Co-investor conundrum: Investors urge Sebi to rethink exit rules

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Subscribe to enjoy similar stories. India-based venture capital and private equity firms have petitioned Securities Exchange Board of India (Sebi) to reconsider rules that mandate their co-investors exit alongside the fund, three people familiar with the development said. Co-investors are those who typically want to take additional exposure to a particular investment made by an alternative investment fund (AIF)—vehicles used by private equity and venture capital firms to invest in India .

Sebi brought in new rules under the PMS (portfolio management services) regime for co-investments in 2022. A key reason to regulate co-investors was to ensure that all AIF investors had identical terms—meaning a co-investor cannot have more favourable terms than other investors of an AIF. This included synchronising co-investor exits alongside funds.

While this has been a thorny issue for two years, it has especially come up over the last year as VC/ PE exits have soared on the back of multiple initial public offerings (IPOs). Many fund managers have booked exits via block deals after the listing of their portfolio firms, but their co-investors have wanted to stay on for a longer period of time, the people cited above said on the condition of anonymity. “Instead of facilitating co-investments in the true sense, the existing regulatory framework almost seems suspicious of such arrangements (by prescribing simultaneous exits on identical terms)," said Swapneil B.

Akut, partner, S&R Associates. Akut leads the firm’s funds practice. “Most funds are deliberately designed to function as limited-life vehicles, with initial public offerings providing the exits they need at the end of their life cycles.