New Delhi, July 31 -- The Securities and Exchange Board of India (SEBI) has proposed changes to its online dispute resolution (ODR) mechanism that could boost foreign investors' confidence regarding investing in alternative investment funds (AIFs).
On July 23, SEBI proposed changes to the ODR mechanism to reduce timelines, enhance enforceability as well as the ease of investing in the securities market.
Among the proposals is one that could improve foreign investor sentiment towards AIFs. It proposes to give investors the choice to resolve disputes with AIFs according to the pre-existing agreement between them.
Currently, any investor complaint must first be raised with an intermediary. If the grievance remains unresolved, it is escalated to SEBI's Complaint Redressal System (SCORES). If the issue still persists, the investor can initiate the ODR process, and the designated ODR institution will appoint a conciliator. However, if the conciliation outcome is unsatisfactory, the dispute can be presented before an arbitrator appointed by the ODR institution.
SEBI has now proposed that a limited partner (LP) and the fund may opt out of the ODR process and settle disputes as per their contract. Legal experts said this would likely instill greater confidence in foreign investors who prefer to route disputes through international arbitration agencies.
"For AIF LPs, particularly foreign investors, the ability to rely on neutral arbitration clauses under globally-recognised forums such as the Singapore International Arbitration Centre (SIAC) or the London Court of International Arbitration (LCIA) is essential to ensuring confidence in cross-border dispute resolution," said Anita Jain, founding partner at Aequitas Law Partners. "The draft circular considers this expectation and proposes to provide clarity within the ODR framework with respect to the choice of mode for resolving the dispute."
Fund-specific proposals
SEBI's consultation paper has suggested two more AIF-specific changes.
The first is to exempt investors in all AIFs, whether incorporated as trusts, limited liability partnerships (LLPs) or companies, from any liability that may be cast upon the fund manager during dispute resolution.
Currently, AIF regulations protect investors' money held only in trust-based AIFs from such a liability. Investors in AIFs set up as LLPs or companies do not enjoy this protection. While several AIFs in India are incorporated as trusts, foreign investors are generally more comfortable with the LLP structure.
The second proposal is that investors in AIFs and venture capital funds be allowed to directly escalate a grievance to the ODR mechanism if they are not satisfied with the resolution provided by the fund.
Other market entities need to go through a pre-conciliation mechanism mediated by designated bodies. For example, a stock exchange may be the corresponding designated body for listed companies and the Association of Investment Bankers of India (AIBI) may be the designated body for merchant bankers. However, SEBI's consultation paper has not proposed any such designated bodies for AIFs and their investors.
Published by HT Digital Content Services with permission from VC Circle.