Private Funds: Corpus v Investible Funds – Need to reconsider SEBI’s penalty order?

A SEBI Adjudicating Officer recently ruled in the matter of Indgrowth Capital Fund – I that the term ‘investible funds’ under the AIF Regulations must be strictly construed, leaving no scope for commercial nuances. The ‘investible funds’ of an AIF 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.

Key Takeaways:
  • SEBI 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.

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