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Asia Pacific Intelligence

India's regulator permits 73 alternative investment funds to launch against backdrop of free falling rupee

Thursday, September 05, 2013

Asia Pacific Intelligence's sister publication, Alternative Market Briefing, saw Komfie Manalo of Opalesque Asia reporting that India's market regulator SEBI (Securities and Exchange Board of India) has announced the approval of 73 entities to launch Alternative Investment Funds (AIFs), a newly created class of pooled-in investment vehicles for real estate, private equity and hedge funds so far this year.

According to a report by The Hindu, those approved to operate AIFs included KKR India, Arth Capital, Landmark Opportunity Fund, HBS Raksha Movies, Tata Alternative Investment Fund, Monsoon Alternative Investment Trust, DSP Blackrock Alternative Investment Fund and Edelweiss Alternative Investment Trust.

SEBI issued guidelines for AIFs in May and outlined the three categories in which these special classes of market intermediaries could operate. Under SEBI rules, all AIFs are regulated, including those operating as private equity funds, real estate funds and hedge funds.

The three categories are; Category-I AIFs, which include Social Venture Funds, Infrastructure Funds, Venture Capital Funds and SME Funds; Category-II AIFs are those that have no limitations in terms of investment but are not allowed to raise debt except for meeting day-to-day requirements; and Category-III AIFs include hedge funds and those trading to generate short-term returns.

In April this year, SEBI allowed only 47 entities to set up AIFs. The 47 AIFs had been registered with SEBI since July. SEBI had allowed only 12 AIFs to set up shop in the country till October of last year.

Separately, India's market regulator tightened the leverage buying norms of hedge funds and other complex leveraged funds classified under Category II-AIFs in July this year, said The Hindu Business Line. Under the changes, Category II-AIFs will now have to follow leverage limit caps.

The expansion of the alternative industry in India comes at a time when according to The Economist India's economy is facing its tightest spot since 1991. Hit by the merest hint that the US Fed will ease on QE, the rupee has gone into freefall. According to The Economist, not so long ago India was celebrated as an economic miracle with Prime Minister Manmohan Singh in 2008 citing growth of 8-9% as ‘India's new cruising speed'. However, now the picture is different. The rupee has tumbled by 13% in three months, 20% this year. The stockmarket is down by a quarter in dollar terms and with borrowing rates at levels last seen after Lehman Brothers' demise, bank shares have sunk.

Investment Week reported that on just one day the Indian currency plunged 3.7% in a single day, its largest one-day percentage fall in 18 years, to as low as 68.7 rupees per dollar.

According to Reuters, late August trading sessions saw investors sell nearly $1bn Indian as investors panicked. Tension in the Middle East raises concerns of a rising oil price and India is vulnerable as it imports 80% of its oil.

Apart from broader global issues, India is also battling with a budget and current account deficit, which last year reached $87.8bn, according to Investment Week. According to reports, the local government is striving to contain the deficit within the $70bn mark in the year to March 2014, and this is putting further pressure on the currency and the local market. Meanwhile, local bonds also continue to suffer. Since the end of May investors have pulled a total of $8.7bn from local debt on Fed tapering fears.

The Economist believes that to prevent a slide into crisis, the government needs first to stop making things worse, citing the ‘urge to tinker' as hindering reform. "The authorities must accept that 2013 is not 1991. Then the state nearly bankrupted itself trying to defend a pegged exchange rate. Now the rupee floats, and the state has no foreign debt to speak of. A weaker currency will break some firms with foreign loans, but poses no direct threat to the government's solvency."

Observers urge Raghuram Rajan, the central bank's incoming head, to control inflation and the government to encourage growth with radical deregulation and breaking up of state monopolies, reform of labour laws and an overhaul of the country's fundamental infrastructure.

The Economist concludes: "The calamity of 1991 led to liberalising reforms that ended decades of stagnation and allowed a spurt of fast growth. This latest brush with disaster could produce a positive legacy, too, but only if it persuades voters and the next government of the importance of a new round of reforms that deal with the economy's flaws and unleash its mighty potential."

This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.
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