Sebi allows PE funds to sponsor MFs; to set up Rs 33,000 crore debt market development fund

This takes the available investible fund to Rs 33,000 crore.The fund, in the form of an alternative investment fund, will act as a backstop facility for purchase of investment-grade corporate debt securities during times of stress, she said.Of the AMCs contribution to the fund, 10 per cent will come from their equity and the rest 90 per cent will come from the beneficiary schemes, Buch said.Tightening the screws on fund houses on the feecommission structure, the chairperson said, we dont want to tell them how much to pay and to whom.

Capital markets regulator Sebi on Wednesday introduced a slew of measures for the mutual fund industry, including setting up a Rs 33,000-crore corpus for a corporate debt market development fund and allowing private equity funds to sponsor a mutual fund house as they can bring in strategic guidance and talent to fuel the industry growth.

The regulator also allowed self-sponsorship of mutual fund schemes as part of its measure towards more ease of doing business.

The decision to allow private equity funds to sponsor mutual fund houses comes in the backdrop of IDFC Mutual Fund getting acquired by a consortium comprising Bandhan Financial Holdings, the Singaporean sovereign wealth fund GIC and private equity fund ChrysCapital recently.

In addition, the Sebi board 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 the flexibility to voluntarily disassociate itself from the MF without needing to induct a new and eligible sponsor.

On the corpus of the proposed corporate debt market development fund (CDMDF) which will function like an alternative investment fund, Sebi chairperson Madhabi Puri Buch told reporters after the board meeting that it will have Rs 33,000 crore of investible corpus.

''The corporate debt market development fund will have an initial corpus of Rs 3,000 crore contributed by mutual fund houses. The government has allowed a 10x leverage on this with full guarantee by the Credit Guarantee Corporation also. This takes the available investible fund to Rs 33,000 crore.

''The fund, in the form of an alternative investment fund, will act as a backstop facility for purchase of investment-grade corporate debt securities during times of stress,'' she said.

''Of the AMCs' contribution to the fund, 10 per cent will come from their equity and the rest 90 per cent will come from the beneficiary schemes,'' Buch said.

Tightening the screws on fund houses on the fee/commission structure, the chairperson said, ''we don't want to tell them how much to pay and to whom. All that we want is that whatever be the fee, it should be fully disclosed. It's as simple as that.'' On seeking stricter mutual fund fees disclosures, the chairperson said, ''We have ample evidence to believe that the commission being paid to brokers or so-called researchers are not for the business they render. So is the case with other service fees, such as for research reports.

''Pay brokers as much as you want but bring them onto the table fully and disclose, because it concerns public money because if you don't do that it's the unitholder who loses. Period. We have enough evidence to believe that the so-called disclosed brokerage fees are not being paid for genuine business service rendered.'' ''All we are saying is that just disclose all your expenses without any subheads or ifs and buts. When you total your expense ratio, it has to be just total; it's as simple as that. We are not in the business of telling a business house how much they have to pay for a service.

''Another reason why we want to know the fee structure is that there is what you call the economies of scale even in mutual funds. But the problem is that the scale is on the asset class side and not on the scheme level.

''Thirdly, there is clear case of double-charging the unitholder. Because we have clearly found that the brokerage was paid not for the service rendered but for some other reasons.'' 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 regulator has approved a framework to enhance the role and accountability of the mutual fund trustees in a move to safeguard unitholders' interests.

MF trustees will have to justify the fee charged to the unitholder, Buch said, adding, ''tell me if your fund is underperforming the benchmark and the key asset class tracking it as well as your peer funds, but you still charge higher fee to your unitholder, how can that be justified? And why should it be allowed? So we want the mutual fund trustee to hold the management accountable on all these scores and report to us.'' The proposed CDMDF is aimed at instilling confidence among the participants in the corporate bond market and generally enhancing secondary market liquidity.

The fund, based on a guarantee to be provided by the National Credit Guarantee Trust Company, 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.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)