The Securities and Exchange Board of India (Sebi), the national markets regulator, has proposed a review of the Qualified Institutional Buyer (QIB) status granted to alternative investment funds, venture capital funds and foreign venture capital investors.

Sebi was urged to investigate the issue after discovering that some alternative investment funds (AIFs) were taking advantage of the regulatory vacuum by merging members belonging to the same family or group. These AIFs continue to invest in IPOs under the QIB quota, effectively breaching the QIB-related norms under the Sebi (Issue of Capital and Disclosure Requirements) Regulations 2018.

The regulator found that as of March 31, 2023, some 318 AIF schemes had five or fewer investors, with 210 of these schemes having only one or two investors. Sebi said many of these investors belong to the same group, i.e., the same family, conglomerate, or holding/subsidiary.

AIFs are pooled investment vehicles that collect funds from investors and funnel them into different vehicles according to a defined investment policy. While the AIF Regulations state that no AIF scheme may have more than 1,000 investors, there is no requirement for a minimum number of investors in an AIF scheme.

Generally, QIBs are large, experienced and well-informed institutional investors with the expertise and financial capability to assess, invest in and manage capital market risks. They are expected to contribute expertly to IPO/FPO price discovery etc. It can also be observed that many of the entities designated as QIBs are professional, professional money managers investing on behalf of many stakeholders.

Sebi’s Alternative Investment Policy Advisory Committee (AIPAC) considered the abuse of the AIF nomenclature and thus concluded that any AIF funded 50% or more by a single investor or by investors belonging to the same group The AIF should not be entitled to the benefits specified for the QIB. Similar concerns were expressed in the designation of FVCI as a QIB.

“It is worth noting that FPIs that are individuals, bodies corporate and family offices are not designated as QIBs and therefore such entities do not have access to the flexibility available to QIBs. However, no similar exclusion is provided in the case of FVCIs. It is required Note that individuals are not eligible to be registered as FVCIs. To align the conditions of FVCIs with those of FPIs and to resolve issues associated with designating FVCIs as QIBs, it is necessary that only those FVCI institutions and family offices that are not corporations be designated as QIB,” Sebi said in a consultation paper it released.

The market watchdog has until 1 June to seek public and stakeholder comment on the consultation paper.