Legal and Regulatory Framework

Role of Regulators in India: The regulations in financial markets are driven by the need to safeguard the interests of consumers and ensure regulated development of financial markets. There are four main regulators:
- Reserve Bank of India (RBI): Regulates the banking system and money markets.
- Securities and Exchange Board of India (SEBI): Regulates the securities markets.
- Insurance Regulatory and Development Authority of India (IRDAI): Regulates the insurance market.
- Pension Fund Regulatory and Development Authority of India (PFRDA): Regulates the pension market.
Role of SEBI in Regulating Mutual Funds: SEBI regulates mutual funds, depositories, custodians, registrars and transfer agents (RTAs), and credit rating agencies. Its main objectives are to protect investor interests and promote the development of the securities market.
SEBI Regulations: Cover three important aspects:
- Disclosures by Issuers: SEBI mandates disclosures by issuers of securities, such as companies and mutual funds.
- Efficiency of Transactions: SEBI aims to ensure efficient transactions in the securities markets.
- Low Transaction Costs: SEBI strives to keep transaction costs low.
Regulatory Reforms by SEBI: SEBI has issued various regulations and circulars to protect investor interests and empower informed investment decisions. These reforms cover:
- Scheme-Related Documents: SEBI regulates the content and frequency of publication of scheme-related documents.
- Registration: SEBI covers registration of key players, such as asset management companies, sponsors, and trustees.
- Conversion and Consolidation of Existing Schemes: SEBI regulates the merger of schemes to protect investor interests.
- New Products: SEBI governs the introduction of new product categories, such as Infrastructure Debt Funds and ESGs.
- Risk Management System: SEBI mandates robust operational risk management systems for mutual funds.
- Disclosures and Reporting Norms: SEBI ensures transparency through proper disclosures and reporting norms.
- Governance Norms: SEBI covers fund-level governance norms, including the formation of audit and valuation committees.

Legal and Regulatory Framework (Part 2)

Independent Directors and Trustees: SEBI regulations emphasize the importance of independent directors and trustees to ensure scheme-level governance norms, including minimum investor requirements and benchmarking of scheme performance.
Governance Norms: Regulations cover aspects such as systems audit of mutual funds and the role of mutual funds in corporate governance.
Segregated Portfolio: Creation of a segregated portfolio is a mechanism to separate distressed or illiquid assets from more liquid assets in a mutual fund portfolio, typically in response to a credit event.

Key Regulatory Provisions

Secondary Market Activities: Regulations govern mutual fund activities in equity, debt, government securities, and derivatives markets.
Net Asset Value (NAV): Provisions cover NAV disclosures, rounding off, cut-off times, and uniformity in calculation of sale and purchase prices.
Valuation: Regulations outline the valuation of securities in which mutual fund schemes invest.
Loads, Fees, and Expenses: Limits are imposed on various loads, fees, and expenses, along with disclosure requirements for commission payable to distributors.
Dividend Distribution: Procedures are outlined for dividend distribution, including calculation of distributable surplus.
Investment by Schemes: Guidelines and circulars cover investment restrictions and limits for mutual fund schemes.
Advertisements: Regulations govern what advertisements can cover, frequency, disclaimers, and risk factors.
Investor Rights and Obligations: Provisions cover matters such as account statements, redemption pay-outs, penalties for delays, and instant access facilities.
Certification and Registration of Intermediaries: Requirements are specified for certification, registration, and continuous professional education for intermediaries.
Transaction in Mutual Fund Units: Regulations cover transactions through stock exchanges, document preservation, KYC norms, etc.

Additional Regulatory Aspects

Corporate Debt Market Development Fund (CDMDF): SEBI regulations cover registration, disclosure, investment restrictions, risk management, and governance norms for CDMDF.
Execution Only Platforms (EOPs): Regulations govern applicability, scope, eligibility, on-boarding, fees, operational risk management, and disclosures for EOPs.
Miscellaneous: Provisions cover all matters not specified in the above categories.

Mutual Funds Regulations

SEBI (Mutual Funds) Regulations, 1996: These regulations, as amended, set out guidelines for mutual funds, with aspects discussed throughout this workbook.
Compliance with Other Regulators: Mutual funds must comply with regulations from other regulators, such as RBI, regarding money market and foreign exchange investments.
Stock Exchange Regulations: Mutual funds must adhere to the listing, trading, and margining rules of the stock exchanges with which they have a business relationship.

Investment Restrictions and Portfolio Diversification

General Restrictions: Mutual funds are subject to restrictions such as buying and selling securities on a delivery basis, not advancing loans, and limits on investments in group companies and other mutual funds.
Debt Securities Restrictions: Specific limits apply to investments in debt instruments, including those rated not below investment grade by a credit rating agency.
Investment Limits: Aggregate limits are set for all schemes of a mutual fund to mitigate risks and protect investor interests.

Legal and Regulatory Framework (Part 3)

Investment Restrictions: Trustees/AMCs shall ensure that the bank in which a scheme has short term deposits do not invest in the said scheme until the scheme has short term deposits with such bank.
Liquid Assets: Open-ended debt funds have to maintain a minimum of 10 per cent of their corpus in liquid assets, defined as Cash, Government Securities, T-bills, and Repo on Government Securities.
Non-Convertible Preference Shares (NCPS): To be treated as debt instruments, with all applicable debt investment restrictions.
Equity Investment Restrictions:
- Investments in equity shares and equity-related instruments shall only be made if such securities are listed or to be listed.
- At least 80 percent of ELSS funds should be invested in equity and equity-linked securities.
- No more than 10 percent of a scheme's NAV shall be invested in the equity shares and equity-related instruments of a company.
InvIT Investment Restrictions:
- No mutual fund under all its schemes shall own more than 10 percent of units issued by a single issuer of InvIT.
- A mutual fund scheme shall not invest more than 10 percent of its NAV in the units of InvIT, and more than 5 percent of its NAV in the units of InvIT issued by a single issuer.
SEBI Advertisement Code for Mutual Funds:
- Advertisements shall be accurate, true, fair, clear, complete, unambiguous, and concise.
- Advertisements shall not contain false, misleading, biased, or deceptive statements.
- Advertisements shall contain a standard warning in legible fonts: 'Mutual Fund investments are subject to market risks, read all scheme related documents carefully.'
Advertisement Guidelines for Mutual Funds:
- Performance advertisement of mutual fund schemes shall be provided in terms of CAGR for the past 1 year, 3 years, 5 years, and since inception.
- Point-to-point returns on a standard investment of Rs. 10,000 shall also be shown.
- The disclosed performance shall be of regular or direct plan of the Mutual Fund, with a footnote mentioning different plans have different expense structures.
Celebrity Endorsements of Mutual Funds:
- SEBI has permitted celebrity endorsements at the industry level for increasing awareness of Mutual Funds as a financial product category.
- Celebrity endorsements shall not promote a scheme of a particular Mutual Fund, and shall be subject to certain conditions.

Legal and Regulatory Framework (Part 4)

Celebrity Endorsements: Expenses towards celebrity endorsements shall be limited to the amounts aggregated by Mutual Funds at the industry level for investor education and awareness initiatives. Prior approval of SEBI shall be required for issuance of any endorsement of Mutual Funds as a financial product featuring a celebrity.
Branding and Advertisement Requirements for Specialized Investment Funds (SIFs): SIFs must have distinct identification, separate from the mutual fund, to maintain clear differentiation between the offerings of the SIF and that of a mutual fund. The AMC may use the sponsor's or mutual fund's brand name in the offer documents, advertisements, and promotional materials of the SIF for a period of five years from the date of SEBI's approval for the launch of the SIF.
SEBI Guidelines for Circulation of Unauthenticated News: Market intermediaries must have a proper internal code of conduct and controls in place to prevent the circulation of unauthenticated news. Employees must not encourage or circulate rumors or unverified information without verification.

Investors' Rights & Obligations

Right to Beneficial Ownership: Unit-holders have a proportionate right to the beneficial ownership of the assets of the scheme. Investors can ask for a Unit Certificate for their Unit-holding.
Right to Change the Distributor: Investors can choose to change their distributor or opt for direct investing through a written request.
Right to Inspect Documents: Unit-holders have the right to inspect key documents such as the Trust Deed, Investment Management Agreement, and Memorandum & Articles of Association of the AMC.
Right to Appoint Nominees: Investors can appoint up to 10 nominees, who will be entitled to the 'Units' in the event of the demise of the investors.
Right to Pledge Mutual Fund Units: Investors can pledge their mutual fund units to offer security to a financier.
Right to Grievance Redressal: There is a formal grievance redressal policy for investors, and SEBI has mandated that the status of complaints redressed should be published by each AMC in their annual report.

Investor Grievance Redress Mechanism

SEBI Complaint Redress System (SCORES): SCORES is a web-based centralized grievance redress system of SEBI that enables investors to lodge, follow up on their complaints, and track the status of redressal of such complaints online.
Redressal of Complaints: The asset management company shall redress investor grievances promptly but not later than twenty-one calendar days from the date of receipt of the grievance.

Legal and Regulatory Framework

Definition: The legal and regulatory framework for mutual funds in India is governed by the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI).
Details: The framework includes regulations, guidelines, and codes of conduct that ensure the protection of investors' interests and promote transparency and fairness in the mutual fund industry.

Key Entities and Complaint Handling

Entities against which complaints are handled by SEBI include:
- Listed companies/registrar & transfer agents
- Brokers/stock exchanges
- Depository participants/depository
- Mutual funds
- Portfolio Managers
- Other entities (KRAs, Collective investment scheme, Merchant banker, Credit rating, foreign portfolio investor etc.)

Cyber Security and Cyber Resilience

Cyber Security and Cyber Resilience Framework (CSCRF): SEBI has issued a detailed framework to address evolving cyber threats and ensure compliance by SEBI Registered Entities (REs).
Key Objectives: The CSCRF aims to align with industry standards, encourage efficient audits, and ensure compliance by REs.
Cyber Resiliency Goals: The framework covers five cyber resiliency goals:
1. Anticipate
2. Withstand
3. Contain
4. Recover
5. Evolve

AMFI Code of Conduct

AMFI Code of Ethics (ACE): The Association of Mutual Funds in India (AMFI) has established a code of ethics to promote high ethical and professional standards in the mutual fund industry.
Key Objectives: The ACE sets out standards of good practices to be followed by Asset Management Companies in their operations and dealings with investors, intermediaries, and the public.
AMFI's Code of Conduct for Intermediaries: AMFI has also framed guidelines and a code of conduct for intermediaries, known as AMFI Guidelines & Norms for Intermediaries (AGNI).

Sample Questions

The regulator of mutual funds in India is the Securities and Exchange Board of India (SEBI).
Mutual funds can buy and sell securities only on a delivery basis, making the statement True.
The minimum percentage of the mutual fund scheme corpus that must be invested in equity and related instruments in the case of Equity Linked Savings Schemes (ELSS) is 80 percent.
SEBI has permitted celebrity endorsement at the industry level for the purpose of increasing awareness of mutual funds.
Investors have the right to specify up to three nominees for their mutual fund investment folios, but the exact number can vary, and the options provided do not include the correct answer.