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.
Recent RBI Rule Change Hinders Investments, Creating Backlog of Deals for AIFs
Industry Seeks Clarification on Regulatory Change
Introduction:
According to industry experts, a recent regulatory change by the Reserve Bank of India (RBI) has caused venture capital and private equity funds to halt new and follow-up investments, leading to a backlog of deals. Fund managers and founders have approached the banking regulator seeking clarification on the matter.
Issue with Capital Call Process:
To fundraise for private equity and venture capital funds, investors or limited partners (LPs) commit a certain amount to the fund, and the fund manager requests capital on a deal-by-deal basis. However, a recent modification of Form INVI by RBI has disrupted this process. According to a fund manager with $500 million-plus of assets under management (AUM), the regulatory change makes it difficult for investment funds, such as alternative investment funds (AIFs), real estate investment trusts (REITs), and infrastructure investment trusts (InvITs), to issue partly paid units.
Lack of Clarity from RBI:
The change was not announced to the industry publicly and was discovered only when some AIFs tried filing Form INVI. According to industry experts, despite representations made to RBI, there has been no response, causing the fundraising process to halt.
Multiple Issues Faced by AIFs:
The inability to file Form INVI has created several challenges for AIFs. AIFs are unable to draw down capital from foreign investors, new units cannot be issued by AIFs that have already closed their fundraising, and there is no provision to reopen a closed-end fund according to AIF regulations. Moreover, the inability to issue partly paid units exposes the funds to tax sections that were never conceived of being applied to AIFs.
Clarity Needed from RBI:
Industry experts stress the need for clarity from RBI to facilitate partly paid up investments by AIFs since the Securities and Exchange Board of India (SEBI) has permitted such investments. The lack of response and clarification from RBI has led advisors to caution fund managers against using Form INVI since it may lead to inaccurate disclosures and regulatory action in the future.
Impact on Management Fees:
According to a leading fund practice lawyer, funds may earn fewer management fees due to the undervaluation that results from making accounting adjustments to fill Form INVI and report funding commitments inaccurately.
Conclusion:
The RBI’s regulatory change has caused significant disruptions to the fundraising process for AIFs, leading to a backlog of deals and uncertainty in the industry. The lack of clarity and response from RBI has created challenges for AIFs in drawing down capital and issuing new units. Industry participants are calling for clarity from RBI to address the issues and facilitate partly paid up investments by AIFs.
More cos, LLPs set up via revamped portal
Over 100,000 companies and limited liability partnerships (LLPs) have been set up using the high security forms introduced this year in the revamped MCA21 statutory filing portal from April to August, showing an improvement of over 11%, the ministry of corporate affairs said in an update, suggesting that the technological upgrade has stabilised after its teething troubles. Data showed that over 92,000 companies and LLPs were formed in the same time a year ago. Various other corporate filings made in the revamped portal have also gone up from the year ago period. Over 306,000 LLP forms have been filed in the revamped portal from 1 April to 10 September, compared to 233,000 in the same time a year ago, the ministry said. Forms filed by companies in the new high security forms in the 1 April to 10 September period this year has touched 2.44 million, against 2.29 million in the same time a year ago.
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