India’s market regulator, the Securities and Exchange Board of India (SEBI), has sought disclosures from private equity (PE) and venture capital (VC) funds, known as alternative investment funds (AIFs), regarding investors who have been granted preferential terms, raising questions about unequal treatment among limited partners (LPs), The Economic Times reported on Monday.
About a week ago, SEBI asked fund managers to submit documents like ‘side letters’ and ‘contribution agreements’ that provide special rights to investors.
The regulator may compare a side letter, which is an agreement between a fund house and some investors, providing rights and obligations which are outside the standard investment document, with the fund’s private placement memorandum (PPM) — the disclosure document used for fund raising through private offering, the report said.
“Side letters inherently provide differentiated rights — whether economic or governance-driven — for investors, representing the opposite end of the spectrum of SEBI’s push for homogeneity,” Richie Sancheti, founder of law firm Richie Sancheti Associates, told ET. “How SEBI navigates these differing objectives could shape the future of fundraising for AIFs as a platform.”
More than 1,200 AIFs have raised close to Rs 5 lakh crore till now from local and offshore investors comprising individuals and institutions.
Sebi got a greater sense of these practices — though some of which are quite prevalent in the PE-VC industry worldwide — after AIFs submitted details to depositories for dematerialising the units (or shares) issued to investors in the funds.
The regulator, it appears, is uncomfortable with situations where better rights given to some investors undermine the rights of others. However, multiple funds have been offering differential rights on the grounds these would ‘not be prejudicial to the interest of other investors”, the report said.
