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sebi: Now, Sebi quizzes old VC funds over terms extensions

Old venture capital funds (VCFs), floated during the boom days before the 2008 meltdown and in the next few years after the crash amid a sea of easy money, have drawn the attention of the Indian capital markets regulator for stretching their lifespans well over a decade now.

On Tuesday, the Securities & Exchange Board of India (Sebi) asked these funds to share the number of extensions that have been taken for the various schemes, the tenure of the schemes as stated in the private placement memorandum, and the ‘end date’ which is the deadline for all exiting investments.

The lifespan of a VCF is typically 10 years.

There are about 185 such old VCF schemes which are registered under the erstwhile Sebi VCF Regulations of 1996. These entities have to share the information with Sebi’s supervision, enforcement and compliance division for AIFs and foreign portfolio investors (FPIs).
Pooled vehicles like VCFs, private equity funds, infra and debt funds which were launched after 2011 are governed under SEBI (Alternative Investment Funds) Regulations which came into force in 2012. There are over 1,000 AIFs. About a fortnight ago the regulator had sought similar information from all AIFs.

The rules were easier for old VCFs.

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Industry circles feel that funds which have breached the end date or taken repeated extensions — probably to fish for better deals and avoid distress sale — may be pulled up by Sebi. Some are hoping that Sebi would permit extension with a higher threshold of investor approval to avert a fire sale of securities and write-offs.

“Due to the Urban Infra case where extension of tenure beyond prescribed limit (including additional extension of two years) was not allowed, several funds, including AIFs, are stuck. They are forced to consider liquidating assets as piecemeal distribution is practically not possible,” said Venkatesh Prabhu, director, MITCON Credentia Trusteeship Services Ltd, a trustee for many AIFs.

The Sebi order on Urban Infra, an AIF, imposed sanctions against the manager and trustees for failing to sell off underlying securities before the end of the term.

In its December 13 email, Sebi has also asked funds to state their date of ‘first close’ (which is typically within a year of registration), date of ‘final close’ (about two years after the first close), and the date from which tenure of a scheme is calculated. While AIFs may extend life by two years with investors’ consent, there are no binding deadlines for old VCFs (under the 1996 regulations). As a result, many have delayed closing to attract more investments and subsequently stretched their tenures while waiting for profitable exits — a practice they believed was their fiduciary obligation to investors.

“But with Sebi sending strong signals that funds have to stick to tenure deadlines, it has become a serious issue for old as well as new funds,” said a fund manager.

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