SEBI Report on Dedicated Infrastructure Funds

The Securities and Exchange Board of India has published the Report and Recommendations of the Committee on Launch of Dedicated Infrastructure Funds by Mutual Funds

I have been a firm supporter of allowing domestic hedge funds, private equity funds, real estate funds and other alternative investment vehicles. I would also welcome retail access to these products with appropriate risk disclosures. Thus in principle, I have no problem with the proposed Dedicated Infrastructure Funds. My difficulty is that the report does not justify why an exception should be made only for infrastructure funds while keeping the lid shut on all other alternative investment vehicles.

From the perspective of a securities regulator, the justification for a retail product has to be in terms of the risk-reward profile that the product provides to the investor. The report is silent on this and talks only about the need for infrastructure for the economy. The most depressing statement in the report is the statement in the report that:

The nature of infrastructure projects ... will include a gestation period where the project could be loss making. Thus, the NAV performance of the [Dedicated Infrastructure Funds] may suffer during the initial periods. This could have a negative impact on the listed price and generate adverse reactions from investors who exit early. Hence providing a listing window of 24 months will help the [Dedicated Infrastructure Fund] to deploy a substantial portion of the funds as well as some investments might move beyond the initial construction / build-out period.

To my mind, this amounts to cheating the investors by deliberately concealing information from them. In a rational market, investors should be trusted to understand that there will be losses in the gestation period. If they do not, then they are not appropriate investors for the fund.

I strongly believe that permitting retail access to a financial products should be based primarily on whether the product fulfills an investor need and only secondarily (if at all) not on whether it fulfills the need of the issuer (infrastructure developer in this case) or the intermediary (the mutual fund in this case).

I also think that it is far better to liberalize regulations across the board to provide investors access to a wide range of financial products than to make an exception for one special interest group. The regulatory goal has to be to increase innovation, competition and market completeness. That calls for a wide range of alternate investment vehicles.

Posted at 5:43 pm IST on Tue, 7 Aug 2007         permanent link

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