These requirements were put in place over time to ensure that only reputable sponsors are eligible to set up mutual funds. However Given the changing landscape of the mutual fund industry, a provision was added to the MF Regulations in 2021 to allow applicants to sponsor a mutual fund even if the profitability track-record condition of eligibility was not met, provided the applicant had a positive net worth of at least Rs. 100 crore
SEBI intends to review the framework for mutual fund sponsors in order to investigate the possibility of allowing a diverse set of entities, which would otherwise be ineligible, to be associated with mutual funds.
The sponsor is responsible for establishing a mutual fund and carrying out all necessary tasks, such as obtaining necessary approvals, funding, incorporating and establishing an asset management company, establishing a mutual fund trust and Trustee Company, and so on.
Currently, the Sponsor must have been in the financial services business for at least five years. Sponsor must have a positive net worth and contribute at least 40% of the asset management company’s net worth.
These requirements were put in place over time to ensure that only reputable sponsors are eligible to set up mutual funds. However Given the changing landscape of the mutual fund industry, a provision was added to the MF Regulations in 2021 to allow applicants to sponsor a mutual fund even if the profitability track-record condition of eligibility was not met, provided the applicant had a positive net worth of at least Rs. 100 crore.
Over time, it has been observed that once a mutual fund has reached a certain level of AUM and existence, the sponsors’ obligations gradually diminish to minor activities (such as signatory to trust deed). By this point in the business cycle, the AMC has demonstrated self-sufficiency and maturity in operating in the best interests of the unitholders.
According to SEBI , a sponsor is important in the early years of a new mutual fund but not in subsequent years. A sponsor is also unnecessary in a mature AMC. Adequate funds, if available, can facilitate access to all necessary resources available at the industry level for new AMCs.
To increase the penetration of the Mutual Fund industry, it was felt that an alternative set of eligibility requirements should be introduced to allow new players who would otherwise not have been eligible to act as sponsors. This is expected to facilitate new capital flow into the industry, foster innovation, encourage competition, and make consolidation and exit easier for existing sponsors.
The SEBI Working Group noted that private equity with significant capital can invest in technology, provide strategic guidance, and attract top talent to fuel growth and innovation, as well as expand the presence of mutual funds by driving inclusive growth. PE may also provide constructive competition to existing Mutual Fund entities and improve value to investors. As a result, the Working Group agreed that facilitating PE can add value to the Indian Mutual Fund Industry.
Recently, IRDAI issued guidelines that allow private equity funds to invest in the insurance sector with greater flexibility. These guidelines allow promoters to reduce their stake from 50% to 26% if the insurer has a satisfactory solvency record over the previous five years and is a listed entity. In light of this, the Working Group discussed the possibility of a private equity firm directly sponsoring the Mutual Fund.