Now Private Equity Firms Can Sponsor Mutual Funds

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MUMBAI India’s market regulator is likely to allow private equity funds to own local asset management companies (AMCs) amid the growing popularity of mutual funds and soaring stock markets, said said two people aware of the plan.

“Private Equity (PE) funds will be allowed to sponsor mutual funds, under certain conditions. Many existing sponsors and directors are facing a cash flow crisis due to the inability of their core businesses to generate enough capital as a result of the pandemic, ”said one of the two people named above.

“PEs have the liquidity that the FP sector needs to grow, but the money managed by PE funds has a limited lifecycle as they are forced to pay returns to their investors, posing a risk to their investors. mutual funds in which the general public invests. “

An entity with a 40% or more stake 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 pool of public funds are allowed to be mutual fund promoters.

The new rules will potentially pave the way for global EP giants to acquire local AMCs. Mint announced in October that Blackstone was in talks to acquire L&T Investment Management Ltd, the mutual funds division of L&T.

Regulations proposed by the Securities and Exchange Board of India (Sebi) will grant conditional approvals to PE funds seeking to purchase a controlling stake in AMCs.

“The new standards will require PEs to meet a certain criteria of net worth, height, experience and to adhere to certain foreclosure standards in order to be able to sponsor or purchase control of any AMC,” the said. first person.

In addition, any PE wishing to be a sponsor of a mutual fund may be required by Sebi to commit capital of a value greater than ??100 crore, as long as they intend to be the sponsor or controlling owner of the mutual fund company, the two said, on condition of anonymity.

“In addition, the PE fund will need to create a completely separate and independent AMC subsidiary and trustee to be the sponsor or controlling owner of a mutual fund company,” said the first person.

In addition, the private equity firm may need to adhere to different regulations to launch open-ended and closed-end equity oriented programs.

“Sebi will hold a meeting this week and publish the draft standards allowing PEs to be sponsors or controlling owners of mutual funds,” said the first person.

Global fund managers, including SEs, envision a share of the mutual fund business in India, with the culture of investing in equities emerging rapidly in the country.

“The problem is that many AMCs are being promoted by NBFCs and manufacturing companies, which are most affected by the pandemic. It is time for Sebi to allow PEs to sponsor AMCs if the regulator is to help the MF industry grow, ”said the second person.

In the context of a prolonged liquidity crisis in the NBFC space since the collapse of Infrastructure Leasing and Financial Services Ltd in 2018, and a liquidity shortage in manufacturing companies with AMC activities, several entities have sought to sell their mutual fund business.

The mutual fund industry is expected to grow ??34 trillion ??92 trillion by fiscal year 29-30 in terms of assets, according to a report by brokerage firm Elara Capital.

According to the report, mutual funds attract a greater share of the capital paid into financial assets.

Gross household investment in FMs increased at a compound annual growth rate (CAGR) of 27.3% in fiscal years 13-20. In comparison, gross household investment in financial assets grew at a CAGR of 11.5% during FY12-20.

MF assets in India as a percentage of GDP are only 12% compared to the global average of 63%, implying a huge room for growth, according to the report.

Some fund companies and consultants have predicted that the industry will reach the ??100,000 billion assets under management mark much earlier.

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