Legal Structure of mutual funds

Legal Structure of Mutual Funds

• Definition: A mutual fund is defined by SEBI (Mutual Fund) Regulations, 1996, as a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities.
• Key Components: The key components of a mutual fund include the Sponsor, Trustees, Asset Management Company (AMC), and Custodian.

Key Constituents of a Mutual Fund

• Sponsor: The sponsor is the main person behind the mutual fund operation and is responsible for investing in the capital of the AMC. The sponsor should have a sound track record and reputation of fairness and integrity in all business transactions.
• Board of Trustees: The trustees have a critical role in ensuring that the mutual fund complies with all the regulations and protects the interests of the unit-holders. The trustees are responsible for entering into an investment management agreement with the AMC, reviewing the service contracts, and ensuring that all transactions are in compliance with the regulations.
• Mutual Fund Trust: A mutual fund is constituted in the form of a trust, and the instrument of trust is in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908.
• Asset Management Company (AMC): The AMC is responsible for the day-to-day operations of the mutual fund, including arranging for offices and infrastructure, engaging employees, and interacting with regulators and service providers. The AMC is appointed by the sponsor or the trustees with the approval of SEBI.
• Custodian: The custodian has custody of the assets of the fund and is responsible for accepting and giving delivery of securities for the purchase and sale transactions of the various schemes of the fund. The custodian is appointed by the trustees and needs to register with SEBI under the SEBI (Custodian) Regulations 1996.

Legal Structure of Mutual Funds (Part 2)

• Custodian: Represents the interest of the sponsor or its associates, and ensures that securities are held for the benefit of investors.
• Unit Holder Protection Committee (UHPC): Responsible for protecting unit holders' interests, ensuring sound market practices, and compliance with laws and regulations.
• UHPC Mandate: Reviews compliance issues, keeps unit holders informed, and submits reports to the AMC's board of directors.

Organization Structure of Asset Management Company

• Compliance Function: Ensures legal compliances, signs due-diligence certificates, and reports to the head of the AMC.
• Fund Management: Invests and manages investors' money, with sub-teams including analysts, fund managers, and dealers.
• Operations and Customer Services Team: Attends to customer queries, resolves issues, and maintains investor records.
• Sales and Marketing Team: Reaches out to investors, manages distribution channels, and engages with mutual fund distributors.
• Other Functions: Includes finance/accounts, administration, human resources, and information technology.

Role and Support Function of Service Providers

• Fund Accountant: Calculates the NAV by collecting information about assets and liabilities.
• Registrars and Transfer Agents (RTAs): Maintain investor records, process transactions, and update unit capital.
• Auditors: Responsible for auditing accounts, with scheme auditors appointed by Trustees and AMC auditors appointed by the AMC.
• Distributors: Sell mutual fund schemes to clients, require NISM certification, and register with AMFI.
• Collecting Bankers/Payment Aggregators: Facilitate collection and payment of funds for schemes.
• KYC Registration Agencies: Establish investor identity and address, with KRAs processing details and documents to assign a unique number.

Legal Structure of Mutual Funds (Part 3)

• Valuation Agencies: SEBI has issued guidelines for fair valuation of debt securities that are non-traded or thinly traded. At least two valuation agencies provide a valuation matrix, which AMCs use to arrive at fair valuation.
• Credit Rating Agencies: Rate debt securities issued by various issuers. Fund managers consider these ratings as an initial input while taking investment decisions. Credit rating assumes greater importance in certain debt fund products.
• Depositories and Depository Participants: Hold securities in dematerialized or electronic form on behalf of investors. Investors can hold mutual fund units in dematerialized form through a depository participant.
• Stock Exchanges and Transaction Platforms: Investors can transact in mutual fund units through stock exchanges. Units of close-ended funds and ETFs are compulsorily listed on at least one stock exchange.
• MF Utilities India: A transaction platform for units of mutual funds, allowing investors to perform various transactions such as purchase, sale, and switch.
• Role and Function of AMFI:
  • Defines and maintains high professional and ethical standards in the mutual fund industry.
  • Recommends and promotes best business practices and code of conduct.
  • Interacts with SEBI and represents the mutual fund industry.
  • Undertakes a nationwide investor awareness program.
  • Regulates the conduct of distributors, including disciplinary actions.
• Cyber Security and Cyber Resilience: SEBI has issued a Cyber Security and Cyber Resilience Framework (CSCRF) to address evolving cyber threats and ensure compliance by SEBI Registered Entities (REs).
• Key Terms:
  • ARN: AMFI Registration Number, mandatory for becoming a mutual fund distributor.
  • CSCRF: Cyber Security and Cyber Resilience Framework, issued by SEBI to ensure compliance by REs.
  • REs: SEBI Registered Entities, required to comply with the CSCRF.