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In order to curb misuse of AIF regulations, SEBI has issued a consultation paper in which it has proposed to enhance due diligence of AIFs, key management personnel of AIFs and their managers while ensuring ease of doing business.
This has come after SEBI found that a few AIFs circumvented RBI and FEMA norms to facilitate transactions. SEBI said, “While the AIF industry has registered robust growth over the years, we have come across more than 40 cases involving over Rs 30,000 crores recently, where AIFs appear to have been structured to facilitate circumvention of certain financial sector regulations, thereby eroding trust in the system. To ensure sustained capital formation, it is important to take steps to restore the trust and prevent such circumvention, while at the same time ensuring minimal impact on legitimate AIF investments.”
According to SEBI some of the areas where AIFs misused SEBI guidelines were ever-greening of stressed loans and avoiding Foreign Exchange Management Act (FEMA) and Qualified Institutional Buyer (QIB) norms.
SEBI said, “To address the specific regulatory concerns around misuse of AIF structure as articulated above, it is proposed to introduce a general obligation in the existing AIF regulations that would require AIFs, managers and their key management personnel (‘KMPs’) to ensure that their operations and investments do not facilitate circumvention of regulations administered by any financial sector regulator. To achieve the objective of this general obligation through effective implementation, this general obligation conveying the regulatory intent needs to be translated into a clear set of implementation standards to set definitive and specific responsibilities and obligations on all stakeholders.”
The market regulator sought your feedback on these proposals by Feb 11, 2024. You can submit your feedback by clicking here.