By way of a Notification dated June 26, 2023 (‘Notification’), SEBI has amended the SEBI (Mutual Funds) Regulations, 1996 to inter alia strengthen the existing eligibility criteria for sponsors of a mutual fund (‘Main Criteria’), introduce alternative eligibility criteria, permit private equity fund or pooled investment fund to sponsor mutual funds and permit sponsors to disassociate from the AMC of a mutual fund.

While most of the amendments pursuant to the Notification have not yet been notified, the following key amendments will be effective from August 1, 2023:

i.    Strengthening the Main Criteria: In addition to earlier eligibility criteria, an applicant seeking registration as a sponsor is now also required to inter alia have:

• average net annual profit (after depreciation, interest and tax) during the immediately preceding five years of at least INR Ten crores (approx. USD 1.2 million);
• net profit in each of the immediately preceding five years (as against having profits in three out immediately preceding five years). The earlier exemption from this requirement for applicants having a net-worth of INR 100 crores (approx. USD 12 million) has been deleted; and
• a positive liquid net-worth (i.e., net-worth deployed in unencumbered liquid assets, cash, money market instruments etc.) (‘PLNW’) more than the proposed capital contribution in the AMC (as against having net-worth more than such proposed capital contribution).

ii.   Alternative Criteria: The Notification has introduced the following alternative criteria for registration as a sponsor if the Main Criteria is not met:

• capitalise the AMC such that it has a net-worth of at least INR 150 crores (approx. USD 18 million);
• lock-in for a period of five years on the initial shareholding equivalent to the capital contributed by the sponsor to the extent of at least INR 150 crores (approx. USD 18 million);
• appointment of certain senior management professionals having an aggregate experience of at least 30 years;
• in case of acquisition of an existing AMC, the sponsor should have a minimum PLNW equal to the incremental capitalisation required to ensure the minimum capitalisation; and PLNW of the sponsor, or funds tied by the sponsor, is to the extent of the aggregate par value or market value of the shares to be acquired, whichever is higher; and
• in case of acquisition of stake in an existing AMC, shareholding equivalent to at least INR 150 crores (approx.. USD 18 million) should be locked in for five years.

iii.  Private Equity Funds / Pooled Investment Vehicles / Pooled Investment Funds permitted to sponsor mutual funds: The aforesaid entities are now permitted to register as sponsors of mutual funds subject to certain conditions specified by SEBI; and

iv.   Disassociation of Sponsors: Sponsors are now permitted to voluntarily disassociate from AMCs and the mutual fund, subject to certain conditions to be specified by SEBI. If a sponsor disassociates from an AMC and the mutual fund and the AMC of such mutual funds wishes to act as the sponsor, then the shareholding of any shareholder of such AMC should be below 10% and the board of directors of such AMC should have at least 2/3rd independent directors.

Other material amendments pursuant to the Notification inter alia include that (i) instead of trustee, the board of directors of an AMC will now be required to conduct certain due diligence in connection with the operations of the mutual funds including ensuring fulfilment of prescribed requirements before the launch of any scheme; and (ii) chairperson of the board of directors of that trustee company will be an independent director.