SEBI Proposes Alternative Eligibility Criteria For Mutual Fund Sponsors

The market regulator proposes alternative eligibility criteria paving the way for PE funds to enter the mutual fund segment.

<div class="paragraphs"><p>SEBI building in Mumbai. (Photo: Shailesh Andrade/Reuters)</p></div>
SEBI building in Mumbai. (Photo: Shailesh Andrade/Reuters)

The Securities and Exchange Board of India has sought to review the existing eligibility criteria for sponsors of mutual funds.

The market regulator, in its latest consultation paper, proposes to introduce a new eligible criteria that allow sponsors, who are otherwise ineligible—such as Private Equity Funds—to act as a sponsor.

This is expected to facilitate fresh flow of capital into the industry, foster innovation, encourage competition and provide ease of consolidation, and easing exit for existing sponsors.
SEBI Consultation Paper

SEBI had set up a working group to review the role and eligibility of a sponsor of a mutual fund and to review the role of trustees in April last year.

The regulations are being reviewed as the role of a sponsor has significantly changed over the years.

The relevance of a sponsor in the later years of an Asset Management Company has reduced to that of an investor as the company itself becomes self-sustaining, according to the working group.

This calls for the penetration of new players in the industry, who can bring innovation in the market.

The proposal made for revamping the existing framework are as under:

Alternative Eligibility Criteria

Capital Criteria: The proposed eligibility criteria require newly set up AMC’s to have a minimum net worth of Rs 150 crore as against the existing criteria, which requires Rs 50 crore for a sponsor that meets the profitability criteria and Rs 100 crore for a sponsor that does not meet the profitability criteria.

The present framework requires sponsors to have a positive net worth for at least five years preceding the year of application. Around Rs 100 crore of such net worth shall be liquid until the AMC is able to bring back profits continously for five years.

Lock-In Period: To avoid the eventuality of sponsors withdrawing capital soon after the company is capitalised, a minimum lock-in period of five years is recommended under the proposal. This will prevent ‘license trading’ where non-serious entities sets up mutual funds only to transfer it to another entity.

Contributions Of Human Capital: In order to make good the dearth of track record, the sponsor is expected to contribute significantly to the human resource of the company.

"Total experience of Chief Executive Officer, Chief Operation Officer, Chief Regulatory Officer and all the fund managers combined should be at least 30 years," the recommendation said.

The proposal also allows sponsors, who acquire the AMC without the required eligibility, to hold on to the stake in the company by meeting these alternative requirements.

Private Equity Funds To Be Sponsors

In view of the fact that the Insurance Regulatory and Development Authority has allowed private equity funds to invest flexibly in the insurance sector, the working group has proposed an increase in the participation of PE funds in the mutual fund sector.

Also, the fact that many PE funds directly hold stake in several MF sponsors and the best offers for sponsors aiming to exit the industry comes from PE sectors has been critical in re-evaluating the role of private equity funds in the sector.

According to the proposals, PE funds besides fulfilling the alternative eligibility criteria must also fulfill additional criteria, such as: 

  • PE should have acted as fund manager in an investment fund for at least five years, and must have drawn a capital of not less than Rs 500 crore.

  • The definition of associate company has been enhanced to included companies, in which the fund has 10% or more stake. This brings such companies under the radar of restrictions set for associate/group companies under the regulations.

Reduction In The Stake Of Sponsors

The working group, after considering a cost benefit analysis on reduced role of sponsors, have come to the conclusion that there is no need to mandatorily phase out/reduce their role in an AMC. It shall be completely voluntary and left to the market dynamics. This will however help in reducing the conflicts, the working group said.

Self-Sponsored AMCs

The proposals also allow AMCs to disassociate themselves from its sponsor as long as it meets certain conditions. This includes an experience of five years in the financial markets, a net profit of Rs 10 crore for the last five years as well as a guarantee to not commence any guaranteed returns scheme on such date.

Sponsors proposing to disassociate themselves from the AMC should have completed their lock-in period requirements.

However, the proposal warns of potential conflicts that could arise from such disassociation.

Comments are invited on the proposal from various stakeholders till Jan. 29.