Corpus Versus Investible Funds – Need To Reconsider SEBI’s Penalty Order?: Resolut Partners' Analysis
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Resolut Partners Update
Securities and Exchange Board of India recently ruled that the term ‘investible funds’ under the AIF Regulations must be strictly construed, leaving no scope for commercial nuances. The ‘investible funds’ of an alternative investment fund are calculated by netting the estimated expenditure from the corpus of the fund.
While calculating ‘investible funds’, Indgrowth Capital had reduced the amount of its estimated expenditure by expected income streams in the form of dividends and returns from short-term investments. SEBI held that this was in violation of the AIF Regulations.
In this analysis, we examine the theoretical framework underpinning the two competing views at play. We note that AIFs are a sophisticated asset class with a fairly significant entry barrier and therefore it may not be appropriate for the regulator to adopt a paternalistic approach to protecting AIF investors.
Securities and Exchange Board of India has strictly construed the term ‘investible funds’ leaving no scope for commercial nuances.
SEBI rules that estimated expenditure cannot be offset against estimated income streams when calculating investible funds.
SEBI appears to be driven by the view that investors should not be over-concentrated in a single asset.
AIFs are a sophisticated asset class, and it may not be appropriate to adopt such a paternalistic stand on investor protection.
In the dynamic world of securities regulation, it is generally accepted that it is not possible to legislate for every possible eventuality. Legislation (or more correctly, secondary legislation) in this sphere should therefore be given a purposive interpretation, allowing commercial nuances to be factored in.
One may ultimately disagree with the particulars that were subtracted from the estimated expenditure in the Indgrowth case. For instance, one may conclude that it may not have been appropriate for estimated expenditure to be reduced by estimated dividend income from portfolio companies.
The point, however, is that such an analysis is vastly different from the strict construction approach that was adopted by the SEBI Adjudicating Officer to preliminarily rule out the possibility for any set-off against estimated expenditure.
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