Indian Mutual Funds – New M&A Rules! Anu Tiwari (Partner), Ritu Sajnani (Senior Associate), Utkarsh Bhatnagar (Senior Associate) and Karthik Koragal (Associate) The Securities Exchange Board of India (“SEBI”) carried out a regulatory revamp exercise of SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) and various circulars issued under it by way of a circular on mutual fund(s) (“MF”) issued on March 4, 2021 (“MF Circular”), effective from March 5, 2021, thereby streamlining a robust regime governing the reporting, compliance and disclosure requirements applicable to asset management company(ies) (“AMC”) and the trustee(s) of such AMCs. Reporting requirements strengthened Currently, the MF Circular requires an AMC to furnish the complete details of any indirect change in its control/ promoters of the sponsor(s) to SEBI and also notify details of a proposed change in control (whether direct or indirect) to the unitholders, by way of an email (in addition to publishing the same in newspapers. Similarly, in case of any proposed change to the fundamental attributes of a MF scheme, trustees are now mandated to obtain comments from SEBI, prior to effectuating such change. With an intent to ensure better compliance, SEBI has also expanded the scope of ‘key personnel’ of an AMC to include chief investment officer, chief risk officer, chief information security officer, chief operation officer, compliance officer, sales head, investor relation officer(s), etc. in addition to the erstwhile list of key personnel, which included the chief executive officer, fund manager(s), dealer(s) and head of other departments of the AMC. Hence, inter alia these new key personnel who are also now prohibited from carrying on self-dealing or front running activities, in addition to meeting the prescribed eligibility criteria. The revised reporting requirements extends SEBI’s regulatory prowess to monitor and bring more transparency in relation to the indirect change in control of the AMCs’ process. Relaxations and scrutiny go hand-in-hand In order to facilitate innovation in the MF space, SEBI has introduced certain relaxations like permitting employees of AMCs to participate in private placement of equity by any company, has allowed trustees to delegate its function(s) to declare/ fix a record date and decide the quantum of dividend, etc. to AMC officials. Further, trustees are now mandated to report to SEBI the MF securities dealt by them, only if a transaction exceeds INR 5 lakhs (vis-a-vis the previous threshold of INR 1 lakh). The regulator has also classified investment in non-convertible preference shares (“NCPSs”) as a ‘debt instrument’ and accordingly, limitation of a MF scheme to invest not more than 10% of its net asset value in debt instruments will also include NCPSs. The trustees now being required to obtain SEBI comments before effecting a ‘change in in the fundamental attributes of a MF scheme’ seems burden-some, as the regulator’s role, and oversight, already guarantees for the requisite checks and balances to govern the MF scheme, including for MF scheme transfers, through separate regulations and circulars in this behalf. Above is likely to add another layer to M&A deal-making, with already many layers involved, impacting deal costs and timelines, especially if a ‘new sponsor’ application may be involved, from a process, governance and unit holders’ standpoint. Albeit above ties into SEBI’s increasing focus on MF trustee’s accountability, which has hitherto been an overlooked area, given the nature and composition of MF trustee boards. Though, done with noble regulatory intent, one would have to see whether the above changes, including expansion of key personnel, further ‘spook’ trustee directors, especially independents - already an onerous position, with few upsides, especially after Calcutta High Court’s Order in the ITC / JPMorgan MF Trustees case, and SEBI’s approach qua Franklin Templeton trustees in 2020, expand the scope of potential SEBI show-cause ‘noticees’ from the current list of 7 (!), and shoot MF M&A in the knees, which was given a new lease of life recently via SEBI dropping the ‘3/ 5’ profitability criterion in Regulation 7, MF Regulations.

The Securities Exchange Board of India (“SEBI”) carried out a regulatory revamp exercise of SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) and various circulars issued under it by way of a circular on mutual fund(s) (“MF”) issued on March 4, 2021 (“MF Circular”), effective from March 5, 2021, thereby streamlining a robust regime governing the reporting, compliance and disclosure requirements applicable to asset management company(ies) (“AMC”) and the trustee(s) of such AMCs.

Reporting requirements strengthened

Currently, the MF Circular requires an AMC to furnish the complete details of any indirect change in its control/ promoters of the sponsor(s) to SEBI and also notify details of a proposed change in control (whether direct or indirect) to the unitholders, by way of an email (in addition to publishing the same in newspapers. Similarly, in case of any proposed change to the fundamental attributes of a MF scheme, trustees are now mandated to obtain comments from SEBI, prior to effectuating such change.

With an intent to ensure better compliance, SEBI has also expanded the scope of ‘key personnel’ of an AMC to include chief investment officer, chief risk officer, chief information security officer, chief operation officer, compliance officer, sales head, investor relation officer(s), etc. in addition to the erstwhile list of key personnel, which included the chief executive officer, fund manager(s), dealer(s) and head of other departments of the AMC. Hence, inter alia these new key personnel who are also now prohibited from carrying on self-dealing or front running activities, in addition to meeting the prescribed eligibility criteria.

The revised reporting requirements extends SEBI’s regulatory prowess to monitor and bring more transparency in relation to the indirect change in control of the AMCs’ process.

Relaxations and scrutiny go hand-in-hand

In order to facilitate innovation in the MF space, SEBI has introduced certain relaxations like permitting employees of AMCs to participate in private placement of equity by any company, has allowed trustees to delegate its function(s) to declare/ fix a record date and decide the quantum of dividend, etc. to AMC officials. Further, trustees are now mandated to report to SEBI the MF securities dealt by them, only if a transaction exceeds INR 5 lakhs (vis-a-vis the previous threshold of INR 1 lakh).

The regulator has also classified investment in non-convertible preference shares (“NCPSs”) as a ‘debt instrument’ and accordingly, limitation of a MF scheme to invest not more than 10% of its net asset value in debt instruments will also include NCPSs.

The trustees now being required to obtain SEBI comments before effecting a ‘change in in the fundamental attributes of a MF scheme’ seems burden-some, as the regulator’s role, and oversight, already guarantees for the requisite checks and balances to govern the MF scheme, including for MF scheme transfers, through separate regulations and circulars in this behalf.

Above is likely to add another layer to M&A deal-making, with already many layers involved, impacting deal costs and timelines, especially if a ‘new sponsor’ application may be involved, from a process, governance and unit holders’ standpoint.

Albeit above ties into SEBI’s increasing focus on MF trustee’s accountability, which has hitherto been an overlooked area, given the nature and composition of MF trustee boards.

Though, done with noble regulatory  intent, one would have to see whether the above changes, including expansion of key personnel, further ‘spook’ trustee directors, especially independents – already an onerous position, with few upsides, especially after Calcutta High Court’s Order in the ITC / JPMorgan MF Trustees case,[1] and SEBI’s approach qua Franklin Templeton trustees in 2020, expand the scope of potential SEBI show-cause ‘noticees’ from the current list of 7 (!), and  shoot MF M&A in the knees, which was given a new lease of life recently via SEBI dropping the ‘3/ 5’ profitability criterion in Regulation 7, MF Regulations.


[1] (2018)4CALLT367(HC).

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Photo of Anu Tiwari Anu Tiwari

Partner in the Corporate, M&A and Financial Institutions Advisory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has over 15 years of experience and advises clients on matters related to public and private M&A, raising capital, commercial agreements, and activism. Anu…

Partner in the Corporate, M&A and Financial Institutions Advisory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Anu has over 15 years of experience and advises clients on matters related to public and private M&A, raising capital, commercial agreements, and activism. Anu represents both Indian and multinational fintech, banking, broker-dealer, exchange, asset management, speciality finance and information technology companies on transactional, enforcement and regulatory matters.

Anu has been a member of RBI’s Committee on Household Finance, SEBI’s Working Group on Mutual Fund Regulation, Fintech Committee of the Confederation of Indian Industries (CII) and a visiting faculty at the SP Jain School of Global Management.

Mr. Tiwari has been recognised by Chambers & Partners, IFLRMergerMarket and as Lawyer of the Year 2021, India, by Global Law Experts for his work in the M&A, Financial Regulatory and Blockchain/  Cryptocurrency space. He can be reached at anu.tiwari@cyrilshroff.com

Photo of Ritu Sajnani Ritu Sajnani

Senior associate in the Financial Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Ritu advises financial services clients on matters before the Reserve Bank of India, Securities and Exchange Board of India, Ministry of Finance and appellate tribunals. She has represented…

Senior associate in the Financial Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Ritu advises financial services clients on matters before the Reserve Bank of India, Securities and Exchange Board of India, Ministry of Finance and appellate tribunals. She has represented several Indian and multinational fintech, banking, broker, exchange and asset management companies on transactional and regulatory matters. She can be reached at ritu.sajnani@cyrilshroff.com

Photo of Utkarsh Bhatnagar Utkarsh Bhatnagar

Senior Associate in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Utkarsh has represented various Indian and multinational fintech, information/ emerging technology companies, and also pharmaceutical, and healthcare companies on transactional, enforcement and regulatory matters. His transactional…

Senior Associate in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Utkarsh has represented various Indian and multinational fintech, information/ emerging technology companies, and also pharmaceutical, and healthcare companies on transactional, enforcement and regulatory matters. His transactional practice focus is on public & private M&A, commercial agreements and regulatory matters. He can be reached at utkarsh.bhatnagar@cyrilshroff.com

Photo of Karthik Koragal Karthik Koragal

Associate in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Karthik has a demonstrated history of working in the regulatory, fintech and other fields of law. He has represented several Indian and multinational fintech, banking and asset…

Associate in the corporate and financial regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Karthik has a demonstrated history of working in the regulatory, fintech and other fields of law. He has represented several Indian and multinational fintech, banking and asset management company on transactional and regulatory matters. Karthik advises financial services clients on matters before the Reserve Bank of India and Securities and Exchange Board of India. His transactional practice focus is on acquisitions, capital raising and commercial agreements. He can be reached at karthik.koragal@cyrilshroff.com.