Mutual Fund News : SEBI Proposes Allowing Private Equity (PE) Funds to Sponsor Mutual Fund Houses

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The capital markets regulator, Securities Exchange Board of India (SEBI), has proposed allowing Private Equity (PE) Funds to become the sponsor for a mutual fund house and boost their investment in schemes. This move is expected to bring in strategic guidance and talent to propel the industry's growth.

A sponsor is an anyone that establishes a mutual fund, either in his individual capacity or in collaboration with another legal entity. The sponsor is in charge of all aspects of establishing a mutual fund, including getting relevant approvals, fundraising, incorporation, and the formation of an asset management company.

In the recent past, private equity funds have indirectly held holdings in sponsors of mutual funds. This proposal is followed by the acquisition of IDFC Mutual Fund by a consortium consisting of Bandhan Financial Holdings Ltd., Sovereign Wealth Fund GIC, and private equity fund ChrysCapital.

SEBI has issued a consultation document in which it seeks public feedback on allowing private equity funds to act as mutual fund sponsors. According to the consultation paper, a SEBI-constituted working group proposed an alternative set of eligibility criteria to allow private equity funds that do not qualify under the current requirements to act as sponsors of mutual funds, as well as further strengthening the existing eligibility requirements to ensure that only high-quality entities qualify.

At the moment, any entity that owns 40% or more of a mutual fund is deemed a sponsor and must meet the qualifying conditions.

The alternate eligibility criteria for sponsor of Mutual Fund includes:

  • Sponsor should capitalise the AMC such that the positive liquid net worth of AMC should be at least Rs 150 crore.

  • The capital contributed to the AMC should be locked-in for a period of 5 years.

  • The minimum sponsor stake of 40% should also be locked in within the same period of 5 years.

Apart from this, the regulator has suggested additional criteria:

  • PE or its manager should have a minimum of five years of experience in the capacity of investment manager in the financial sector and should have managed committed capital of at least Rs 5,000 crore.

  • Off-market transactions should not be permitted between the schemes of MF and Sponsor PE.

  • The mutual fund sponsored by the PE should not participate as an anchor investor in the public issue of an investee company, where any of the schemes/ funds managed by the sponsor PE have an investment of 10 per cent or more, or have a board representation.

The Securities and Exchange Board of India (SEBI) will be seeking comments from the public/market participants till January 29 on the proposals.