Sebi asks MFs to show more skin in the game and invest more in their own programs

Domestic asset management companies (SGAs) will soon have to invest a significantly higher amount in their own systems.

The Securities and Exchange Board of India (Sebi) has published the framework to align the interests of AMC and unitholders. As part of this, AMCs will now need to invest between 0.03 percent and 0.13 percent of the plan corpus depending on the risk levels of individual plans.

According to a calculation by Business Standard, the top 10 active equity programs in terms of assets would collectively require investments of around Rs 365 crore, compared to Rs 50 lakh currently mandated, in their own program under the new guidelines.

Sebi has given fund companies until May 2022 to meet this requirement.

Currently, fund houses are required to invest a maximum of Rs 50 lakh per program. In August, Sebi’s board removed the upper cap and instead tied the investment to the size and risk of the fund in an effort to ensure more skin in the game.

The risk profile will comply with the existing labels within the framework of the risk-o-meter.

If the risk value is less than or equal to one, the funds should invest 0.03% in the system, while if the risk value is greater than five, 0.13% of the assets under management of the system (AUM) will be invested. in the diagram.

AMCs that run the largest actively managed equity programs in the country may need to increase their investments up to 10 times.

G Pradeepkumar, CEO of Union AMC, said: “This will ensure that the fund companies’ investments in the programs will be in line with the risk of the program and the AUM. As the size of the program increases, AMCs need to invest more money.

This is a welcome step that will help align the interests of AMCs more closely with those of unitholders. “

The regulator in its circular said that the plan’s risk value according to the previous month’s risk-o-meter should be taken into account and that the investment should be maintained at all times until the end of the regime’s tenure or until the plan is wound up.

“AMCs can invest from their equity or the sponsor can fund the AMC to fulfill the above obligations, if necessary. However, AMCs will be required to fill the minimum equity gap to comply with MF regulatory requirements if a temporary mark-to-market loss is maintained for two consecutive quarters, ”the Sebi circular clarified.

The AMCs ensure that this temporary nature of the loss at market value is certified by the auditor. Market players say the move will dramatically increase the cost and benefit players who have higher net worth.

Currently, an AMC must maintain a net worth of Rs 50 crore. Previously, Sebi’s expert group had proposed investments between 0.03% and 0.25%. However, that would have resulted in an investment of around Rs 3,953 crore, or five times the total existing investment, according to Sebi.

AMCs will not be required to invest in exchange-traded funds (ETFs), index funds, overnight funds, funds of funds and in the case of closed-end funds for which the subscription period has ended at the date of entry into force of the regulations amending the funds.

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