India’s burgeoning private equity and venture capital (PE/VC) fund sector is facing an unexpected hurdle: a mandatory exam set by the Securities and Exchange Board of India (SEBI) has resulted in a staggering 60% failure rate among executives. The exam, conducted by the National Institute of Securities Management (NISM), requires at least one executive per firm to pass in order to maintain their registration. This has caused a ripple effect through the industry, with fund managers expressing frustration over the exam’s design and content.
The primary concern lies in the exam’s structure. Fund managers argue that the single exam, covering Category-1, 2, and 3 funds, fails to adequately reflect the distinct regulations governing each category. Category-1 encompasses venture capital, impact, and infrastructure funds, while Category-2 focuses on private equity and private debt, and Category-3 covers public markets funds. The current exam, they claim, is heavily weighted towards Category-3, neglecting the nuances of other categories and creating an uneven playing field for executives specializing in different sectors.
The exam’s introduction came last year as SEBI sought to standardize knowledge and compliance across various financial services sectors. While initially requiring every executive to take the test, SEBI later relaxed the requirement to one executive per firm following industry pressure. Despite this concession, the pass rate has remained stubbornly low, prompting concerns about the exam’s effectiveness and fairness.
The situation has created a unique challenge for PE/VC firms, with experienced executives who have built their careers over decades struggling to pass the exam. To navigate this, many firms are hiring junior-level executives who have already cleared the certification, adding another layer of complexity to recruitment and team dynamics. This trend highlights the immediate need for certified professionals within the industry, particularly as the deadline for compliance is March 2025.
The industry body, Indian Venture and Alternate Capital Association (IVCA), has recognized the seriousness of the situation and has engaged with SEBI to address the concerns raised by its members. The IVCA has advocated for adjustments to the exam structure, particularly by introducing separate exams for each category. Further, SEBI is expected to consider a possible extension of the compliance deadline to provide more time for executives to prepare and take the exams.
The current situation underscores the evolving regulatory landscape within India’s financial services industry. While SEBI’s aim is to ensure industry knowledge and compliance, the implementation of the mandatory exam has generated significant pushback from the PE/VC community. Ultimately, a constructive dialogue between the regulator and industry stakeholders will be crucial to finding a solution that balances regulatory rigor with industry needs.