Private Funds: SEBI holds AIF investors in breach of insider trading norms for AIF’s investments decisions

Private Funds: SEBI holds AIF investors in breach of insider trading norms for AIF’s investments decisions

In a move that could significantly impact the investment landscape into pooling vehicles, India’s securities regulator (Securities and Exchange Board of India (SEBI) has held that investors in alternative investment funds (AIFs) will be liable for breach of insider trading norms if: (a) such investors possess unpublished price sensitive information (UPSI) in relation to any entity; and (b) the AIF trades in the securities of such entity. SEBI’s guidance is likely to hamstring the operations of an AIF/ pooled investment vehicle in many ways – since AIFs are operated by an independent investment manager (IM) and the investors exercise no control/ visibility on the trades executed by the AIF. 

 

First, should each unitholder of an AIF now negotiate for complete visibility on trades being executed by the AIF? Second, is it commercially viable for AIFs to be precluded from investing/ divesting merely because one of its investors possesses UPSI, so that its investors can comply with insider trading laws? Third, what is the duty of the AIF if an investor informs it of being in possession of UPSI? Fourth, will SEBI’s guidance apply to all kinds of pooled investment vehicles, including listed REITs, InvITs? 

Key Takeaways:
  • Most proposals are well thought through – unintended impact in a few cases
  • Mandatory clarification of media rumours – M&A dealmaking compromised and potential creation of a false market?
  • Objective materiality thresholds introduced – could inadvertently lead to over-disclosure and a failure to disclose material information
  • Open-ended and ambiguous proposals cast a wide net – likely to increase directors’/ KMPs’ liabilities

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