India’s alternative investment ecosystem is rapidly maturing, driven by increasing investor sophistication and a supportive regulatory framework. In a major step toward strengthening governance and participation in private markets, the Securities and Exchange Board of India (SEBI) introduced a formalized Co-Investment Vehicle (CIV) framework under the Alternative Investment Funds (AIF) Regulations, 2012.
This effort is especially revolutionary to Category II AIFs that commonly consist of private equity, debt and hybrid funds. The CIV scheme grants the investors the ability to co-invest with the AIFs in unlisted companies but provides high standards of transparency, accountability and efficiency in running the business.
Understanding the CIV Framework
Co-investments were traditionally made possible by Portfolio Management Services (PMS) or other parallel arrangements. Such paths, though, tended to cause regulatory confusion, duplication of compliance requirements, and non-standardization.
A formalized Co-Investment Vehicle (CIV) framework addresses this issue by enabling AIFs to initiate specific co-investment programs on their own regulatory framework. The Co-Investment Vehicles are formed as a scheme under a Category I or a Category II AIF and it is designed with the sole purpose of co-investing in companies that the underlying AIF is or will invest in.
Such a structural transparency does not only ease the operations of funds but also enhances investor protection by offering defined governance, disclosure and risk-segregation measures.
Core Highlights of the CIV Framework
Dedicated Investment-specific Schemes
All CIVs are separate plans of the AIF which focus on a particular unlisted
investor company. Each co-investment opportunity will have to have its own
CIV, with transparency and ring-fencing on the deal level.
Ring-Fenced Assets and Accounts
CIVs are required to have their own
bank account, demat account and
Permanent Account Number (PAN). The assets of the main AIF or any
other scheme are not linked in any way with their assets and this helps
investors to avoid the risks of cross-liability.
Accredited Investor Exclusive Access
The investors who have already
been accredited under the main AIF
scheme are the only ones who can join the corresponding CIV scheme.
This limitation captures a qualified and informed base of investors.
Investment Limit and Oversight The SEBI model limits co-investment to three times the amount of main contribution of the investor on the same company through the AIF. This will ensure there is a balance and there will not be over-exposure to one investment.
Prohibition of Leverage CIVs are not allowed to borrow or leverage funds and the risks involved in the investments are kept at a minimum and clear.
Streamlined Regulation Style SEBI permits some of the relaxations of CIVs, whether in the form of exemption of diversification standards and sponsor obligations, even while keeping the standards of governance. This facilitates the use of CIVs and maintains integrity.
How CIV Scheme Promotes Transparency?
1. Improved Reporting and Record Keeping
A fund manager is required to submit a shelf Placement Memorandum
(PPM) to SEBI in
relation to every CIV, including the objectives,
governance structure, risk factors and operational structure. This also offers
total visibility on all deals to the investors.
2. Ring-Fenced Governance
Isolating the financials and operations of each CIV, SEBI provides the
safety of the co-investment funds of investors against the risks of other
schemes. Such a degree of segregation increases accountability and trust.
3. Audit and Reporting Requirement
CIVs have the same rigorous reporting and audit requirements as AIF
schemes, so consistency and data integrity throughout the structure is
maintained.
4. Regulatory Arbitrage Avoidance
The formalized Co-Investment Vehicle (CIV) framework makes multiple
entities or PMS based structures unnecessary thus eliminating the
possibility of gaps in regulations or overlapping management.
A combination of these features predisposes the CIV structure to being amongst the most open co-investment models in emerging markets.
How the CIV Scheme Adds Flexibility?
Deal-Level Participation
Not only can investors now choose to co-invest in deals that fit their risky
profile; they no longer have to be restricted to the wider range of AIF
portfolio. This ease of use is more appealing to advanced investors in the
Category II AIFs.
Easing of the Operations of Fund Managers
Fund managers are able to handle all the activity under the AIF umbrella
instead of establishing individual entities to handle each co-investment.
This simplifies and lowers administrative cost.
Increased Capital Mobilization
The formalized Co-Investment Vehicle (CIV) framework enables fund
managers to draw specific capital co-investment, which can consist of the
current investors, to enable access to other resources of promising
companies, but the main size of the AIF is not changed.
Enhanced Exit Strategies
Since CIVs are designed to focus on individual deals, investors have a
potential to get returns according to the individual project schedules instead
of getting such returns when the entire fund is exiting.
Global Alignment
The CIV structure will make the AIF ecosystem of India more aligned to the
global standards of international private equity and make the country more
attractive to international institutional investors.
The Road Ahead
Although a formalized Co-Investment Vehicle (CIV) framework adds the complexity of operations, including keeping a separate account and filing multiple compliance reports, it has long-term effects of transparency, protection to the investor, and efficiency. In the long run, these structures are likely to further involve the participation of the Indian market privately and increase investor confidence as the managers become accustomed to them.
Conclusion
The SEBI Co-Investment Vehicle (CIV) Scheme is a new step in the right direction of the Category II AIFs in India. SEBI has developed a balanced model of transparency, flexibility, and protecting the investors by including co-investments into the AIF ecosystem.
To fund managers, it makes it easier to structure deals at the deal level and increases participation among investors. To investors, it gives them visibility, control, and increased control over capital investment.
At Punji Baazar, experts see the formalized Co-Investment Vehicle (CIV) framework as the milestone of the Indian alternative investment market- the milestone that enhances market integrity, promotes innovativeness, and pre-arranges the Indian AIFs to be globally relevant over the long term.