SEBI Issues Framework for PE Funds as Sponsors and Self-Sponsored AMCs

To facilitate the fresh flow of capital into the industry, fostering innovation, encouraging competition, and easing exit for existing sponsors, the Securities and Exchange Board of India (SEBI) has allowed private equity (PE) funds to sponsor mutual fund schemes and has permitted the establishment of self-sponsored asset management companies (AMCs). Currently, mutual fund houses must have a sponsor and be a business in financial services such as banking, stock broking, or housing finance company. SEBI has issued a regulatory framework through a circular dated July 7, which outlines the key rules for mutual fund sponsors. Among the rules is the requirement for a minimum lock-in period of five years for the initial shareholding of the sponsor and the PE in the corporate entity sponsoring the mutual fund.

Key Highlights

  1. SEBI allows PE funds to sponsor mutual fund schemes and establish self-sponsored AMCs.
  2. Only PEs with a minimum of five years of experience can sponsor mutual fund houses.
  3. The regulatory framework ensures safeguards to protect investors in PE-owned fund houses.
  4. Mutual fund sponsors can voluntarily reduce their stake and become self-sponsored AMCs.
  5. Disassociated sponsors lead to the classification of shareholders as “financial investors.”
  6. AMCs must deploy the minimum net worth required in specified assets, according to SEBI.

Empowering PE Funds as Sponsors

SEBI’s new framework mandates that among the pooled investment vehicles, only PEs with a minimum of five years of experience can sponsor a mutual fund house. This move aims to promote competition and consolidation in the industry, enabling PE funds to play a more significant role.

Framework Circular Issued

SEBI notified the rules for the new setup of sponsors of a Mutual Fund in June, and now the regulatory framework has been issued through a circular dated July 7. This circular provides detailed guidelines for PE funds acting as sponsors and self-sponsored AMCs.

Key Rules for Sponsor PEs

PEs seeking to sponsor mutual funds must meet certain criteria.

They should have a minimum of five years of experience as a fund or investment manager in the financial sector.

Additionally, they should have managed, committed, and drawn down a minimum capital of Rs 5,000 crore, ensuring their financial stability.

Self-Sponsored AMCs and Stake Reduction

Recognising the evolution of the mutual fund industry, SEBI allows a sponsor to voluntarily reduce its stake in an AMC. A fund house can become a self-sponsored AMC if it has been in the financial services business for at least five years, has a positive net worth for the past five years, and maintains an average net annual profit of Rs 10 crore during that period. This flexibility enables AMCs to stand on their own and build trust among investors.

Disassociation and Financial Investor Classification

SEBI outlines the timeline for sponsors looking to disassociate from an AMC, requiring them to reduce shareholding below 10 percent within a specified period. After disassociation, the shareholders become classified as “financial investors,” and there is no sponsoring entity for the AMC. This shift ensures transparency and independence in the operations of the self-sponsored AMC.

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Deployment of Liquid Net Worth

SEBI has made a decision stating that Asset Management Companies (AMCs) are required to allocate the minimum net worth in various forms such as cash, money market instruments, Government Securities, Treasury bills, Repo on Government securities, or listed AAA-rated debt securities. 

It is important to note that these debt securities should not possess bespoke structures, structured obligations, credit enhancements, embedded options, or any other features that could potentially increase the liquidity risk of the instrument over time.

What Does This Mean for Indian Investors- Safeguards for Investor Protection

To safeguard the interests of investors in PE-owned fund houses, SEBI has implemented various measures. Off-market transactions between the schemes of the mutual fund and the sponsor PE or its manager are prohibited. Additionally, there can be no off-market transactions between the mutual fund schemes and investee companies of funds of sponsor PE with significant stakes or board representation.

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