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I. Background:

(i) SEBI notified the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2023 (“Amendment”), on June 27, 2023. The Amendment follows a Consultation Paper on Review of Regulatory Framework for Sponsors of a Mutual Fund, which the SEBI had released on January 13, 2023 (“Consultation Paper”).

(ii) The Amendment strengthens the existing eligibility criteria for sponsors of a mutual fund, which requires sponsors to have vintage in the “business of financial services” (“Original Criteria”), and requires the sponsor to have,

a. a net profit in all of the preceding five years (as opposed to the erstwhile requirement of profit in three out of five years);

b. minimum average net profit of INR 10 crore in preceding five years; and

c. positive “liquid net worth” i.e. (cash, money market instruments, T-Bills and G-Secs), greater than the proposed capital contribution of such sponsor.

(iii) The Amendment also introduces alternate eligibility criteria (“Alternate Criteria”), which allows non-financial services entities and “a private equity fund or a pooled investment vehicle or a pooled investment fund”, to become sponsors, subject to,

a. capital infusion of INR 150 crore into the asset management company (“AMC”);

b. shareholding equivalent to the initial capitalisation of INR 150 crore to be locked-in for a period of five years;

c. appointment of experienced senior management officials, having a combined experience of at least 30 years; and

d. in cases of acquisition of an existing AMC, maintaining liquid net worth equal to the incremental capitalisation to bring the net worth of the AMC to INR 150 crore.

(iv) The Amendment provides a framework for ‘existing’ sponsors to “disassociate” from an AMC, basis conditions to be prescribed by SEBI, and subject to,

a. AMC having diversified shareholding (no single shareholder with more than 10% shareholding); and

b. AMC having 2/3rd independent board of directors (as opposed to the 50% independent board of directors for AMCs with a sponsor).

(v) The Amendment replicates many monitoring and investor protection responsibilities for the board of directors of the AMC, in addition to the trustees.

The amendments in Paragraphs I(ii), (iii) and (iv) above shall come into force on August 1, 2023, in Paragraph I(v) above shall come into force once it is notified by SEBI.

II. Analysis:

(i) Original Criteria:

a. INR 10 crore profit floor may impact smaller players; requirement to maintain positive “liquid net worth” may affect investment strategy at the sponsor level.

b. Given the August 1, 2023 enforcement date for Paragraph I(iii) above, greenfield applications/ brownfield acquisitions currently being contemplated, may be accelerated; but the status of pending sponsor applications with SEBI is unclear.

c. The exemption that had introduced a window for early stage Technology/ FinTech companies to ‘sponsor’ a mutual fund (i.e. by bringing INR 100 crore net worth, if the original criterion of profitability in three out of five years is not met), has been deleted. Loss-making early-stage players who have recently ‘sponsored’ mutual funds, either through fresh applications or acquisition of existing AMCs, will not have this flexibility going forward.

(ii) Alternate Criteria:

a. PE/ VC funds are now permitted to sponsor mutual funds, without support from a strategic player. This is a big move by SEBI.

b. The 40% shareholding lock-in requirement, as contemplated under the Consultation Paper, has been dropped, in favour of a blanket INR 150 crore capitalisation lock-in for five years. This may possibly enable sponsor “disassociation”for high net worth AMCs.  

c. “Sponsor-less” AMCs: Once SEBI prescribes the conditions, as mentioned in Paragraph I(iv) above, when a sponsor’s shareholding falls below 10%, “de-sponsorisation” will now be available (especially for listed AMCs), akin to “de-promoterisation”. Given the onerous ‘sponsor’ compliance requirements, this is a welcome step.

III. Implications:

EntityImplication
Strategic InvestorsHigher obligations imposed.  
PE / VC FundsPositive, PE/ VC funds can now ‘sponsor’ MF AMCs.  
Early Stage PlayersAs 3/5 years profitability exemption has been dropped, early stage players would have to explore alternative criteria.

IV. Conclusion:

Mutual Fund sector was the only space which lacked clarity on the status of financial sponsors. These Amendments are a step in the right direction as it will now enable PE/ VC funds to enter the Mutual Fund space as ‘sponsors’, and trigger fresh deal activity.

Fixing of a higher accountability on the board of directors of AMCs will help improve corporate governance standards, thereby benefitting investors/ unitholders.


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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 Kush Wadehra Kush Wadehra

Principal Associate in the Corporate and Financial Regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Kush has represented various Indian and multinational fintech, information/ emerging technology companies, on transactional, enforcement and regulatory matters. His transactional practice focus is on public &…

Principal Associate in the Corporate and Financial Regulatory practice at the Mumbai office of Cyril Amarchand Mangaldas. Kush has represented various Indian and multinational fintech, information/ emerging technology 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 kush.wadehra@cyrilshroff.com

Photo of Naman Lodha Naman Lodha

Associate in the Financial Services Regulatory Practice at the Mumbai office of Cyril Amarchand Mangaldas. Naman advises clients on regulatory matters with respect to financial services. He can be reached at naman.lodha@cyrilshroff.com