PE funds get to be promoters of MFs

The board of Securities and Exchange Board of India (Sebi) also approved a range of proposals related to mutual fund sponsorship, ASBA-like infrastructure for secondary markets, debt fund backstop facility, and environmental, social, and governance (ESG) promotion in Indian listed companies, aligning India’s practices with global standards.

Clearing the way for private equity funds to become sponsors of mutual funds opens a new business line for them in India’s fast-growing mutual fund industry. PE funds can now set up mutual funds independently or in collaboration with other firms under the approved framework.

On 27 September 2021, Mint first reported that Sebi was likely to allow PE funds to own local asset management companies (AMCs) amid the growing popularity of mutual funds.

Sebi’s move assumes significance against the backdrop of several existing sponsors and trustees facing a cash crisis due to the inability of their core businesses to generate enough capital.

“The amendments also allow for ‘self-sponsored AMCs’ to continue the mutual fund business, subject to the said AMCs fulfilling certain criteria. This would give the original sponsor flexibility to voluntarily disassociate itself from the MF without needing to induct a new and eligible sponsor,” Sebi said.

An entity with a 40% stake or more in an asset manager is its sponsor. Currently, only banks, non-bank lenders, or those with more than five years of experience in managing a public pool of funds are allowed to be mutual fund sponsors.

The new rules will clear the way for global PE giants to acquire local AMCs. Mint reported in October 2020 that private equity giant Blackstone was in talks to acquire L&T Investment Management Ltd, the mutual funds business of L&T.

PE investments in India dropped 23% in 2022 from a year earlier, a report from S&P Global Market Intelligence said on 28 February. India’s PE investments fell to $28.27 billion in 2022, while China, the largest economy in the region, posted a 45.1% decline to $70.86 billion, the report said.

However, India’s share of the total PE investments in the Asia region rose to 25.1% in 2022 from 11.9% in 2020 as China’s share dropped, S&P said.

“PE players have been showing interest in the mutual fund industry. There was an advisory committee which had made this recommendation a couple of years back. I believe this is a good move as PE players can add their perspective and support the MF industry and enhance value for the investors,” said Siddharth Mody, senior partner at law firm Desai & Diwanji.

The regulator has also approved a framework proposed in January to protect client funds from misuse by brokers in the secondary market. The Application Supported by Blocked Amount or ASBA-like facility will be optionally offered to investors and stock brokers. The facility allows blocking funds for trading in the secondary market through UPI.

Sebi’s board met amid an ongoing political debate over Adani group’s business dealings in the light of a scathing report by US-based short-seller Hindenburg Research.

Sebi chairperson Madhabi Puri Buch said the market regulator would follow the advice of the Supreme Court in the Adani case and that the regulator was duty-bound to follow it.

The court had earlier this month asked Sebi to investigate if there were any violations of market norms and stock manipulation in the Adani group.

Buch said Sebi wouldn’t comment on Adani over the Hindenburg report since the matter is sub-judice.

To establish Corporate Debt Market Development Fund (CDMDF) as an Alternative Investment Fund, the board adopted changes to the Sebi (Alternative Investment Funds) Regulations, 2012, to serve as a backstop facility for the purchase of Investment Grade Corporate Debt security in stressful situations to give people the confidence to improve the secondary market generally and in the corporate bond market liquidity. “SBI AMC will be the main stakeholder of the proposed fund,” Buch clarified while elaborating on the fund. Finance minister Nirmala Sitharaman last year said that the government had taken up the proposal for the fund.

The BRSR (Business Responsibility and Sustainability Report) Core will be introduced, containing a limited set of key performance indicators for which listed entities must obtain reasonable assurance to enhance the reliability of ESG disclosures.

A glide path is prescribed for the applicability of BRSR Core, beginning with the top 150 listed entities (by market capitalization) from FY24, which shall be gradually extended to the top 1000 listed entities by FY27.