Mumbai/New Delhi: Following a recent change in the Reserve Bank of India (RBI)’s regulations, venture capital and private equity funds have halted new and follow-up investments, resulting in a backlog of deals, said fund managers and founders. The industry has approached the banking regulator, seeking clarification, they added.
As part of the private equity and venture capital fundraising process, investors or limited partners (LPs) commit an amount to a fund, which is not immediately transferred. The fund manager requests capital on a deal-by-deal basis, which is referred to as capital call or drawdown; then, fund managers issue partly paid units to these LPs. The Securities and Exchange Board of India (Sebi) has granted permission for alternative investment funds, or AIFs, to issue partly paid units when requested by investors and AIFs.
However, two months ago, RBI modified Form INVI, which must be submitted by the investment funds (AIFs, real estate investment trusts (REITS) and infrastructure investment trusts (INVITS)) to RBI as soon as they receive a capital commitment from foreign investors. This move was to the prevent filing of such partly paid units. “The change was not announced to the industry as a whole, and was discovered only when some AIFs tried filing Form INVI,” a fund manager with $500 million-plus of assets under management (AUM), said, seeking anonymity. According to him, industry groups made representations to RBI on the issue, but are yet to get a response.
“Now, the entire process seems to be stuck,” said a founder waiting for his fundraising deal to close, also requesting anonymity.
In fact, AIFs are facing issues on multiple fronts as they cannot draw down capital from foreign investors, as the new rule does not allow them to file Form INVI, said a second fund manager, seeking anonymity. Besides, AIFs that have declared final close can’t issue new units and there is no provision in AIF regulations to reopen a closed-end fund. It has limited the scope to raise follow-on investments, he added.
Since AIF units are considered securities, the inability to issue partly paid units may expose the funds to tax sections that were never conceived to be applied to AIFs, he said.
“A change in format does necessitate clarity from the RBI to facilitate partly paid up investment by AIFs. This is particularly necessary since Sebi has specifically permitted such investments,” said Moin Ladha, partner, Khaitan &Co.
An email query to RBI remained unanswered till press time.
Advisors are also cautioning fund managers against using Form INVI. A leading fund practice lawyer, who spoke on condition of anonymity, said any AIF that raises capital from foreign investors should try and avoid filling the form. “The form is not suitable for AIFs, however, since it is mandatory, most AIFs are filling it by making accounting adjustments for the fields in INVI form. However, AIFs should avoid such practices since it may lead to inaccurate disclosures and may open them up for regulatory action in future.”
For instance, if an AIF received a funding commitment of $500 million of which the investor has paid $100 million in first tranche, instead of showing the total commitment of $500 million, the funds are showing $100 million. “Management fees earned by fund houses may be adversely impacted, too, due to the undervaluation,” the lawyer said.
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Updated: 13 Sep 2023, 12:13 AM IST