New regulations have been made out by the Securities and Exchange Board of India (Sebi) for private equity firms that sponsor mutual fund companies and self-sponsored asset management companies (AMCs).
A sponsor is any organization with a stake of at least 40% in a mutual fund.
Candidates seeking sponsorship under the new framework must have at least five years of experience as fund managers, with experience managing at least Rs. 5,000 crore in the financial sector.
A mutual fund sponsored by a private equity fund is also not permitted to take part as an anchor investor in public offerings of investee businesses when the sponsor has a 10% or more stake or board participation.
In addition, Sebi has required a five-year lock-in term for the sponsor’s initial participation in an AMC. If sponsorship is moved to another business within the private equity firm, however, this time may be extended. A private equity fund’s suitability to serve as a sponsor will depend on how it has conducted itself in its own country.
Additionally, under the conditions that they have been engaged in the financial services industry for at least five years, have a positive net worth, and satisfy certain profit requirements, Sebi has permitted AMCs to become self-sponsored. Sponsors who want to separate from the mutual fund must have done so for at least five years prior to the proposed separation.
According to Sebi, these changes are intended to increase the mutual fund sector’s penetration and make it easier for new kinds of sponsors to enter the market while also promoting capital flow, innovation, competition, consolidation, and simpler exits for current sponsors.
Liquid Net Worth Investment by AMCs
Regarding the use of liquid net worth by AMCs, Sebi states that the minimum amount of liquid net worth necessary must be used to purchase listed AAA-rated debt securities, government securities, cash, money market instruments, and other fixed assets without customised structures, credit improvements, or embedded options. When purchasing an AMC, sponsors must make sure that the tied-up money or positive liquid net worth are equivalent to the whole par value or market value of the shares being purchased.
Mutual Fund Trustees’ Functions
The functions and responsibilities of Trustees and the board of AMCs for Mutual Funds were described by Sebi in a separate statement. By evaluating the success of the AMCs’ schemes in comparison to industry peers or relevant benchmarks, trustees should guarantee the fairness of the fees and costs levied by the AMCs. They should also make sure AMCs have sufficient mechanisms in place to guard against misselling and to manage the assets they are in charge of managing and valuing.
Trustees may hire professional companies like audit firms, law firms, and merchant bankers to undertake due diligence on their behalf for duties other than the basic ones outlined, allowing them to concentrate on their primary tasks.
On August 1, a new regulatory framework for private equity companies serving as sponsors will go into effect, and on January 1, 2024, AMCs will be required to deploy their liquid net worth.
