Outsiders can now have a say in PE, VC fund deals | Economic Times

Mumbai: India’s capital market regulator has allowed outside experts, probably even foreigners, to have a say in investment decisions of local private equity, venture capital and angel funds.The move is in line with the demand from large offshore investors who want to play a more active role in funds which handle their money.According to a government notification, the Securities & Exchange Board of India (Sebi) has paved the way for external members — residents as well as NRIs and foreign nationals — in the investment committees of domestic funds (known as alternative investment funds or AIFs in regulatory parlance).While the notification (signed by the Sebi chairman) allows external members, it does not elaborate on whether such members can be non-residents. But, the regulator on Monday disclosed that allowing non-residents in AIF investment committees (IC) was considered by the Sebi board. In fact, in September Sebi approached the government and RBI on the subject.While AIFs can attract investment from overseas investors, any acquisition of shares by an AIF in a local company is considered as a domestic investment — and not as a foreign direct investment (FDI) — as the manager is controlled by residents. It is a flexibility that adds to the charm of AIFs. In this context, Sebi’s present step may pose a tricky question: will AIFs retain their ‘domestic’ character, once it has foreigners in the investment committee? And, if it doesn’t, investments by such AIFs may not be considered as FDI —thereby limiting investment opportunities in companies where FDI investments have either touched or nearing permissible limits.The move is being closely tracked by professionals who advise overseas investors and fund formations. “Under the current exchange control framework, for the treatment of downstream investment by an AIF as domestic, the AIF needs to be managed by its named manager and such manager must be controlled by resident Indian citizens. Sebi now seems comfortable with the IC formally taking investment decisions. While pragmatic and in line with global practices, this puts IC compositions under scrutiny from an exchange control perspective,” said Richie Sancheti, head-investment funds, Algo Legal.According to Tejesh Chitlangi, Senior Partner at IC Universal Legal Lawyer, “Under exchange control laws, ‘control’ can also be exercised by virtue of management or policy decision making rights and the same should vest with the investment Manager and sponsor of an AIF to the general exclusion of others. Similar to exchange control laws, the Sebi outsourcing norms prohibit an AIF manager from delegating its investment decision making and other key functions.” “This, however, may conflict with the functioning of an investment committee which may have a large investor nominee having affirmative or veto rights on certain important decisions. Sebi’s new norms seem to be permitting investor nominee presence on the committee and participating in key decision making, albeit with certain checks and balances,” Chitlangi said. Sebi and RBI spokespersons did not respond to ET’s queries on whether AIFs having foreigners as external members in the IC will be considered as domestic funds. While the IC is appointed by the board of the AIF’s asset management company, the notification says the committee members shall be “equally responsible as the manager for investment decisions”. The move marks a shift in Sebi’s earlier stand. Till now, the regulator insisted that the AMC board would have the last word on investments in AIFs having external members.“While the regulations allow external members in the investment committee, they seem to be silent on the qualifications and residential status of the members. So it might be possible to appoint foreign citizens or residents as committee members. Also, the new guidelines require that if the investment manager does not have a professional qualification, then the management team should have one additional personnel with such a qualification,” said Rajesh Gandhi, Partner, Deloitte.External members, whose names are not disclosed in fund documents at the time of onboarding investors, shall be appointed to the IC only with the consent of at least 75% of the investors by the value of their investment in the AIF.