise money from abroad will come under the FII regulations.

You spoke of filling the regulatory vacuum. What about collective investment schemes such as teak schemes, gold bonds and so on?

Yes I agree there are grey areas there. Now, collective investment schemes are to be regulated by SEBI. But we find that very few schemes are willing to submit themselves; they usually claim that they are not collective investment schemes. They are generally taking advantage of the Chit Fund Act or are NBFCs.

In one or two States, this activity has been going on in a big way. The money is often collected from remote areas. We have issued orders in some cases against such firms, but they have gone to Court over this. In the case of collective investment schemes, we need clarity on who the enforcement agency is.

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