Many PE and VCs - or, alternative investment funds (AIFs), the regulatory term for such pooled vehicles - have been told to spell out the details of these differential rights given to certain investors.
In a communique to many AIFs about a week ago, the Sebi asked fund managements to submit documents like 'side letters' and 'contribution agreements' that provide special rights to investors.
The regulator may compare a side letter, which is an agreement between a fund house and some investors, providing rights and obligations which are outside the standard investment document, with the fund's private placement memorandum (PPM) - the disclosure document used for fund raising through private offering.
The capital market regulator has asked several funds to reveal the names of investors who have been offered beneficial terms by the funds and have representation on the funds' investment committees.
More than 1200 AIFs have raised close to₹5 lakh crore till now from local and offshore investors comprising individuals and institutions.
Sebi got a greater sense of these practices -though some of which are quite prevalent in the PE-VC industry worldwide -after AIFs submitted details to depositories for dematerialising the units (or shares) issued to investors in the funds.
However, multiple funds have been offering differential rights on the grounds these would 'not be prejudicial to the interest of other investors.'