SEBI issues framework for PE funds as sponsors and self-sponsored AMCs

Currently, mutual fund houses must have a sponsor and must be a business in financial services such as banking, stock broking, housing finance company and so on.

The Securities and Exchange Board of India (SEBI) has mandated that among the pooled investment vehicles, only private equity funds (PEs) can sponsor a mutual fund house, while the entities should have a minimum of five years of experience.

To facilitate the fresh flow of capital into the industry, fostering innovation, encouraging competition, providing ease of consolidation and easing exit for existing sponsors, the capital markets regulator in March allowed PEs to sponsor mutual fund schemes and also permitted the set-up of self-sponsored asset management companies (AMCs).

Currently, mutual fund houses must have a sponsor and must be a business in financial services such as banking, stock broking, housing finance company and so on.

SEBI had notified the rules for the new set-up of sponsors of a Mutual Fund earlier in June. The regulator has now issued a regulatory framework via a circular dated July 7.

Key rules for sponsor PEs

There are many types of pooled investment vehicles such as hedge funds, private equity funds, and pension funds. As per the regulatory framework, only PEs can sponsor a mutual fund.

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Further, the applicant PE or its manager should have a minimum of five years of experience as a fund or investment manager and an experience of investing in the financial sector. The applicant should also have managed, committed and drawn-down capital of a minimum Rs 5,000 crore.

As per SEBI’s MF regulations, an initial shareholding of a sponsor equivalent to capital contributed to an AMC to the extent of not less than Rs 150 crore is locked-in for a period of five years.

The said lock-in period of five years will also be applicable to the shareholding of PE in the corporate entity, which is sponsoring the mutual fund.

Safeguards in place

To ensure that investors interested are protected in a PE-owned fund house, SEBI has proposed several safeguards.

The regulator has barred off-market transactions between the schemes of the mutual fund and sponsor PE as well as schemes managed by the manager of the sponsor PE.

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There can also be no off-market transactions between the schemes of the mutual fund and investee companies of funds of sponsor PE, where it holds more than 10 percent stake, or has a board representation or a right to nominate board representation.

Self-sponsored AMCs

According to the regulator, considering the evolution of the mutual fund industry and the significant shift in the nature of roles and responsibilities in the last few decades, most of the AMCs can be stated to be prepared enough to stand on their own and create trust among their investors.

In view of this, SEBI has decided to allow a sponsor to voluntarily reduce its stake in an AMC.

A fund house can become a “self-sponsored AMC”, if it has been carrying on business in the financial services for a period of not less than five years and also has a positive net worth in all the immediately preceding five years.

To become a self-sponsored AMC, the entity should have average net annual profit of at least Rs 10 crore during the preceding five years.

Further, in terms of timelines, SEBI said that any sponsor looking to disassociate needs to reduce shareholding below 10 percent -- within five years in the case of listed AMCs and three years in the case of unlisted AMCs.

Post disassociation of any sponsor, all the shareholders of such AMC would be classified as “financial investors” and there will not be any sponsor of such AMC.

Post disassociation, the upper limit of shareholding for any financial investor needs to be below 10 percent.

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According to SEBI, the dissociated sponsor or a new entity can become the sponsor of a self-sponsored AMC if it fails to meet SEBI regulations.

Deployment of liquid net worth

As per SEBI regulations, an AMC has to deploy the minimum net worth required in assets as specified by SEBI.

In this regard, SEBI has decided that AMCs must deploy the minimum net worth required either in cash, money market instruments, Government Securities, Treasury bills, Repo on Government securities, or in listed AAA-rated debt securities without bespoke structures/structured obligations, credit enhancements or embedded options or any other structure/ feature which increase the liquidity risk of the instrument on a continuous basis.

“Such investments shall be unencumbered,” SEBI said in the circular.