The SEBI Working Group also considered the fact that PE funds can act as a sponsor to Real Estate Investment Trusts or Asset Reconstruction Companies and that IRDAI has issued specific guidelines in 2017 allowing private equity funds and AIFs to be promoters of insurance companies.
The Securities and Exchange Board of India (SEBI) has released a consultation paper, seeking comments from the public over permitting private equity funds to operate as sponsors of mutual funds.
A sponsor is any person who either in his individual capacity or in concert with another body corporate establishes a mutual fund. The sponsor is responsible for all the steps for setting up a mutual fund such as obtaining necessary approvals, funding, incorporating and setting up an asset management company.
Regulation 7 of the SEBI (Mutual Fund) Regulations, 1996 mandates the eligibility criteria for the sponsors of a mutual fund. Amongst many stringent parameters, the regulations specify that the sponsor should have a sound track record and a general reputation for fairness and integrity, while simultaneously carrying on business for the last five years with a positive net worth throughout those years.
These regulations were put in place over time to ensure that only sponsors with a reputation above reproach and possessing adequate financial wherewithal would qualify to set up a mutual fund. In view of the changing landscape of the mutual fund industry, a proviso was included in the MF Regulations in 2021. It cleared the way for an interested applicant to sponsor a mutual fund even if the profitability track-record condition of eligibility was not met, provided that the applicant had a positive net worth of not less than Rs 100 crore.
The consultation paper mentions that a working group under SEBI after conducting a detailed study of various requirements and best practices around the world recommended a two-pronged approach. The first approach zeroed in on strengthening the existing eligibility criteria and the second one suggested an alternative set of eligibility requirements so as to enable the qualification of private equity funds.
In the recent past, private equity funds have been indirectly holding stakes in sponsors of mutual funds. Further, sponsors looking for an exit from the mutual fund business have not been able to find good offers from entities other than private equity funds.
The Working Group also considered the fact that private equity funds can act as a sponsor to Real Estate Investment Trusts or Asset Reconstruction Companies and that IRDAI has issued specific guidelines in 2017 allowing private equity funds and AIFs to be promoters of insurance companies. In fact, recently, IRDAI introduced guidelines providing more flexibilities to private equity funds enabling them to invest in the insurance sector and has introduced provisions by which promoters will be allowed to dilute their stake. In light of these developments, the working group considered the possibility of private equity funds being allowed to sponsor mutual funds subject to additional safeguards.
These safeguards mandate that:
- The private equity fund should have a minimum of five years of experience in the capacity of fund or an investment manager and the experience investing in the financial sector. It should also have managed committed and drawn-down capital of not less than Rs 5,000 crore as on the date of the application.
- 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% or more or has a board representation.
- The private equity fund will have to be locked in as a sponsor for a minimum of five years.
Besides the recommendations of the working group, comments from the public have been elicited for other relevant questions such as the need for a reduction in stake of sponsors of mature AMCs so as to reduce sponsor-related conflicts or whether the reduction in stake of sponsors of AMCs will serve the unit holders.