SEBI is looking into matters related to side letters or contribution agreements, that govern preferential terms for some LPs in a venture fund
LPs are said to have raised concerns about whether VC funds are being fair and equal in courting the interest of HNIs, family offices, corporate funds and institutional investors alike
If SEBI bars side letters, large funding rounds for startups might fall through the cracks, and it might make it challenging for Indian VC funds to raise large corpuses
India’s private equity (PE) and venture capital (VC) landscape is already bracing itself for a slew of changes — from skill-based certification for key personnel at AIFs to more transparency in how their funds are being liquidated. Many of these, of course, don’t affect Indian VC firms run by professional fund managers, but the latest demand by SEBI is likely to change that.“It’s not surprising that SEBI is asking now about LPs and the private placement memorandum (PPM). PPM should be standard for everyone, but we all know that’s not the case. In fact, even those LPs that may be complaining now knew about it,“ says a Bengaluru-based early stage fund manager. “Having a large CVC as a corporate LP means your portfolio gets direct exposure to the LP’s network, which then allows them to scale up and grow faster. It’s a win-win for the fund manager and the other LPs. But it’s a problem when large corporate giants become acquisitive and acquire companies in the fund’s portfolio in distress situations.”
According to an ET report, SEBI recently asked AIFs or Indian VC firms to reveal which of their investors or limited partners (LPs) have entered into deals with preferential terms or a bigger say in the deal making process. Of course, this has opened up concerns about whether VC funds are being fair and equal in courting the interest of HNIs, family offices, corporate funds and institutional investors alike.