Mumbai: Capital market regulator SEBI Monday tightened disclosure norms for hedge funds and other Alternative Investment Funds using complex trading strategies, especially for those leveraging investments for higher returns or borrowings.
Such funds have been asked to have a comprehensive risk management framework and a strong compliance function as per their size, complexity and risk profile. They have also been asked to maintain appropriate records of their trades and provide full disclosure of their trade management practises and any conflict of interest to SEBI.
The directions have been made by SEBI through its 'Operational, Prudential and Reporting Norms for Alternative Investment Funds (AIFs)', which were introduced by the regulator last year as a separate product class.
The AIFs have been divided into three categories. The Category I AIFs include those investing in start-ups, social ventures, SMEs, infrastructure or other areas that can get government incentives for being 'socially or economically desirable'.
The Category II AIFs include private equity funds and debt funds which do not get any incentives or concessions from the government and do not undertake leverage or borrowing other than to meet day-today operational requirements.
The other AIFs have been placed under Category III and they employ "diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives". These include hedge funds or funds which trade with a view to make short-term returns.
SEBI today said Category III AIFs, which undertake leverage would need to submit a report to SEBI on a monthly basis about their activities.
The others who do not undertake any leverage can, however, submit such reports on a quarterly basis.
In today's circular SEBI also said that AIFs employing leverage need to have provide full disclosure and transparency about conflicts of interest and how they manage them from time to time to investors.
"Such conflicts shall be disclosed to the investors in the placement memorandum and by separate correspondences as and when such conflicts may arise. Such information shall also be disclosed to SEBI as and when required by SEBI," it said.
Regarding redemption norms, SEBI said that the manager of open ended funds in the category 111 need to maintain an appropriate liquidity management policy and also need to ensure adequate and sufficient degree of liquidity to the scheme to meet redemption obligations and other liabilities.
Besides, the manager of such AIFs need to clearly disclose the possibility of suspension of redemptions in exceptional circumstances to investors in the placement memorandum.
For the purpose of arriving at leverage undertaken by an AIF, leverage shall be calculated as the ratio of the exposure to the net asset value of the AIF.
The leverage of AIFs would not exceed two times of the net asset value of the fund.
SEBI said AIFs are required to have adequate systems in place to monitor their exposures.
Besides, they would need to report to the custodian on a daily basis the amount of leverage at the end of the day (based on closing prices) and whether there has been any breach of limit during the day.
Custodians would report to SEBI the extent of breach and reasons for the same.