How Would the Venture of Fintech Disrupt Mutual Fund Businesses
The fintech startup and other entities have got the approval to venture mutual fund business as the Securities and Exchange Board of India (SEBI) relax the norms for the fintech. Now, if the fintech has a net worth of a minimum of 100 crore whatever be the company’s profit then the fintech could enter the mutual fund business. So far the regulator had constraints for the entrants to have a minimum of five years of experience in the financial services business and also to demonstrate three years of profitability along with maintaining a net worth of about 50 crore. But, the SEBI’s relaxation has waived off these norms, in order to facilitate innovation and to give better access to more investors at a faster pace this applies for tech-enabled solutions as well.
SEBI states, “Sponsors that are not fulfilling profitability criteria at the time of making the application shall also be considered eligible to sponsor a mutual fund, subject to having a net worth of not less than INR 100 Cr for the purpose of contribution toward the net-worth of the asset management company (AMC).”
With this, now the entities are eligible to enter mutual funds, provided they maintain their net worth a minimum of 100 crore until they demonstrate profitability for five years. Alongside, they are also expected to maintain their net worth throughout and not just towards the year-end.
However, the financial experts believe that the change brought out in the SEBI norms would ease the entrant, the tech startups in the mutual funds business. Particularly, relinquishing most of the profitability requirements that are considered as a boost for Indian startups, as most of the companies put their initial public offering (IPO) plans on the backburner and are waiting to turn a profit. Additionally, the SEBI has also released a set of proposals to encourage Indian startups to go public.
These include a discretionary quote to startups floating an IPO that enables the startups could allow up to 60 percent of the shares to be sold in the IPO to choose investors on a discretionary basis before the issue opens to all investors, the regulator. However, Parliament passed the Companies Bill, 2020, which empowers the central government to provide certain classes of public companies to list classes of securities in foreign jurisdictions.
SEBI has amended norms relating to eligibility criteria, net worth, and segregation of a mutual fund’s assets as a measure to promote innovation in mutual funds simultaneously safeguarding unitholders.
According to the Mutual Fund regulations, any company intending to sponsor a mutual fund must have earned profits for at least three of the preceding five years, along with a positive net worth. However, some companies, especially startups such as Paytm and other fintech companies, may not match the profitability criteria.
Thus, to counter the scenario, SEBI has permitted a company to sponsor a mutual fund that has a net worth of Rs 100 crore or more. The market regulator has also given a nod to a proposal that would expect mutual funds to segregate and ring-fence assets and liabilities of each scheme along with the existing requirement of segregating bank accounts and securities accounts.
This would bring transparency, limit losses on account of illiquid or bad assets to a particular scheme. It would also prevent supplies from surreptitiously transferring such bad assets to prevent disclosure.
Relaxations in the Lock-in Period for Promoters another important change approved by the market regulator pertains to the removal of minimum promoter contribution and subsequent lock-in requirements for issuers who intend to make a further public offer (FPO).SEBI regulations currently require the promoter of an issuer to make a minimum contribution which is locked in for a prescribed period.
Dhirendra Kumar, CEO, Value Research says, “There are many companies that are waiting to set-up a mutual fund business in India which are yet to make profits. With these announcements, regulators have facilitated such players to start the mutual fund operations in India.”