No ‘in-house’ trustees for PE, VCs, moots Sebi

Mumbai: The Indian capital market regulator wants private equity and venture capital funds, which have emerged as significant institutional investors in recent years, to have independent trustees having no connection with the sponsor and manager of the funds.About 40% of alternative investment funds (AIFs) — the regulatory term for PE, VC and other pooled vehicles with easier regulations like angel funds — have trustees that are not regulated by the Securities & Exchange Board of India (Sebi). Trustees take care of the interests of the beneficiaries or investors of the fund.Thus, according to the Sebi proposal, all in-house and unregulated trustees will have to be replaced with Sebi-regulated debenture trustees.The regulator, sources told ET, recently placed the proposal before the Alternative Investment Policy Advisory Committee which was constituted by Sebi in 2015 under the chairmanship of Infosys founder NR Narayana Murthy. The standing committee is expected to discuss the matter this week. The move comes across as part of a broader plan by Sebi to bring in regulated intermediaries dealing with AIFs. The proposal on ‘regulated trustees’ follows a recent direction to AIFs to hire investment banks for raising money.Industry circles and legal practitioners tracking funds are divided on the subject. “Technically, as long as an entity and its stakeholders do not have any adverse regulatory track record, nothing stops even a plain vanilla entity from functioning as an AIF Trustee. Permitting only Sebi-regulated debenture trustees to act as an AIF trustee will check any potential conflict situations which may arise out of having unregulated in-house trustees and also extend more comfort to investors whose interest a trustee is duty-bound to protect,” said Tejesh Chitlangi, senior partner, IC Universal Legal.However, Richi Sancheti, partner, Algo Legal, feels that such a move, along with the mandate to engage merchant bankers to filter offer documents, is regulatory excess. “AIFs can be set up in formats (like a company or an LLP) that do not require a trusteeship interface. In any event, AIF regulations, along with the recently introduced code of conduct that has been made applicable to trustees of AIFs as well, are quite comprehensive,” said Sancheti. 86273499The proposed move comes at a stage when AIFs are growing at a fast pace — with more than 90 new AIFs coming up in FY21 taking the total number of AIFs to over 700. During FY21, AIFs have invested about Rs 47,000 crore, taking the cumulative investments to over Rs 2 lakh crore. Under the circumstances, Sebi could be trying to ring-fence AIF activities with rules and entities which can be pulled up by the regulator for any irregularity. ET’s email to a Sebi spokesperson went unanswered until press time.Sanjay Sinha, president of the Trustees Association of India and former CEO of Axis Trustee, who has been advocating independent trustees for mutual funds, said Sebi’s move was in the right direction given the surge in fundraising and investments by AIFs. But some in the VC industry said though an external trustee may not be expensive, they were unsure whether an entity that acts as a trustee for several fund houses can devote adequate time and attention to the job.Among other things, an AIF trustee’s functions include executing investment management agreements, vetting the private placement memorandum, vetting contribution agreements among investment managers, investors, and the trustee, as well as appointing auditors and obtaining compliance certificates on fund operations from investment managers.

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