India's private equity and venture capital fund sector is staring at an embarrassment with 60 out of 100 executives failing in an exam mandated by the stock market regulator.
The exam, conducted by the National Institute of Securities Management (NISM), is mandatory for one executive per firm to secure or keep their registration. Often, it is a principal-level investment manager who appears for the exam on behalf of the firm.
Multiple fund managers, speaking on the condition of anonymity, explained the high failure rate and what they are doing to get around it, even as an industry body has taken up the matter with the regulator.
“The problem is they have one exam for Cat-1, Cat-2 and Cat-3 funds, although rules governing each category are separate,” a fund manager said. Alternative fund managers register as Category-1 if they are running venture capital, impact or infrastructure funds. Cat-II funds are for private equity or private debt, while public markets funds fall under Cat-3.
“It (the exam) is too Cat-3 heavy. And the way they set the exam, it does not reflect the way the industry operates,” a second fund manager added.
The trouble began with the Securities and Exchange Board of India (Sebi) last year asking executives at alternative investment funds (AIFs)—which covers PE and VC firms—to pass an exam with multiple choice questions, since others offering similar services were already doing so. Initially, Sebi wanted every such executive to take the test, but this was relaxed to one executive per firm following requests from multiple fund managers. Funds have time till March 2025 to comply.
“Since the examination process began 4-5 months ago, around 36-40% of the executives who have taken the test have passed. It is not a big concern, as the initial pass percentages for other asset classes was low as well. As time goes by, the pass percentage is expected to improve,” a person familiar with Sebi's thinking said. When executives running Portfolio Management Services first started taking the test, the pass percentage was around 10-12%, which is now close to 40%, the person added.
Earlier, anyone could set up an AIF if a key team member had at least five years of investment experience, with one member holding a relevant educational qualification, like a finance degree. This was seen as a deterrent for new fund managers, and was changed to the current test system after industry representation, the person cited above said.
NISM, which conducts the exam, did not immediately respond to a request for comment on Wednesday.
Many funds with experienced executives operating in India for over two decades are hiring junior executives with certification to supplement their investment team and meet Sebi’s requirement.
“The erstwhile eligibility requirements acted as a barrier to new managers since a minimum experience criterion was specified. The new measures are an attempt by the regulator to level the playing field and encourage new talent and the growth of the industry," said Swapneil B. Akut, a partner at law firm S&R Associates who leads the funds practice said.
"If existing fund managers are finding it difficult to clear the examination, I would not say that it casts a doubt on their experience or knowledge of the fund industry - more likely that it may have been quite a while since they last prepared or appeared for an examination. A potential mid-way could be for the regulator to exempt existing fund managers that can demonstrate significant experience and a track record of compliance,” Akut said.
However, such exemptions are unlikely, the person cited above familiar with Sebi's thinking said. “There are many regulatory changes. Even an existing fund manager must keep abreast and hence, the exam is needed,” the person added. “The markets regulator is cognizant of the feedback the industry has provided,” the person added.
The issue of exempting existing fund managers was raised in 2023 itself during the public consultations. At the time, Sebi had acknowledged that the feedback from the AIF managers on the exam proposal was “overall negative”.
At the time, AIF managers had asked for exempting existing fund managers as “they have specialized investment management qualifications such as CFA, CA, MBA etc. Therefore, there may not be a need for the fund management team to have another qualification,” the feedback from the AIF industry said, according to the minutes of the Sebi board meeting. However, it was not accepted in the interests of ensuring that fund managers have the requisite awareness on new guidelines, besides testing their knowledge, the person cited above added.
Mutual fund managers, investment advisors, equity, commodity and derivatives traders, research analysts, insolvency professionals, and merchant bankers also need certifications from Sebi.
After PE and VC fund managers sought more time, Sebi extended the timeline till March 2025 for fund managers to comply with.
“Folks who have Cat-1 funds are being asked questions about Cat-III and vice versa,” said the second fund manager, an industry veteran.
The test is a multiple choice question paper with negative marking for wrong answers.
Practising investment professionals often fail the test on technicalities, on some rule change that they might have missed. “Sometimes, the question itself is wrong because Sebi would have subsequently changed the rule,” a third fund manager said.
Many are struggling because it has been over 10-15 years since they took any examination.
“I’ve told my colleagues to just get on with it. They need to cram for a bit and take the exam,” a fourth fund manager said.
To be clear, many executives did clear the exam after studying for a week.
This is also making several junior-level executives valuable for firms. “It has so happened that the juniormost folks are now asked to take these tests, so as to ensure the firm ticks the box,” a fifth fund manager said. “It is akin to one person per medical store having a D.Pharm certificate to meet the regulatory requirements,” he explained.
“None of these exams make sense. However, as we are being seen as a portfolio management service provider, we are being subjected to these tests,” the executive said, adding funds are looking for candidates with the certification, since the deadline for compliance is 31 March, 2025.
Indian Venture and Alternate Capital Association (IVCA), the industry body for the venture capital and private equity firms has taken up the issue with the regulator. “New sets of question papers are likely to be set in order to make it more relevant for those appearing under each category,” a sixth fund manager said. “Most likely, the deadline to comply with the requirement too will be pushed by a few months.”
