SEBI CIRCULAR ON THE REGULATORY FRAMEWORK FOR SPONSORS OF A MUTUAL FUND

The Securities and Exchange Board of India (“SEBI”) in the exercise of its power conferred under Section 11 (1) of the SEBI Act, 1992, read with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, vide circular no. SEBI/HO/IMD/IMD-PoD-2/P/CIR/2023/118¹ dated July 07, 2023 (“Circular”), to facilitate new types of players to act as sponsors of Mutual Fund (“MF”).

The key highlights of this circular:

SEBI introduces new eligibility criteria for MF sponsors through the amendment of MF Regulations, 1996 on June 26, 2023, recommended by MF Advisory Committee. In continuation of this, the following course of action has been determined:

1. Deployment of liquid net worth by Asset Management Company (“AMC”)
   As per Regulation 21(1)(f) of the MF Regulations, AMC is required to deploy their minimum net worth, as specified by SEBI in various assets. Additionally, they can invest in listed AAA-rated debt securities without complex structures or features that increase liquidity risk. These investments shall remain unencumbered.


2. Acquisition of an AMC
   In terms of Regulations 7(a)(iii) and (iv) of MF Regulations, in case of the change in control of an existing AMC where the cost of acquisition is funded out of borrowings by a sponsor following points must be taken into consideration: -
   
   • such sponsor’s stake in the AMC shall be free from any encumbrance;
   
   
   • the sponsor shall have other assets to encumber for borrowings other than the shares of the proposed AMC;
   
   
   • the sponsor shall have other assets available for collateral;
   
   
   • the sponsor shall have a minimum positive liquid net worth equal to the incremental capitalization required for the AMC's minimum capitalization, and this net worth should also cover the value of the shares to be acquired; and
   
   
   • the incremental capital contribution required for the AMC cannot be funded through borrowings and must come from the acquirer's net worth only.


3. Pooled Investment Vehicle as sponsor of MFs
   As per Regulation 7(a)(ii) of the MF Regulations private equity funds or pooled investment vehicles are allowed to sponsor MFs under specified conditions set by SEBI. For this, the following points have been brought up in the Circular:
   • only private equity funds (“PEs”) among pooled investment vehicles are eligible for sponsorship;
   
   
   • such PEs shall have a sound track record and general reputation of fairness and integrity in all his business transactions and must comply with conditions mentioned under clauses (i) to (iv) of Clause 7(a);
   
   
   • the applicant PE shall be a body corporate or a body corporate set up by a PE whether in India or abroad;
   
   
   • the applicant PE or its manager shall have at least five years of experience as a fund/investment manager with a track record of managing committed and drawn-down capital of INR 5,000 Cr. (Rupees Five Thousand Crores Only) or more.
   The PEs acting as MF sponsor shall be safeguarded by not allowing off-market transactions between the schemes of the MF and the sponsor PE or its managed corporation.


4. Reduction of stake and disassociation of sponsor
   The existing AMC can act as its own sponsor as per Regulations 7C(1) and 7C(2) of the MF Regulations. To qualify as a “self-sponsored AMC”, the company must meet specific criteria, including carrying on business in financial services for at least 5 (five) years, shall have a positive net worth for five years, and an average annual profit of at least INR 10 Crore (Rupees Ten Crores Only) after tax and expenses.
   The disassociating sponsor shall have served for at least 5 (five) years, and the reduced shares must be free from encumbrance or lock-in. A disassociating sponsor shall reduce their shareholding below 10% (ten percent) within specific timelines (5 years for listed AMCs and 3 years for unlisted).
   A self-sponsored AMC shall maintain the minimum net worth requirement continuously. The AMC's statutory auditor and trustees must submit compliance reports on eligibility criteria to SEBI annually, half-yearly, and quarterly.
   The constitution of a trustee company for a self-sponsored AMC follows these guidelines:
   • If the AMC is unlisted, the trustee company's shareholding shall mirror that of the AMC at all times.
   • If the AMC is listed, financial investors shall maintain shares in the trustee company mirroring their holding in the AMC.


5. Re- Association of the Sponsor(s)
   MF Regulations 7C(5) permits new sponsors or disassociated sponsors to take over AMC if the AMC fails to meet the conditions of the self-sponsored AMC. The new sponsor must allow a 1 (one) year cure period for the AMC to meet the conditions and if AMC fails after that the disassociated sponsor or any new entity shall become sponsor of the concerned MF. Here an exit option shall be provided to the unitholders of the existing schemed of the concerned MF. Further, the proposed sponsor shall follow due process of obtaining approval as a sponsor from SEBI.

Conclusion

The Circular aims to strengthen investor protection and enhance governance standards. It introduces stricter eligibility criteria for sponsors, including higher net worth requirements and a clean regulatory track record. It emphasizes the need for transparent disclosures and mandates a minimum investment by sponsors in the fund and establishes a comprehensive code of conduct for sponsors to ensure ethical practices. By implementing these measures, SEBI seeks to foster trust and confidence among investors, promoting a healthy and robust MF industry in India.