Sebi set to regulate private equity

New Delhi: Private equity funds, hitherto unregulated, are set to come under Sebi regulations. The market regulator has already started work on regulating private equity players and guidelines would be issued shortly, economic affairs secretary R Gopalan said.

He said the regulations would be on the lines of venture capital funds, which are also regulated by the Securities & Exchange Board of India.

The venture capital regulation requires mandatory registration with Sebi and enjoys the status of a qualified institutional buyer. The proposed regulations from Sebi come at a time when internationally, there are concerns over private pools of capital such as private equity. In fact, in the past, RBI had also talked about regulating private equity. It has already spoken of tightening the norms for bank-sponsored funds.

Regulatory concerns increased following the global financial crisis as private equity and hedge funds were seen to be lacking transparency.

Even before the 2008 financial crisis, multilateral bodies such as International Monetary Fund and the OECD had expressed concern, especially regarding leverage.

In India, over the years, private equity has gained in significance as they invest in smaller companies and exit when they gain in size, often at a hefty premium to their investment value.

Venture intelligence data shows that private equity investment in the country rose 57% to $3.3 billion during January-March 2011. The inflows come on the back of nearly $9 billion invested by PE funds in Indian markets in 2010.

In contrast, foreign institutional investors (FIIs) bought $1.3 billion worth of Indian equities in March, after selling $2.2 billion in January and February, translating into net outflows of $900 million during the first quarter of the current financial year.

The guidelines would also help clarify some of the concerns that private equity investors have while investing in India.

Inset:

The government is going to soon start work on converting physical assets owned by Indian households into financial assets.

While India enjoys high savings rate, estimated at 35%, a McKinsey study had found that less than half that amount goes into financial assets such as fixed deposits and equities.

In fact, in 2008 (the latest period for which data was collated), real estate was the most preferred investment option with 35% of the savings finding its way into this asset class followed by currency (7%) and gold (5%). Among financial assets, deposits were the most preferred option (18%), followed by insurance (12%).

Economic affairs secretary R Gopalan said at a CII conference on Saturday that the government was taking up the task of encouraging individuals to invest in financial assets.