Sebi not keen on brokers running venture funds

Mar 13, 2007
Ashish Rukhaiyar
MUMBAI

THE Securities and Exchange Board of India (Sebi) is concerned over the interest expressed by stock brokerages to set up venture capital arms. Fearing a possible conflict of interest if stock brokers are allowed to run VC funds, the regulator may come out with a new policy to instill certain checks and balances.

“Around 4-5 brokerages have applied to get their VC arms registered with Sebi. Once registered, they will be able to get tax benefits, too. However, Sebi is concerned that there may not be Chinese walls between the brokerage and the venture capital units,” said a source. The brokerage may use its proprietary books to take position on stocks, which the VC may be buying.

While large financial services groups like ICICI, Kotak and UTI have VC arms, there are certain reservations on allowing brokers to set up VCs. Sebi has been sitting on the applications for almost 4 to 5 months. Sources said an expert committee has been formed to look into the issue. Sebi did not respond to query from ET. The committee will look at framing broader guidelines rather than considering specific applications.

According to Akil Hirani, managing partner, Majmudar & Co, “There are a couple of issues that need to be looked into in this subject. Obviously, co-mingling of the brokerage entity and the venture capital arm is a serious issue and a better option for the market regulator will be to make necessary amendments to the broker regulations, which every broker has to comply with. Further, the regulation needs to be enforced rigorously so that the systems are in place for Chinese walls. One can cite the example of an IPO where the brokerage arm releases a report while investment banking arm is the underwriter. There is always an inherent bias, which needs to be addressed.”