Sebi might soon allow PE players to snap up, set up their own AMCs

Private equity (PE) players may soon get more leeway to snap up asset management companies (AMCs) or set up their own. Market regulator Securities and Exchange Board of India (Sebi) is likely to further ease mutual fund (MF) ownership rules, said people in the know. The issue will be taken up at its board meeting scheduled for Tuesday. The board is also likely to ease the framework governing superior voting rights (SR shares), in a bid to give more flexibility to the founders of new-age companies to raise capital before going public. Sebi could also operationalise the framework to allow setting up of gold spot and social stock exchanges.

At present, PE firms are not banned from acting as a MF sponsor. However, the prerequisites make it difficult for them to acquire or run a fund house.

Under current regulations, a sponsor is required to meet the 'fit and proper criteria' under which an entity needs to have a sound track record and general reputation of fairness and integrity in all its business transactions. To meet the 'sound track record' criteria, a sponsor is required to have operated a financial services business for a period of not less than five years and have a positive net worth in the preceding five years. A sponsor is also required to hold at least 40 per cent stake in the AMC.

Industry players say many of the current requirements act as a deterrent for PEs to take up sponsorship of MFs.

Sources said the regulator intends to ease several of these rules in order to boost innovation and expand the reach of MF products. The move could also intensify competition in the Rs 36-trillion MF industry.

PE players raise funds from institutional investors and wealthy individuals to invest in various assets. PEs invest in stressed assets, conduct leveraged buyouts or acquire stakes in companies ahead of their public listings. Typically, PE firms have an investment horizon of 3 to 5 years.

"The MF regulations say that if a sponsor changes, the investors have to be provided with an exit option. A PE fund has a life cycle and may necessarily want to exit after a few years, Hence, providing an exit to investors each time is not amenable to business generally," said Vishal Agarwal, partner, Deloitte India.

Sources said the regulator could look at easing this rule provided PE firms don't exit the business before 5-7 years.

Earlier attempts by PE players to bid for domestic MFs, either alone, by using the 'limited-life' fund vehicle or its general partner entity (GP), or in partnership with Sebi regulated entities, have had mixed results.

Market observers say last year PE giant Blackstone's bid to buy L&T AMC had failed to get the requisite nod from the regulator.

"Historically, Sebi has preferred permanent capital in AMCs. Treated only strategic players, appropriately regulated, either in India or home jurisdiction, and with experience in retail funds management, as 'carrying on the business in financial services.' Hence, Sebi has typically not entertained requests from PE players for taking a controlling/sponsor stake in MF AMCs," said Anu Tiwari, partner, Cyril Amarchand Mangaldas.

At present, there are 44 AMCs in India, although the bulk of the Rs 36-trillion assets are managed by the top 10 years. In recent months, several fintech companies have tried to get a toehold in this space.

"Allowing greater PE participation in AMCs should ideally improve the governance standards and public perception of such AMCs and de-emphasis shareholder control," added Agarwal.

Meanwhile, the Sebi board is looking to relax eligibility criteria for SR share issuances. The regulator could allow SR shares to be issued even by founders who are part of any promoter whose collective net worth is Rs 500 crore. Further, Sebi could allow trusts and other corporate structures to issue SR shares. Currently, SR shares can be granted only to promoters and founders. Sebi had issued a discussion paper on this topic in July. Sources said most of the proposals made in the paper could get accepted. Likewise, the framework proposed for social and gold spot exchanges in their respective consultation papers could get accepted by the Sebi board.

An email sent to Sebi seeking comments didn't elicit any response.

Lop sided	Bulk of assets are with few large players
(in Rs trillion)	Avg AUM (Rs trn)	Market share (%)
Top 10	27.45	82.73056058
Bottom 34	5.73	17.26943942
Total	33.18	100

Source: Amfi; Note:*For June 2021 quarter