The Securities and Exchange Board of India (Sebi) is deliberating on increasing the minimum ticket size for alternative investment funds (AIFs) to up to Rs 5 crore from the existing Rs 1 crore, according to people in the know.
The present threshold was set in 2012, and the rise in disposable incomes may merit a revision, said industry officials. The number of high-net-worth individuals tapping the alternatives space has also risen significantly.
“The investor who allocates Rs 20 crore versus one who invests Rs 1 crore thinks very differently and is equipped to assess his investment decisions much better. The industry needs to evolve to a place where the regulatory requirements from the perspective of fund structure and commercial areas continue to be light touch even as norms on governance and reporting are adhered to,” said Ashish Fafadia, partner, Blume Ventures.
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Divaspati Singh, partner at law firm Khaitan & Co, feels that this may be the right time to do a rethink on the AIF regime or revisit the threshold for AIF investment.
“Over the last few years, the regulations have become over-prescriptive, which is stifling the growth of the AIF regime. Perhaps, the industry would be willing to adopt a higher investment threshold of Rs 2-4 crore, provided the regulator eases up on the regulations and adopts a lighter-touch regime,” he said.
Experts, however, warn that asset managers may find it challenging to raise Rs 2-4 crore per investor. This could impact small- and mid-sized funds raising Rs 300-600 crore, and make it difficult for first-time managers to garner assets.
A plausible way out of this would to keep the existing Rs 1 crore threshold intact and introduce another Rs 2-5 crore bucket with a light-touch regulation, said industry players.
The regulator introduced the concept of large value funds for accredited investors in 2021. The aim was to provide a light-touch regime for investors with a larger risk appetite and the ability to evaluate risks appropriately. Such investors had to commit at least Rs 70 crore to the fund. The benefits for such funds included the relaxation of concentration norms, certain offer document filing requirements and the flexibility on the tenure requirements for close-ended funds.
These funds, however, are yet to see any meaningful traction among domestic investors due to the high ticket size, issues with accreditation and the need to diversify investments across funds. “Most large- and mid-sized institutions contribute only Rs 25 crore or even lower and this doesn’t allow funds to benefit from these measures,” Fafadia said.
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According to Singh, most global regulators focus on regulating the investment managers, akin to what even the IFSCA has done. “The focus is on the pedigree of the investors to whom such funds could be marketed and offered. You can only raise from accredited investors or qualified purchasers, which is based on a self-certification. The minimum ticket size is typically decided by individual funds driven by commercial consideration,” he said.
The AIF regime has seen several changes in the past year. The regulator recently defined the first close for a fund and issued norms on ring-fencing of assets and liabilities among various AIF schemes. Earlier this year, the regulator directed investment managers of AIFs to appoint compliance officers. Until then, AIF regulations merely enumerated the roles and responsibilities for managers, sponsors and trustees, without thrusting compliance obligations on a specific individual.
In 2020, Sebi’s diktat that members of the AIF’s investment committees would be required to be equally responsible as the fund manager for investment decisions had rattled the industry.
“In the AIF segment, fund managers will have their task cut out in enhancing investor experience and attracting domestic flows with suitable product structuring in order to help the industry grow. However, since it is an evolving segment, building a strong foundation based on transparency, disclosure and investor communication will be crucial,” said a recent note by Crisil Research.
AIF commitments have grown 42% year-on-year to Rs 6.94 trillion as of June 30, 2022, showed the latest Sebi data. The amount invested has risen 43% to Rs 3.1 trillion and the number of AIFs is inching towards the 1,000 mark.