Industry sources familiar with development said Sahara India would prop up the equity capital of First India Mutual Fund by five times to Rs 50 crore (Rs 500 million) from Rs 10 crore (Rs 100 million).
Sahara has signed a memorandum of understanding with the A C Muthiah group, the principal promoter, to acquire the fund.
It has began due diligence to determine the price of the takeover and the deal is expected to be clinched within a month.
Sources said, "Post acquisition, First India's equity will be the second highest in the industry. IDBI-Principal has the largest equity capital of Rs 59 crore (Rs 590million). The minimum equity capital requirement for a mutual fund is Rs 10 crore. However, most of the funds have capital of Rs 15-30 crore (Rs 150-300 million)."
Sahara India corporate communication chief Avijit Sarkar was not available for comment. Industry sources said the capital injection would be the first time in case of the recent acquisitions.
More than 78 mutual funds changed hands in the last couple of years but they did not require capital injection.
The CEO of a top fund said First India needed equity capital injection as its current size was not big enough to compete with market leaders.
He said Sahara had intended to become a major player in the Rs 1.2 lakh crore (Rs 1.2 trillion) domestic mutual fund industry in a short period and, therefore, equity capital of its acquisition would be enhanced to kick-start the process.
In addition to the Muthiah group, other equity participants in the fund are Metropolitan Life Insurance Co of the US and Investec Asset Management of the UK.
Experts said the proposed acquisition would also help First India to expand its network. First India MF has been operating for the past several years but recently went in for an overhaul of operations. The mutual fund has a number of regular schemes under its management.
These are tax-saving (its first, and till recently, the only product), income, gilts, short-term, liquid and the newly-introduced growth fund. Its assets under management are around Rs 100 crore (Rs 1 billion).