The Securities and Exchange Board of India (Sebi) on Friday introduced a consultation paper that proposes to allow private equity (PE) firms to become mutual funds sponsors.
“PE may also provide constructive competition to the current entities in the mutual fund industry and improve value to investors. Hence, the working group agreed that PE, if facilitated, can add value to the mutual fund Industry in India,” the consultation paper said.
Sources said that the Sebi consultation paper comes at a time when there has been considerable interest from PE firms to acquire mutual fund houses in India. For example, there were reports that Blackstone and KKR had shown interest in L&T Mutual Fund and IDFC Mutual Fund, respectively.
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IDFC Mutual Fund was eventually acquired by a consortium comprising Bandhan Financial Holdings, sovereign wealth fund GIC and PE fund ChrysCapital while L&T Mutual Fund was acquired by HSBC Asset Management.
Recently, Samir Arora’s PMS firm, Helios Capital, has also received an in-principle approval from the market regulator.
“The Mutual Fund Advisory Committee of Sebi had recommended allowing PE funds in the mutual fund industry two years back. However, it was not followed up and the committee was dissolved after that,” said an industry source.
Currently, PE funds have been indirectly holding stakes in sponsors of mutual funds. In addition, sponsors looking for an exit from the mutual fund business have not been able to find good offers from entities other than PE funds.
The consultant paper prescribes that the eligibility criteria for PEs should include five years of experience in investment management and in the financial sector. It should also have managed committed and drawn-down capital of not less than `5,000 crore as on the date of the application.
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Other conditions include no-off market transaction between the schemes of the mutual fund and PE sponsor or schemes managed by manager of the sponsor or investee companies of schemes/funds managed by sponsor PE where it holds more than 10% stake. Also, the mutual fund sponsored by the PE cannot be anchor investor in a public issue of an investee company where the PE has investment of 10% or more. In addition, a lock-in of five years would apply to PE funds as well.
The Working Group argued that PEs already act as sponsors to real estate investment trusts and asset reconstruction companies. In addition, even the insurance regulator, the Insurance Regulatory and Development Authority in India, has given more flexibility to PE funds to invest in the insurance sector by allowing promoters to dilute their stake down to 26% from the existing 50% on condition that the insurer has a satisfactory solvency record for five years.
Dhirendra Kumar, founder & CEO, Value Research, said, “This is a good proposal as there is no doubt that there should be varied/wider ownership in the mutual fund industry.”
In its other proposals, the market regulator’s working group said that there should be alternate eligibility criteria for sponsor of MF. That is, the sponsors should adequately capitalise the AMC such that the positive liquid net worth of AMC should be at least `150 crore with a lock-in period of five years and the minimum stake of 40% should also be locked-in for the same time.
However, after the completion of five years (which the working committee considers as mature), the committee proposes that the sponsor can reduce the stake voluntarily to reduce sponsor-relate conflicts. It has sought responses whether there is a need to reduce stake of the sponsors of mature AMCs to a threshold of 26% or 10%.
Self-sponsored AMCs will have to fulfil certain conditions. This includes these AMC being carrying on business in financial services for a period of at least five years, should have a net profit of `10 crore in each of the immediately preceding five years and should not launch any new guaranteed returns scheme.
Among other requirements, sponsor(s) proposing to disassociate should have been a sponsor of the concerned mutual fund for at least five years before the proposed date of disassociation.