SEBI sets up working group to recommend changes to allow PE funds to sponsor a mutual fund

The Securities and Exchange Board of India (SEBI) has formed a working group that will look at current regulations and recommend separate set of eligibility criteria that allow private equity (PE) funds and other non-eligible entities, to sponsor a fund house.

SEBI said that the role of the working group would be “to recommend mechanisms for addressing conflict of interest that may arise if pooled investment vehicles/ private equity act as sponsor and to examine the need for sponsor to dilute its stake in asset management company from the existing requirement of holding at least 40 percent of the net worth and the alternative pathways that may be adopted in this regard.”

The current regulations state that any entity that holds 40 percent or more stake in a mutual fund is considered as a sponsor and is required to fulfil the eligibility criteria.

The regulatory move comes close on the back of IDFC Mutual Fund getting acquired by Bandhan Financial Holding-led consortium of investors, which included Singapore Sovereign Wealth Fund GIC and private equity fund ChrysCapital.

Also read: What Bandhan’s acquisition of IDFC Mutual Fund means for investors and the fund house?

IDFC Mutual Fund was acquired for Rs 4,500 crore, in what is the biggest acquisition deal in the mutual fund industry.

Private equity funds have shown interest in entering the Rs 37 lakh crore mutual fund industry. Earlier, global PE player Blackstone and other PE firms were in the race to acquire L&T Mutual Fund, before HSBC Mutual finally made the acquisition.

SEBI said, “a need has been felt that in addition to the existing eligibility requirements to sponsor a mutual fund, an alternative set of eligibility requirements may be introduced to enable new players, who otherwise may not have been eligible, to act as sponsor. This is expected to not only foster competition in the mutual fund industry but also facilitate consolidation in the industry through mergers and acquisitions so as to reap economies of scale and scope”.

It added that this should bring in fresh flow of capital in the mutual fund industry, but also more innovation.

The working group will be headed by A Balasubramanian, managing director and chief executive officer of Aditya Birla Sun Life Mutual Fund and Chairman of Association of Mutual Funds in India (AMFI).

SEBI has also set-up another working group that will examine the roles and obligations of mutual fund trustees.

The working group will have to come up with recommendations so as to streamline the role of trustees.

SEBI wants to ensure that trustees are able to do complete justice to their fiduciary obligations towards unitholders and surpervisory role, and are not burdened by operational duties, which can be delegated to the fund house.

The working group will identify those responsibilities for which trustees can avail the services of professional assurance agencies and recommend required financial resources to be made available to Trustees to independently discharge their obligations.