Sebi official flags malpractices in AIF industry; calls for setting up self regulatory organisation

There are rampant malpractices happening in the alternative investment funds industry and those are not stray incidents but are widespread, a senior Sebi official said on Thursday and urged the industry to set up a self-regulatory organisation. 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. Out of the total, Rs 3.5 lakh crore has already been invested and the rest is commitment from investors.

"Your association has to draft a code of conduct for yourselves. But before that you need to evolve… into an SRO (Self Regulatory Organisation) because our market intelligence and assessments have found that there are many malpractices happening in your industry that are passed on like normal activities or hidden from disclosures. And these aren’t stray incidents but widespread," Sebi Whole Time Member Ananth Narayan G said at a summit organised by industry body CII here.

"What we get about your industry is only aggregate data which is why the rampant malpractices," he pointed out. According to him, Sebi is at a loss when it comes to data availability on AIFs. Listing out the issues in the industry, Narayan said Sebi has found many instances of AIFs being used for the evergreening of bad loans/assets instead of recognising it and using this route to get fresh funding. Another bad practice is that AIFs are being used to route investments into existing companies which are in violation of the sectoral exposure caps/investment caps under the extant norms.

"We are open to allow you to draft a code of conduct listing out what all you can and cannot do. The proposed draft should clearly say what you will not do, such and such acts circumventing the extant regulations," he said, adding that such a code should first set industry standards too. Currently, Sebi norms for AIFs don’t allow junior tranches, he said but the regulator is even ready to allow it, provided the industry comes out with a code of conduct as the main regulatory objective is to make doing business easier and less painful.