Securities and Exchange Board of India Updates Rules for Asset Management Companies being Launched by Fintech Firms and Other Startups

The Securities and Exchange Board of India (SEBI), the regulator of the nation’s securities and commodities market, announced on Wednesday (December 16, 2020) that it has updated guidelines related to establishing asset management companies (AMCs) for Fintech firms and other startups.

SEBI confirmed that it has tightened up the shareholding guidelines for firms that may be relisting after completing the corporate insolvency resolution process (CIRP) in order to ensure fair price discovery.

SEBI stated that an entity may sponsor a mutual fund even if it’s unable to meet profitability requirements. But the entity must have a net worth of at least Rs 100 crore (appr. $13.6 million). Currently, mutual fund sponsors are required to have a profitability track record and must have a net worth of Rs 50 crore.

Industry professionals in India noted that this development should encourage Fintech companies such as Paytm, PhonePe, and MobiKwik to establish mutual fund divisions.

As first reported by local news outlet Business Standard, Value Research CEO Dhirendra Kumar remarked:

“[Many] fintech firms are far from turning profitable. Balancing the risks, SEBI is saying you bring double the net worth.” 

SEBI stated the stricter net worth requirements may be eased after the AMC have generated profits for 5 consecutive years.

Kaustubh Belapurkar, Director of Fund Research, Morningstar Investment Advisers, stated:

“The amendment to the eligibility criteria for sponsoring a mutual fund is a positive for upcoming entrants like fintech platforms looking to launch a fund.”

Many Fintech companies have expressed an interest in entering the local mutual fund space, which has seen its asset growth increase dramatically from Rs 10 trillion in 2014 to Rs 30 trillion (as of November 2020). Currently, the industry has over 40 players, but most of the assets are being managed by five major players. Despite the strong growth, many international players have reportedly left the business.

Joydeep Sen, Consultant at Phillip Capital fixed income desk, noted:

“While SEBI has been tightening the mutual fund regulations, it realizes that more players need to be encouraged to set up AMCs to ensure growth. Already, we have seen many foreign sponsors exit. The new eligibility criteria could encourage new-age, tech-oriented firms to enter the mutual fund [space.]”

SEBI has stated that firms relisting after the CIRP must have at least 5% public shareholding, which will have to be increased to 10% within a year and 25% after 3 years.

SEBI has also announced the removal of minimum promoters’ contribution and lock-in requirements for firms planning to secure additional funding. The agency has made changes to the fee structure of investment advisors and certain relaxations to rules related to investment committees of alternative investment funds.

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