With private sector mutual funds completing 25 years and scaling up to ₹40-lakh crore in assets, it is only appropriate that the Securities and Exchange Board of India (SEBI) revisits some ground-rules. SEBI’s consultation paper, which takes a fundamental relook at the concept of ‘sponsors’ for Asset Management Companies (AMCs), is thus welcome. While the proposed changes may allow new players with innovative business models to enter the industry, SEBI may need to consider more guardrails to ensure that unitholders continue to enjoy stability and good governance.
The mutual fund space is today dominated by bank- and financial institution-sponsored players who follow undifferentiated business models. Therefore, there’s merit in SEBI trying to induct fresh blood by allowing sponsors without a financial services background. Presently, apart from meeting fit-and-proper criteria, sponsors need a 5-year track record in financial services and minimum net worth of ₹50-100 crore at the AMC level. SEBI is proposing that non-financial players can sponsor MFs too, provided they contribute ₹150 crore in net worth locked in for five years. Private Equity (PE) investors are today ubiquitous across lending, fintech, ARCs, REITs et al, and are all set to enter insurance.
They have disrupted many consumer businesses by providing capital and technology to scale loss-making ventures. But a key issue with allowing PE investors to sponsor MFs is the risk of related-party transactions, where sub-par private investments could be offloaded to public MF investors. SEBI suggests safeguards to prevent this, by barring PE-sponsored MFs from undertaking off-market deals with associate companies or participating in their IPOs. But with ‘associates’ defined as entities where the PE holds a 10 per cent stake or a Board seat, there could still be room for conflicted transactions where PEs own lower stakes. Other negatives need to be weighed too. The relatively short investing horizons of PE funds (7-8 years) could lead to frequent churn in MF sponsors, leading to instability for unitholders. High shareholder returns sought by PE funds can lead to compromises on unitholder interests.
SEBI is also considering if AMCs, once they scale up, must allow sponsors to dilute their holdings. Having sponsors with multiple business interests does lead to conflicts of interest for AMCs, with some instances of MFs taking exposures to doubtful bonds or IPOs from group entities. The paper moots ‘self-sponsored’ AMCs and allowing sponsors to dilute their 40 per cent stake to 26 per cent or below, after five years. This may allow AMCs to transition into widely-held entities. But the scams and controversies surrounding widely-held institutions such as NSE and IL&FS suggest that the lack of a controlling promoter (sponsor) is no guarantee of good governance. If the sponsor requirement is done away with, SEBI must vest AMCs with the responsibilities and fiduciary duties of the sponsor, in cases where investors need to be compensated for mismanagement or SEBI levies penalties for regulatory infractions.