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Recently, the US imposed regulations over hedge funds, pools of money from wealthy people that could invest in practically anything of value anywhere in the world. It could be coincidence, but soon after that, the world's oldest - and most famous - hedge fund investor, George Soros returned all his investors' money, retaining only his personal wealth under management. Around the same time, his one-time deputy and founder of another hedge fund, Stan Druckenmiller, also hung up his boots.

It's clear that gun-slinging investors hate red tape and rules, but it's not equally clear whether they ought to function in regulatory vacuum. In India, markets watchdog Sebi wants to tighten oversight of private fund pools that include private equity, private investment in public equities (PIPES), venture funds and so on. All have to register with the market watchdog and many will have to follow well-defined investment avenues. For example, PIPES can invest only in those listed companies that are not part of an index.

Venture capital can flow to start-ups, but not to established businesses. The regulator hopes that this will encourage capital to flow to new businesses that find it hard to raise money, rather than to already established ones with access to funds. We hope that it is correct: most studies show that private equity and venture funds have not made as much contribution to establishing new entrepreneurs in India as it could.

The other purpose, of course, is to have more transparency and fewer lawsuits. Today, a whole bunch of PE investments of various kinds have gone sour and many investors and promoters meet each other only in courtrooms. Investment pools work in the twilight zone between equity and debt called structured finance, which gives investors the freedom to set terms of funding and promoters access to capital. But defaults are rampant and lawsuits a corollary. It is also not a good idea to allow private equity to come dressed as NBFCs and effectively make risk-free loans at the high rates that risky equity investment command. Private investment pools need to be cleaned up; Sebi has taken the first steps.