SEBI May Allow PE Firms To Set Up AMCs

SEBI, the capital markets regulator in India, could soon allow private equity or PE firms to own Asset Management Companies or AMCs. You will find private equity firms either setting up their AMCs or acquiring existing ones. It helps these firms tap into the growing mutual fund industry in India. As per current laws, PE firms can function as sponsors of mutual funds. However, the prerequisites make it challenging for these firms to run a mutual fund house. Why may SEBI allow PE firms to run AMCs?

What is a private equity firm?

You have private equity firms pooling funds from wealthy and institutional investors and putting them in various assets. It is a private mode of financing where investors directly invest in private firms. 

You have PE firms focusing on stressed assets, going for leveraged buyouts, buying a controlling stake in a company by using outside capital or even acquiring firms before their IPOs. 

You will find PE firms focusing on an investment horizon of three to five years. It has a goal of investing in companies to increase their value over time and then selling at a profit. 

SEBI may allow PE firms to set up AMCs

You have SEBI easing rules so that private equity firms can set up AMCs in India. It will ease the framework governing the superior voting rights (SR shares) to give flexibility to the founders of new-age companies. You will find the new-age companies raising funds quickly and going public soon. 

You have current rules where a sponsor must meet the ‘fit and proper criteria’ to sponsor an AMC. It means the entity sponsoring the AMC must have a track record of performance and a reputation for fairness and integrity in the business transactions. 

According to current SEBI rules, the sponsor of a mutual fund must have operated a business in financial services for at least five years and must have a positive net worth in the preceding five years. Moreover, the sponsor must have at least a 40% stake in the AMC. You have these rules serving as a deterrent for private equity firms to set up AMCs.

You will find mutual fund regulations that state that investors would have to be offered an exit option if the sponsor changes. You have many PE funds having a life cycle that is of a shorter duration. It means these firms cannot meet the mandatory criteria. You have SEBI looking to ease the exit option criteria, provided PE firms do not exit the business before five to seven years. 

You have the SEBI board looking to relax the eligibility criteria governing superior voting rights. SEBI may allow founders who are part of a promoter whose collective net worth is Rs 500 crore to issue SR shares. Moreover, SEBI may even allow corporate structures and trusts to issue these shares.

Why does SEBI want PE firms to start AMCs?

You have SEBI encouraging innovation in the mutual fund industry to increase mutual fund penetration in India. PE firms could propel this innovation and intensify the competition in India’s Rs 36 trillion mutual fund industry.  

The increasing presence of PE firms in the AMC space will improve governance in the mutual fund industry. Moreover, many fintech companies are also looking to expand into the mutual fund space. 

You have private equity firms looking to become sponsors of mutual funds. Fintech firms also want to jump into the mutual fund industry. It could lead to innovation as newer mutual fund products are launched in a short time. In a nutshell, the entry of private equity firms can also be good for the mutual fund industry. 

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For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in