Legal and Regulatory Environment

Legal and Regulatory Environment (Part 1)

• Role of Securities and Exchange Board of India (SEBI): SEBI regulates securities markets in India, including mutual funds, depositories, custodians, registrars and transfer agents (RTAs), and credit rating agencies.
• Regulatory Reforms by SEBI: SEBI has introduced various reforms, such as:
  • SEBI (Mutual Funds) Regulations, 1996, to protect investor interests and empower informed investment decisions.
  • Scheme categorization and rationalization to reduce confusion among investors.
  • Creation of segregated portfolios to protect unitholder interests in case of credit events.
  • Mandatory listing of close-ended schemes and units of segregated portfolios on recognized stock exchanges.
• Investor Grievance Redressal: SEBI has implemented measures to address investor grievances, including:
  • Regulations to ensure transparency and fairness in mutual fund operations.
  • Guidelines for investor services, accounting, and valuation norms.
• AMFI Code of Conduct for Intermediaries: The Association of Mutual Funds in India (AMFI) has a code of conduct for intermediaries, which includes:
  • Disclosure: Accurate and timely disclosure of information to investors.
  • Fairness: Fair treatment of all investors, with no misleading or deceptive statements.
  • Transparency: Clear and concise communication of investment risks and returns.
• SEBI Advertisement Code for Mutual Funds: Advertisements must be:
  • Accurate: True, fair, and complete information.
  • Unambiguous: Clear and concise language, avoiding technical jargon.
  • Concise: No misleading or deceptive statements.
  • Standard Warning: Mandatory warning about market risks and the importance of reading scheme-related documents.

Legal and Regulatory Environment (Part 2)

• Advertisement Guidelines: While advertising payout of dividends, all advertisements shall disclose the dividends declared or paid in rupees per unit along with the face value of each unit of that scheme and the prevailing Net Asset Value (NAV) at the time of declaration of the dividend.
• Performance Advertisement:
  • For schemes existing for more than three years, performance shall be provided in terms of Compound Annual Growth Rate (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.
  • It should be clearly mentioned whether the disclosed performance is of regular or direct plan of the Mutual Fund.
• Disclosure of Performance:
  • If the scheme has been in existence for less than six months, past performance shall not be provided.
  • For schemes existing for more than six months but less than one year, simple annualized growth rate of the scheme for the past six months shall be provided.
• Benchmarking:
  • A similar return in INR and by way of CAGR must be shown for the scheme benchmarks, such as Sensex/Nifty for equity schemes and 1-year T-Bill for debt schemes.
  • The benchmark for each scheme type shall be as specified by SEBI.
• Celebrity Endorsements:
  • SEBI has permitted celebrity endorsements at the industry level for increasing awareness of Mutual Funds.
  • Such endorsements shall not promote a scheme of a particular Mutual Fund or be used as a branding exercise of a Mutual Fund house/AMC.
• SEBI Guidelines:
  • Market intermediaries shall have a proper internal code of conduct and controls to prevent circulation of unauthenticated news.
  • Employees shall not encourage or circulate rumors or unverified information without verification.
• Investors' Rights & Obligations:
  • Right to Beneficial Ownership: Unit-holders have proportionate right to the beneficial ownership of the assets of the scheme.
  • Right to Change the Distributor: Investors can choose to change their distributor or opt for direct investing.
  • Right to Inspect Documents: Unit-holders have the right to inspect key documents such as the Trust Deed and Investment Management Agreement.
  • 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 the status of complaints redressed shall be published by each AMC in their annual report.

Legal and Regulatory Environment (Part 3)

• Investor Complaints: The scheme related documents have details of the number of complaints received and their disposal. Pending investor complaints can be a ground for SEBI to refuse permission to the AMC to launch new schemes.
• Demat Statements: In the case of unit-holding in demat form, the demat statement given by the Depository Participant would be treated as compliance with the requirement of Statement of Account.
• Free Transferability of Units: In case of Equity Linked Savings Scheme (ELSS), free transferability of units (whether in demat or physical form) is curtailed for the statutory minimum holding period.

Rights of Investors

• Change in Fundamental Attributes: If there is a change in the fundamental attributes of a mutual fund scheme, then the unitholders are provided the option to exit at the prevailing NAV without any exit load.
• Termination of AMC Appointment: 75 percent of unit holders can terminate the appointment of an AMC. Also, 75 percent of the unitholders can pass a resolution to wind up a scheme.
• Trustee Obligations: The Trustees are bound to obtain consent of the unit-holders whenever required to do so by SEBI, in the interest of the unit-holders, or when required to do so by 75 percent of the unit-holders.

Investor Grievance Redressal

• SEBI Complaint Redress System (SCORES): SCORES is a web-based centralized grievance redress system of SEBI that enables investors to lodge and follow up their complaints and track the status of redressal of such complaints online.
• Online Dispute Resolution Portal (ODR Portal): The ODR portal offers a platform to investors to file any complaints in case the investor is not satisfied with the resolution of the complaints raised directly with the Asset Management Company or through the SCORES platform of SEBI.

AMFI Code of Conduct for Intermediaries

• AMFI Code of Ethics (ACE): The AMFI Code of Ethics sets out the standards of good practices to be followed by the Asset Management Companies in their operations and in their dealings with investors, intermediaries, and the public.
• Key Principles: The AMFI Code of Ethics includes principles such as integrity, due diligence, disclosures, and professional selling practices that Asset Management Companies must follow.

Legal and Regulatory Environment (Part 4)

• Investor Protection: Members should not induce investors by offering benefits which are extraneous to the scheme, and should not misrepresent information in a manner calculated to mislead or by omitting to state material information.
• Investment Practices: Members shall manage schemes in accordance with fundamental investment objectives and policies, and take investment decisions solely in the interest of unit-holders.
• Operations: Members shall avoid conflicts of interest, not engage in front running or self-dealing, and not create a false market or manipulate prices.
• Reporting Practices: Members shall follow standardized valuation policies, uniform performance reporting, and ensure scheme-wise segregation of cash and securities accounts.
• Unfair Competition: Members shall not make statements or engage in acts that harm the interests of other members or place them at a disadvantage.
• Observance of Statutes, Rules, and Regulations: Members shall abide by applicable statutes, rules, and regulations, and establish internal controls and compliance mechanisms.

Key Concepts

• Fundamental Investment Policies: Investment objectives, policies, and terms of a scheme considered fundamental attributes.
• Member: A member of the Association of Mutual Funds in India.
• SEBI: Securities and Exchange Board of India.
• Trustee: A member of the Board of Trustees or a director of the Trustee Company.
• Trustee Company: A company incorporated as a Trustee Company for managing a mutual fund.

Code of Conduct for Intermediaries

• Paramount Investor Interest: Intermediaries should prioritize investor interests and protect them in all circumstances.
• Adherence to Regulations: Intermediaries should adhere to SEBI Mutual Fund Regulations and guidelines.
• Compliance with Sales Literature: Intermediaries should comply with SEBI guidelines for sales literature and performance disclosures.
• Risk Factor Disclosure: Intermediaries should highlight risk factors of each scheme and desist from misrepresentation.
• Commission Disclosure: Intermediaries should disclose all material information, including commissions received for different schemes.
• Infrastructure and Operations: Intermediaries should maintain necessary infrastructure to support AMCs in maintaining high service standards.
• Prohibited Practices: Intermediaries should abstain from commission-driven malpractices, negative statements, and unauthorized activities.
• Confidentiality and Investor Protection: Intermediaries should maintain confidentiality of investor details and protect them from potential fraudulent activities.

Legal and Regulatory Environment (Part 5)

• NISM Certification and Registration: Intermediaries shall obtain NISM certification and register themselves with AMFI and obtain an Employee Unique Identification Number (EUIN) from AMFI apart from AMFI Registration Number (ARN).
• Renewal and Compliance: The NISM certification and AMFI registration shall be renewed on a timely basis. Employees in other functional areas should also be encouraged to obtain the same certification.
• KYD Norms: Intermediaries shall comply with the Know Your Distributor (KYD) norms issued by AMFI.
• Cooperation with Regulatory Authorities: Intermediaries shall co-operate with and provide support to AMCs, AMFI, competent regulatory authorities, Due Diligence Agencies (as applicable) in relation to the activities of the intermediary or any regulatory requirement and matters connected thereto.
• Anti-Money Laundering / Combating Financing of Terrorism: Provide all documents of its investors in terms of the Anti-Money Laundering / Combating Financing of Terrorism requirements, including KYC documents / Power of Attorney / investor’s agreement(s), etc. with Intermediaries as may be required by AMCs from time to time.
• KYC Process: Be diligent in attesting / certifying investor documents and performing In Person Verification (IPV) of investors for the KYC process in accordance with the guidelines prescribed by AMFI / KYC Registration Agency (KRA) from time to time.
• Adherence to Guidelines and Code of Conduct: Adhere to AMFI guidelines and Code of Conduct issued from time to time related to distributors, selling, distribution, and advertising practices.
• Disclosure of Changes: Intimate the AMC and AMFI any changes in the intermediary’s status, constitution, address, contact details or any other information provided at the time of obtaining AMFI Registration.
• Ethics and Fairness: Observe high standards of ethics, integrity, and fairness in all its dealings with all parties – investors, Mutual Funds/ AMCs, Registrars & Transfer Agents, and other intermediaries.
• Service Standards: Render at all times high standards of service, exercise due diligence, and ensure proper care.
• Documentation for Advisory or Execution Only Services: Intermediaries satisfying the criteria specified by SEBI for due diligence exercise, shall maintain the requisite documentation in respect of the “Advisory” or “Execution Only” services provided by them to the investors.
• Refund of Incentives: Intermediaries shall refund to AMCs, either by set off against future commissions or payment, all incentives of any nature, including commissions received, that are subject to claw-back as per SEBI regulations or the terms and conditions issued by respective AMC.
• Claw-back of Commissions: In respect of purchases (including switch-in's) into any fund w.e.f January 1, 2013, in the event of any switches from Regular Plan (Broker Plan) to Direct Plan, all upfront commissions paid to distributors shall be liable to complete and / or proportionate claw-back.
• Prohibition of Fraudulent or Unfair Trade Practices: Do not indulge in fraudulent or unfair trade practices of any kind while selling units of Schemes of any mutual fund.
• Transaction Charges: As per the prevailing regulatory guidelines, distributors are eligible only for Trail commission, the upfront commission or transaction charges have been discontinued.