Informist, Tuesday, Feb 27, 2024
By Rajesh Gajra
MUMBAI – The Securities and Exchange Board of India will ensure there are enough checks and balances on the use of funds borrowed by infrastructure investee companies against pledging of select equity investments by alternative investment funds, the regulator's whole-time member Ananth Narayan G told Informist on the sidelines of an IVC Association event in Mumbai today.
Narayan was referring to a proposal in a Feb 2 consultation paper on allowing alternative investment funds to pledge or create any other encumbrance on the equity of an investee company "only for the purpose of borrowing by the said investee company, if the investee company is in the business of development, operation or management of projects in any of the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure issued by the Department of Economic Affairs, Ministry of Finance, Government of India, from time to time".
Narayan said the regulator was conscious of the risks from the proposal and had, therefore, limited the pledging flexibility to alternative investment funds only for their investments in infrastructure companies. SEBI had earlier rejected a proposal by a working group it had set up on ease of doing business to allow all alternative investment funds to pledge equity of investee companies, irrespective of the sector.
According to the SEBI member, the main risk is of "a possibility of leverage building up in the ecosystem". Given the risks, Narayan said the proposal in SEBI's consultation paper also required that existing alternative investment funds seek explicit investor consent to the possibility of leveraging by way of pledging or encumbrance. New funds may simply disclose the fact in the private placement memorandum.
Narayan, however, emphasised that SEBI "will have checks and balances to ensure that the funds raised (by investee companies) from pledging (against an alternative investment fund's equity investment) are not diverted outside the infrastructure area". In the Feb 2 consultation paper too, SEBI had laid down conditions for the encumbrance flexibility being proposed.
The consultation paper had specified that alternative investment funds would not be allowed to create encumbrance on equity of investee companies with an understanding or arrangement to in turn use the borrowings by investee companies for equity infusion into another company. "For this purpose, suitable standards to ensure that the encumbrance on equity of investee companies by AIFs is only utilised for facilitation of debt raising at the infrastructure sector investee company, shall be formulated by the pilot Standard Setting Forum for AIFs in consultation with SEBI," the market regulator had said in the consultation paper.
It had also specified that the duration of the encumbrance would not be greater than the residual tenure of the scheme of the fund. It also said that encumbrance on equity of foreign investee companies would not be allowed. End
Edited by Avishek Dutta
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