Sebi mulls allowing PEs to own AMCs

Mumbai: The Securities and Exchange Board of India (Sebi) is considering a proposal to allow private equity funds to own local asset management companies (AMCs), a move that will boost competition and mergers and acquisition activity in the space. The regulator is also examining whether to allow loss-making sponsors to invest in mutual fund businesses provided they fulfil the fit-and-proper criteria. This move could allow fintech companies to enter the asset management business, said analysts.

If a private equity fund has a net worth of Rs 150 crore and is able to establish the ultimate beneficiary, it would be able to invest in AMCs in India, said two people familiar with the development.

Sebi didn't respond to queries.


"There has to be a corporate structure where the private equity fund brings its own capital. It will also have to pass the fit-and-proper criteria," said one of the persons cited above.

In April, the regulator had set up a working group to review the eligibility criteria for the sponsor of a mutual fund to facilitate growth and innovation. The expert panel recently submitted its report to the regulator. These proposals were also discussed by the mutual fund advisory committee. The panel has also proposed a lock-in period of three to five years for private equity funds willing to act as sponsors of mutual funds.

Issue of Limited Life of PE Funds
"The concept of private equity funds being allowed to sponsor a mutual fund asset management company till now has not found favour with the regulator, chiefly for the reason that funds are limited life entities," said Sandeep Parekh, managing partner, Finsec Law Advisors. "And the point of a sponsor is to find someone accountable for at least some of the issues with respect to managing the AMC. Sebi, I believe, is rightly rethinking this informal restriction."

While a fund may have a limited life, its ownership of an AMC can be sold subject to Sebi's prior permission, either in-house or to another person, he said. "The concept should be allowed, as it will enable a mix-and-match approach to eligibility, a concept applied in other regulations and of course other jurisdictions," said Parekh.

The move will also encourage professional fund managers to team up with private equity funds to set up mutual funds. "Over the last 30 years, since private sector mutual funds were allowed, several high-performing management teams have produced excellent Indian funds," said PR Srinivasan, managing partner, Xponentia Capital Partners LLP. "Recent years, some of them have achieved successful listings. The regulator can introduce some entrepreneurial competition by encouraging experienced professional fund managers to become entrepreneurs and establish new AMCs or acquire AMCs from sponsors who are seeking to exit. PE funds would be interested in backing entrepreneurial teams in the AMC market space."

A US-based PE fund was recently looking at acquiring a local mutual fund house but was unable to proceed due to regulatory restrictions.

"The issue today is that when someone wants to sell a scaled-up business, who can write a cheque of Rs 1,000 crore or more?" said Dhirendra Kumar, CEO, Value Research. "Allowing PE funds in the mutual fund space will enable credible people to write that fat cheque."

Under Sebi rules, to be a sponsor of a mutual fund, an entity has to have been in the financial services business for at least five years, hold a stake of 40% or more in an AMC, have a net worth of Rs 50 crore and have posted a net profit in three out of the immediately preceding five years, among other things. The Sebi panel has suggested that if a loss-making sponsor wants to invest in the mutual fund space, it should bring in Rs 150 crore as capital. "As far as allowing loss-making companies to sponsor an AMC, it can be allowed subject to a keen and higher oversight over such sponsorship," Parekh of Finsec Law Advisors said. "While the net worth of the sponsor doesn't have much direct bearing on the AMC, the possibility of an unstable sponsor, relying exclusively on its own investors, should be met with a higher degree of continuous scrutiny."

Dhirendra Kumar of Value Research said running a mutual fund is fundamentally different from financial intermediation. Hence, mutual funds should be rigorously regulated.

"If you have a sponsor who believes that making losses for the long term is a good thing, then that itself is a good reason to not allow them to enter this business," Kumar said.

"Raising funds from others and running a loss-making business and managing someone else's hard earned money--they are two very different things and are mutually incompatible. Those who believe in the former don't have the right DNA to run a mutual fund business."

The CEO of a large fund house said, "It's a progressive move by Sebi to expand the eligibility norms for sponsors."