In a major development, the Securities and Exchange Board of India (SEBI) on Wednesday approved a proposal for private equity funds to own mutual fund companies. The decision was taken at a board meeting chaired by SEBI Chief Madhuri Puri Buch.

The market regulator says that the move will give greater flexibility to the industry, and will allow the self-sponsored AMCs to continue the mutual funds business. Currently, any company or entity, which has a 40% or more stake in mutual funds, is considered the sponsor.

"The Board approved amendments to SEBI (Mutual Funds) Regulations, 1996 under which, while strengthening the existing eligibility criteria for sponsors, introduced an alternative route to enable a diverse set of entities to become sponsors of MFs. Such entities, who otherwise may not have been eligible to be sponsors, include private equity funds, with requisite safeguards included in the proposal. The amendments also allow for “Self Sponsored AMCs” to continue the mutual fund business, subject to the said AMCs fulfilling certain criteria. This would give the original sponsor flexibility to voluntarily disassociate itself from the MF without needing to induct a new and eligible sponsor," SEBI says in a statement.

Apart from this, the market regulator has approved amendments for the regulatory framework for ESG (environmental, social and governance) under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and SEBI (Mutual Funds) Regulations, 1996 in order to facilitate a balanced approach to ESG. As part of the key amendments, the market regulator has introduced BRSR (Business Responsibility and Sustainability Report) core for the listed entities. The BRSR will contain a limited set of key performance indicators for listed entities to obtain reasonable assurance.

"A glide path is prescribed for applicability of BRSR Core, beginning with the top 150 listed entities (by market capitalization) from FY 2023 – 24 which shall be gradually extended to the top 1000 listed entities by FY 2026 – 27," SEBI says.

As part of amendments in ESG ratings, the market regulators said that ESG rating providers (ESPs) will be required to consider India/Emerging Market parameters in ESG Ratings. In order to facilitate the credibility of ESG Ratings, ERPs shall offer a separate category of ESG Rating called ‘Core ESG Rating’, which will be based on the assured parameters under BRSR Core, the SEBI says. In order to avoid the risk of mis-selling and green washing in ESG investing, SEBI has introduced mandating ESG schemes to invest at least 65% of assets under management (AUM) in listed companies, where assurance on BRSR core is undertaken. SEBI has also introduced mandating third-party assurance and certification by AMCs’ board on compliance with the objective of the ESG scheme, as well as mandating enhanced disclosures on voting decisions with a specific focus on ESG factors.

For secondary market trading, the board has approved the broad framework for application supported by the blocked amount (ASBA) like facility being made available to investors, The facility is based on the blocking of funds for trading in the secondary market through UPI.

In order to avoid fraud in stock markets, the board has approved a framework to provide an institutional mechanism for the prevention and detection of fraud or market abuse by stock brokers.

Apart from this, the market regulator has approved the setting up of a corporate debt market development fund (CDMDF) in the form of an alternative investment fund (AIF) to act as a backstop for specified debt funds during market dislocations and to enhance liquidity in the second market. "CDMDF, based on a guarantee to be provided by National Credit Guarantee Trust Company (NCGTC) may raise funds, for the purchase of corporate debt securities during the market dislocation," the market regulator says.

SEBI on ESG ratings

SEBI allows PE funds to own mutual fund cos