The Securities and Exchange Board of India (Sebi) has laid down new rules for private equity funds sponsoring mutual fund houses and self-sponsored asset management companies (AMCs).
Any entity that owns 40 per cent or more stake in a mutual fund is considered a sponsor.
Under the new framework, applicants for sponsorship must have at least five years of experience as a fund manager, with experience in investing and managing at least Rs. 5,000 crore in the financial sector.
In addition, the mutual fund sponsored by a private equity fund cannot participate as an anchor investor in public issues of investee companies where the sponsor has a 10 per cent or more investment or a board representation.
Sebi has also mandated a lock-in period of five years for the initial shareholding of the sponsor in an AMC, which can be extended if sponsorship is transferred to another entity within the private equity group. The eligibility of a private equity fund as a sponsor will be based on its conduct in its home jurisdiction.
Further, Sebi has allowed AMCs to become self-sponsored, provided they have been in the financial services business for at least five years, have a positive net worth, and meet specific profit criteria. Sponsors proposing to disassociate must have been sponsors of the mutual fund for at least five years before the proposed disassociation.
These measures aim to enhance the penetration of the mutual fund industry and facilitate new types of sponsors, encouraging capital flow, innovation, competition, consolidation, and easier exits for the existing sponsors, Sebi said.
Deployment of Liquid Net Worth By AMCs
On the deployment of liquid net worth by AMCs, Sebi specifies that the minimum net worth required must be deployed in fixed assets such as cash, money market instruments, government securities, and listed AAA-rated debt securities without bespoke structures, credit enhancements, or embedded options. When acquiring an AMC, sponsors must ensure that the positive liquid net worth or tied-up funds are equal to the aggregate par value or market value of the shares to be acquired.
Roles of Mutual Fund Trustees
In a separate release, Sebi outlined the roles and responsibilities of Trustees and the board of AMCs for Mutual Funds. Trustees should ensure the fairness of fees and expenses charged by the AMCs, reviewing the performance of AMCs' schemes compared to peers or appropriate benchmarks. They should also ensure AMCs have adequate systems to prevent mis-selling and to manage assets under their management and valuation.
To allow Trustees to focus on their core responsibilities, they may engage professional firms such as Audit Firms, Legal Firms, and Merchant Bankers to conduct due diligence on their behalf for responsibilities other than the core ones mentioned.
The new regulatory framework for Private equity firms acting as sponsors will be effective from August 1, with the deployment of liquid net worth by AMCs becoming applicable from January 1, 2024.
