Sebi allows PE funds to become mutual fund sponsors; enhances role, accountability of trustee

Sebi has also cleared a proposal to constitute a unit holder protection committee by the board of an AMC

Capital markets regulator Sebi on Wednesday decided to allow private equity funds to sponsor a mutual fund house as they can bring in strategic guidance and talent to fuel the industry growth.

The decision comes in the backdrop of IDFC Mutual Fund getting acquired by a consortium comprising Bandhan Financial Holdings Ltd, Sovereign Wealth Fund GIC and private equity fund ChrysCapital.

In addition, the board of Sebi has decided to permit "Self Sponsored AMCs" to continue the mutual fund business. This is subject to asset management companies (AMCs) fulfilling certain conditions. The move would give the original sponsor flexibility to voluntarily disassociate itself from the MF without needing to induct a new and eligible sponsor.

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Also, Sebi has cleared a proposal to constitute a unit holder protection committee (UHPC) by the board of an AMC. This is part of Sebi's attempt to have an independent review mechanism for the decisions of AMC from the perspective of the unit holders' interest across all products and services.

Further, the markets regulator has approved a framework to enhance the role and accountability of the mutual fund trustees in a move to safeguard unitholders' interests.

The regulator has decided to set up Corporate Debt Market Development Fund (CDMDF) in the form of an Alternative Investment Fund (AIF) to act as a backstop facility for the purchase of investment-grade corporate debt securities during times of stress.

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This is aimed at instilling confidence among the participants in the corporate bond market and generally enhancing secondary market liquidity.

CDMDF, based on a guarantee to be provided by National Credit Guarantee Trust Company (NCGTC), may raise funds for the purchase of corporate debt securities during the market dislocation, the regulator said in a press release after its board meeting.

Further, Sebi has decided to provide for the enablement of contributions by the specified debt-oriented mutual fund schemes and asset management companies of mutual funds towards building the initial corpus of the CDMDF.

"Access to the fund for selling securities during market dislocation shall be specified mutual fund schemes in proportion to the contribution made to the Fund at a mutual fund level," Sebi said.

The board also approved the framework for triggering CDMDF’s asset purchases during market dislocation.

With regard to mutual fund sponsors, Sebi has decided to introduce an alternative set of eligibility criteria to enable private equity funds, which do not qualify based on the current requirement to act as sponsors of mutual funds and decided to further strengthen the existing eligibility requirements to ensure that only high-quality entities qualify.

At present, any entity that owns 40 per cent or more stake in a mutual fund is considered a sponsor.

In respect of clarity on the roles and responsibilities of trustees and the Board of AMCs, Sebi has cleared amendments in mutual fund rules to provide for the identification of specific areas as the core responsibilities of Trustees, which will require an independent evaluation and due diligence by Trustees.

Besides, areas of potential conflict of interest between the shareholders of the AMC and the unitholders of its schemes were highlighted.

"The amendment shall also explicitly make the Board of AMC responsible for protecting unitholders’ interests, in addition to AMC stakeholders’ interests," Sebi said.