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Sebi quizzes VCs and PEs on dispute resolution process

Oct 11, 2022

Several funds have also been asked by the Securities & Exchange Board of India (Sebi) to confirm whether they have spelt out the resolution framework in the private placement memorandum.

As private equity and venture capital managers chase smart money, battle investor complaints, and deal with shocks of dismal IPO listing and irregularities in some of the marquee startups where they have invested, the capital market has asked fund houses to lay down their mechanisms to resolve disputes.

Several funds have also been asked by the Securities & Exchange Board of India (Sebi) to confirm whether they have spelt out the resolution framework in the private placement memorandum (PPM) - the key document, containing information on the investment strategy and risk management tools among other things, that investors wealthy glean through before putting money in an alternative investment fund (AIF). AIF is the regulatory term for PE, VC, and angel funds.

Funds have to submit the information by October 13, a person aware of the letter from the regulator told ET.

“The nature of complaints fund managers and administrators receive from investors relate to less than expected returns, non-receipt of statements, non-disclosure of certain information, timing of exits, poor listing of startup IPOs, and the rationale of some of the investments… Probably, Sebi has seen a rise in investor complaints,” said an official with a trustee company.

In its communique, Sebi has asked funds to share the number of complaints received by the fund in the last two financial years, the number of complaints that have been directed to the resolution mechanism, type of resolution mechanism the fund has, and whether the resolution procedure was part of PPM.

“As required by Regulation 25 of the AIF Regulations, the SEBI prescribed template for PPM anyways requires the AIF to disclose the dispute resolution mechanism it has adopted along with SCORES details. The issue seems more relevant for AIFs operating before the SEBI PPM template was prescribed in February 2020, in case such AIFs have missed stating these details in their PPMs,” said Suneet Barve, Founder, SSB Legal.

According to the Sebi’s regulation for AIFs, an AIF by itself or through the manager or sponsor, shall lay down the procedure for resolution of disputes between the investors, AIF, manager or sponsor through arbitration or any such mechanism as mutually decided between the investors and the fund.

Typically, the manager of an AIF is a local entity - a company or a limited liability partnership. This manager (which must have at least one employee with certain qualifications) enters into an investment management agreement with the trustee (on behalf of the fund) and is authorized to manage the fund’s investments.

The sponsor chips in money like other investors, and has to contribute 2.5% of the fund corpus or Rs.5 crore, whichever is lower. The manager may also double up as sponsor.

“Not only has the AIF industry grown in the last five years, the arrival of angel funds has lowered the minimum investment (in a fund) to Rs 25 lakh as against Rs 1crore applicable for regular private equity and VC funds. This may have increased the number of complaints. Before AIF regulations, when the threshold investment in a VC was Rs 5 lakh, the number of complaints were also high,” said a person associated with the fund industry.

Over the past few months Sebi has been collecting a lot of information on AIFs. In early September, the regulator had asked AIFs to disclose their valuation methodologies – a query that’s significant as most funds are close-ended vehicles investing in unlisted stocks.

Before that it had asked funds to state whether the sponsor and manager were owned and controlled by persons who are foreign residents.

[The Economic Times]

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