The Securities and Exchange Board of India (SEBI) is considering to allow private equity funds to operate as sponsors of mutual funds and increase the quantum of their investment in schemes as part of its ‘skin in the game’ regulation.

Seeking public comments through a consultation paper issued on Friday, SEBI has also proposed to increase the networth criteria for sponsors with a five-year lock-in. Market participants have to send in their comments by January 29.

Eligibility criteria

As a safeguards measure, the regulator has suggested that the PE fund should have a minimum of five years of experience in the capacity of fund or an investment manager and have experience investing in the financial sector. It should also have managed committed and drawn-down capital of not less than ₹5,000 crore as on the date of the application.

The mutual fund sponsored by the PE should not participate as an anchor investor in the public issue of an investee company, where any of the schemes and funds managed by the sponsor PE has an investment of 10 per cent or more or a board representation.

Fuelling growth

“PE with significant capital can invest in technology, bring in strategic guidance and good talent to fuel growth and innovation and expand the presence of mutual funds, including driving inclusive growth. PE may also provide constructive competition to the current entities in the mutual fund industry and improve value to investors,” SEBI said.

The working group of SEBI also considered the fact that private equity funds can act as a sponsor to real estate investment trusts (REITs) or asset reconstruction companies (ARCs) and that the Insurance Regulatory and Development Authority of India (IRDAI) had issued specific guidelines in 2017 allowing PE funds and alternate investment funds (AIFs) to be promoters of insurance companies.

IRDAI recently introduced guidelines providing more flexibility to PE funds, enabling them to invest in the insurance sector and introduced provisions by which promoters will be allowed to dilute their stake.

Stake reduction

SEBI has also sought comments on the need for a reduction in stake of sponsors of mature AMCs so as to reduce sponsor-related conflicts or whether the reduction in stake of sponsors of AMCs will serve the unit holders.

A sponsor of mutual fund is any person or a corporate that establishes a mutual fund. The sponsor is responsible for funding, setting up the asset management company and obtaining necessary approvals. Among many parameters, the sponsor should have a sound track record and a general reputation for fairness and integrity, while carrying on business with a positive net worth for the last five years.