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September 27, 2021

India to allow private equity firm to sponsor mutual funds

By Verdict Staff

India’s markets regulator is reportedly planning to let private equity (PE) funds to own local asset management companies (AMCs).

Securities and Exchange Board of India (SEBI) will provide conditional approval for PE funds to be sponsors of mutual funds, Livemint reported citing two people familiar with the development.

An entity with 40% holding or more in an asset management firm is called its ‘sponsor’.

At present, SEBI allows only banks, non-bank lenders, or those who have over five years of experience in managing a public pool of funds to be mutual fund sponsors in the country.

Under the proposed rules, PEs will need to meet certain net-worth, size, experience criteria to be eligible to sponsor or buy control of an AMC .

They will be also required to adhere to certain lock-in norms.

In addition, any PE looking to be a mutual fund sponsor may be required by the market regulator to commit capital worth over INR1bn ($13.5m).

“Also, the PE fund will be required to create a completely separate and independent AMC subsidiary and a trustee to be the sponsor or owner in control of a mutual fund house,” the first source said.

The move comes at a time when many of the existing sponsors and trustees are caught up in a cash crisis as their core business fails to generate sufficient capital due to the pandemic.

“PEs the cash the MF industry needs for growth, but the money managed by PE funds has a limited life cycle as they are obliged to pay returns to their investors, which poses a risk to mutual funds in which the general public invests,” one of the sources told the publication.

The proposed new rules are expected to help global PE firms enter Indian asset management space through M&A strategies.

These include BLACKSTONE ’s proposed acquisition of L&T’s mutual fund arm.

SEBI is expected to put out the draft norms for allowing PEs to be sponsors or owners in control of mutual funds this week.

Earlier this month, Indian wealth manager White Oak Capital received approval from the regulator to establish a mutual fund business.

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