By Gopal Srinivasan

As someone deeply entrenched in the private equity and venture capital industry for the past two decades, I find the Securities and Exchange Board of India (SEBI)’s quarterly publication on Alternative Investment Funds (AIFs) as of March 2024, released on June 20, 2024, particularly noteworthy. 

Fund managers, who previously harboured concerns over the submission of extensive data, must now commend SEBI for its painstaking efforts to transform this data into valuable insights.

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The continuous publication and analysis of such data by government agencies and stakeholders are crucial for enhancing industry functioning. Having witnessed nearly 25 regulatory changes since the introduction of AIF guidelines in 2012, I heartily commend SEBI for not only adhering to global standards but also setting precedents with its best practices. No other regulator globally has made similar detailed publications.

I am confident that the insights provided—categorized by source (domestic, Foreign Portfolio Investment, Foreign Venture Capital Investor), instrument, and sector—will influence several policy changes:

• The 52 per cent dependence on overseas flows has exposed the industry to the “funding winter” experienced over the past two years. The government agencies and regulators may now be keen to channel more domestic pools to build resilience, similar to mutual funds, with appropriate regulatory and tax changes, including parity on long-term capital gains (LTCG).

• The RBI may review and align the scope of investments by banks in AIFs, suitably expanding the definition of equity shares. The majority of much-needed flow (more than 92 per cent) for promoting entrepreneurship in India has occurred through such instruments in the unlisted space. The Reserve Bank of India (RBI) /Insurance Regulatory and Development Authority of India (IRDAI) might also consider suitable incentives, as the flow to financial services is currently lower at 14.5 per cent, despite its crucial importance for the country’s progress.
• Steps may be taken to operationalize earlier budgetary announcements on blended capital to encourage the flow of capital towards climate change and the environment. Currently, this area has attracted only 2.5 per cent compared to 16.8 per cent in the real estate space.
• Suitable incentives could be introduced to improve corporatization and formalization in Micro, Small and Medium Enterprises (MSMEs), thereby enhancing the flow of private equity/ venture capital funds from a mere 6 per cent within the overall group of MSMEs and startups.
• Despite personal remittances surging from 0.45 per cent of the Gross Domestic Product (GDP) in 1975 to 3.5 per cent in 2023, further simplification in documentation and compliance could improve NRI (Non-Resident Indian) participation which currently stands at less than 2 per cent.

This latest publication may facilitate more changes by SEBI/RBI, by addressing unfounded concerns, as is often quoted “knowledge is the enemy of fear“.

(Alternative Investment Funds (AIFs) commonly called Private Equity/Venture Capital Funds, regulated by SEBI are pooled investment vehicles which collect funds from sophisticated investors, whether Indian or foreign, for investing in startups early-stage ventures and SMEs or other sectors as per investment policy).

(About the author: Gopal Srinivasan is the Founder, Chairman and Managing Director of TVS Capital Funds.)

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