Examining the SEBI (Alternative Investment Funds) Regulations 2012: A Capital Market Perspective of Hedge Fund Regulation in India

Abstract

As European, American and Asian investment banks continue to deal with the fallout of the worldwide credit and liquidity crunch, it is crucial to appreciate that a significant causal origin of the 2008 crisis was the management of the alternative financial sector and specifically, in the regulation of both domestic and offshore hedge funds. Although the industry has often been beneficial for the financial system, critics believe that these benefits have accrued at a cost. Significant ‘systemic’ risks that have plagued the domestic financial systems as a direct consequence of hedge funds operating both the credit and the market channel (largely on the basis of unlimited leverage), are domino leverage failure, asset price downward spirals and money laundering, among others. Naturally, the need to manage and regulate the industry, and more importantly, how to do so, has gained importance in industry dialogue. Through this paper, the authors seek to design an effective capital markets regulatory design for hedge funds.