The Securities and Exchange Board of India (“SEBI”) recently approved amendments to the SEBI (Mutual Funds) Regulations, 1996 (“MF Regulations”) at its December 16, 2020 board meeting, notified on February 4, 2021 through the MF Regulations by way of the SEBI (Mutual Funds) (Amendment) Regulations, 2021, with effect from March 5, 2021.
Currently, a Mutual Fund (“MF”) ‘sponsor’ is required to have a ‘sound track record’ i.e. having profits in 3 out of the last 5 years, including the fifth year. Recognising the role of emerging tech/ fintech companies in the Indian financial services space and to facilitate MF innovation/ geographic penetration, SEBI relaxed the above profit criterion for sponsors. Going forward, MF sponsors who do not meet the above, would still be eligible to, either set up a new, or acquire an existing, MF asset management company (“AMC”) and trustee company, if it has a minimum net-worth of INR 1 billion as contribution towards the AMC’s net-worth, which is required to be maintained till the sponsor makes profits for 5 consecutive financial years.
Currently, tech/ fintech companies act as MF distributors/ intermediaries and offer technology-enabled wealth management platforms. The above relaxation has opened the MF flood-gates, with several technology and wealth management/ distribution platforms applying for either a new SEBI MF license (organic route), or inorganically through acquisition of existing MF AMCs and trustee companies. This will deepen the Indian MF industry and investment product offerings, which after the 2010-2012 wave which saw many global asset managers enter India through joint ventures with existing Indian MF players, has been ‘sleepy’ without any new major global players entering this space – rather only exits by global payers since then.
Above relaxation by SEBI is probably the single-most important step taken by the regulator to allow new players in the Indian MF space, since the MF Regulations came into force in 1996.
With the above hurdle crossed, all eyes now are on SEBI to see whether pools of private and third-party capital i.e. private equity funds with corpus raised from limited partners would have a shot at either sponsoring new MFs or bidding for >40% net-worth stake in existing Indian MFs. At present, MF Regulations require the ‘sponsor’ to be carrying on the business in ‘financial services’ for at least 5 years. Historically, SEBI has preferred permanent capital in MF AMCs and treated only strategic players, appropriately regulated, either in India or home jurisdiction, and with experience in retail funds management, as ‘carrying on the business in financial services’. Hence, SEBI has typically not entertained requests from private equity players for taking a controlling/ sponsor stake in MF AMCs. Earlier attempts by private equity players to bid for Indian MFs, either alone, by using the ‘limited-life’ fund vehicle or its general partner entity (GP), or in partnership with SEBI regulated entities, have had mixed results.
Given the COVID-induced liquidity measures taken by Central Banks world over, resulting in the current public and private market valuations and the IPO/ SPAC ‘frenzy’ in the West, and its ‘coupling’ effect on the Indian markets, going forward, private pools of capital, either proprietary or third-party, managed by private equity players, would emerge, as they already are, as the most important sources of capital for making investments in India in general, and in our MF space in particular.
Given this, probably time has come for the securities market regulator to recognize the role of, and the need for, private equity investments in the Indian mutual fund industry – which is the only asset class still left untouched, given the above sponsor eligibility criterion, by Indian and global private equity players – albeit, with necessary ‘belt and suspenders’ to safeguard retail investors from risks associated with limited-life sponsors and avoid frequent ‘change in control’ of the AMC and trustee company.