Sebi relaxes rules to enable Fintech firms launch mutual funds

The Securities and Exchange Board of India (Sebi) Wednesday paved the way for technology startups to enter the mutual fund business by waiving the profitability requirement, approved doing away with minimum promoter contribution toward follow-on public offers (FPO), and also eased norms on investing in insolvent companies.

“To facilitate innovation and enhanced reach to more investors at a faster pace including tech-enabled solutions, sponsors that are not fulfilling profitability criteria at the time of making the application, shall also be considered eligible to sponsor a mutual fund subject to having a net worth of not less than Rs 100 crore for the purpose of contribution toward the net-worth of the asset management company (AMC),” Sebi said Wednesday after its board meeting.

The regulator said the net worth of the AMC would have to be maintained until the time it makes a profit for five consecutive years.


“This is aimed to encourage start-ups such as Paytm to enter the mutual fund space. As per the current mutual fund guidelines on profitability, they would have to wait forever,” said Dhirendra Kumar, CEO of Value Research.“It takes a lot of time for these companies to break even.”

“With the relaxation in guidelines for profitability and higher net worth, the stage could be set for private equity and technology players to come in as sponsors in the mutual fund industry,” said the CEO at a domestic fund house.

Until now, regulators required an entrant to have five years of experience in the financial services business, demonstrate three years of profitability, and maintain a net worth of Rs 50 crore.

The Sebi board has also approved a proposal to make it mandatory for all AMCs to maintain the minimum net worth continuously. At present, fund houses were required to maintain it toward the year-end.

The regulator has also done away with the minimum promoters’ contribution and subsequent lock-in requirements for issuers making an FPO. At present, promoters are mandated to contribute 20% toward FPOs.

“It is an investor-friendly decision and reward to compliant companies by way of facilitating the raising of further funds,” said Pavan Kumar Vijay, founder, Corporate Professionals.

Sebi has also relaxed the one-year lock-in requirement for incoming investors and tweaked rules on minimum public holding norms for companies emerging out of the insolvency process.

The regulator said such companies would have to have at least 5% public shareholding at the time of their admission to dealing on the stock exchange, as against no minimum requirement at present. They would have to achieve 10% public shareholding within 12 months and 25% in three years.