Sebi sent 377 warnings to AIFs in FY24 against 20 in the previous year

Warning letters are softer regulatory actions compared to quasi-judicial orders of Sebi where it imposes a fine and/or disgorgement of wrongful gains. These orders are issued by Sebi’s adjudication officers and can be challenged in court.

Warning letters, on the other hand, are administrative warnings issued by Sebi officials when they find deficiencies in compliance. These are considered milder regulatory actions because Sebi doesn’t impose a penalty. Sebi just asks the entity to be careful on a specified issue, failing which it warns of action, say legal experts.

Most of these warning letters are after detailed annual inspections of certain AIFs conducted by Sebi, say experts.

An email sent to Sebi remained unanswered.

“Considering the increasing participation by retail investors, the regulatory regime has been made more stringent over time. A lot of AIFs from the earlier light-touch regime are getting these notices and more of these funds are now engaging in mock inspections and compliance audits to remain prepared,” said Nandini Pathak, head of investment funds practice, Bombay Law Chambers.

The warnings largely pertain to non-compliance with rules by AIFs, especially about disclosures made in the private placement document (PPM). These documents are published by the AIFs while seeking investors.

According to legal experts, in many cases, Sebi has found the AIF did not make complete disclosures about the investment manager and the team making investment decisions.

There have also been cases where AIFs have received warnings for lapses in compliance about fund managers and for not addressing investor grievances swiftly, say market participants.

“PPM audit report is one important document used to identify non-compliances,” Vivaik Sharma, partner, Cyril Amarchand Mangaldas, said. “At the time of application of new schemes, Sebi may require confirmation of the 'fit and proper' criteria in the specific context of such administrative warnings or show cause notices.”

Earlier, since AIF rules were meant to be light-touch regulations, there was no uniform format for filing the document or disclosures to be made. This was in stark contrast to mutual funds whose scheme documents are standardised by Sebi.

In and around 2020, the regulator started encountering cases where AIF fund houses had made inadequate disclosures in the PPMs. Since then, Sebi has started tightening the PPM norms by issuing standardisation rules.

“Since Sebi warnings to AIFs were increasing primarily due to non-compliance with regulations, particularly regarding PPM disclosures, to address these compliance issues, Sebi recently enforced the standardization of PPMs through a circular aimed at enhancing transparency and accountability in the AIF sector,” said Rohini Nair, Partner, ANB Legal.

“Sebi has also been proactively updating the AIF regulations to enhance transparency and strengthen investor protection. The pace of regulatory changes has led to some operational challenges for AIFs.”

The development comes at a time when AIFs are rapidly increasing their footprint in the Indian market, emerging as favoured investment products amongst wealthy investors.

In three years — between June 2021 and June 2024 — the total investments made by AIFs more than doubled from Rs 2 lakh crore to Rs 4.32 lakh crore, Sebi data shows.