SEBI (Mutual Fund) Regulations, 1996

SEBI (Mutual Fund) Regulations, 1996 (Part 1)

Definition: A mutual fund is a vehicle in the form of a trust that mobilizes money from investors for investing in different markets and securities.
Key Features:
- A mutual fund shall be constituted in the form of a trust.
- The trust is created by one or more sponsors.
- The operations of the mutual fund trust are governed by a trust deed.
- Mutual funds raise money through the sale of units to the public or a section of the public.
- Every mutual fund shall be registered with SEBI.
Structure: A mutual fund must have a three-tiered structure consisting of:
- A Sponsor: The main body that establishes the mutual fund.
- A Trustee: A trustee company that holds the property of the mutual fund in trust for the benefit of the unit holders.
- An Asset Management Company (AMC): Handles the day-to-day management of the scheme.
Important Concepts:
- Units: The investment that an investor makes in a scheme is in the form of a certain number of units.
- Face Value: Typically, every unit has a face value of Rs. 10.
- Net Asset Value (NAV): The true worth of a unit of the mutual fund scheme.
- Assets Under Management (AUM): The sum of all investments made by investors in the mutual fund scheme.
- Recurring Expenses: Fees or commissions paid for various expenses, charged as a percentage to the scheme's AUM.
Role of Stakeholders:
- Sponsor: Establishes the mutual fund, appoints the trustees, and sets up an AMC.
- Trustees: Hold the property of the mutual fund in trust for the benefit of the unit holders.
- Asset Management Company (AMC): Handles the day-to-day management of the scheme.
Eligibility Criteria for Sponsor:
- Sound track record of carrying out business in the financial services space for at least 5 years.
- Positive net worth in all the immediately preceding 5 years.
- Net profit after providing for depreciation, interest, and tax in each of the immediately preceding 5 years.
- Average net annual profit after depreciation, interest, and tax during the immediately preceding 5 years of at least Rs 10 crores.
- Fit and proper person.
- Minimum contribution of 40% to the net worth of the AMC.

SEBI (Mutual Fund) Regulations, 1996 (Part 2)

Definition: The SEBI (Mutual Fund) Regulations, 1996, outline the guidelines for the establishment and operation of mutual funds in India.
Key Concepts:
- Trustee: A trustee is a person or company that holds the property of a mutual fund in trust for the benefit of the unit holders. The main role of a trustee is to protect the interests of the unit holders and ensure that the mutual fund complies with all SEBI regulations.
- Asset Management Company (AMC): An AMC is the investment manager of a mutual fund, responsible for managing the day-to-day operations and investor's money.

Key Responsibilities of Trustees

Approval of Schemes: Trustees must approve each new scheme floated by the AMC before its launch.
Review of Transactions: Trustees review all transactions of the AMC on a quarterly basis and file reports with SEBI on a half-yearly basis.
Appointment of AMC: Trustees are responsible for appointing an AMC to manage the assets of the fund.
Independent Directors: SEBI mandates a minimum of 2/3rd independent directors on the AMC Board.

Obligations of Trustees

Accountability: Trustees are accountable for the funds and property of the mutual fund and must hold them in trust for the benefit of the unit holders.
Compliance: Trustees must ensure that the transactions of the mutual fund are in accordance with the provisions of the trust deed and SEBI regulations.
Reporting: Trustees must file reports with SEBI on a half-yearly basis, including a report on the activities of the mutual fund and a certificate stating that the trustees have satisfied themselves that there have been no instances of self-dealing or front running.

Asset Management Company (AMC)

Formation: An AMC is appointed or formed by the trustee or sponsor and must be approved by SEBI.
Supervision: The AMC is supervised by its own board of directors and the directors of the trustee.
Net Worth Requirement: The AMC must have a net worth of at least Rs.50 Crores at all times.
Fees: The AMC gets a fee for managing the funds, but is restricted from engaging in any business other than management and advisory services.

Obligations of AMC and its Directors

Due Diligence: The AMC and its directors must take all reasonable steps and exercise due diligence to ensure that the investment of funds is not contrary to SEBI regulations and the trust deed.
Compliance: The AMC must submit quarterly reports to the trustees on its activities and compliance with SEBI regulations.
Investment Decisions: The AMC must exercise due diligence and care in all its investment decisions and obtain prior in-principle approval from the recognized stock exchange(s) where units are proposed to be listed.

SEBI (Mutual Fund) Regulations, 1996 (Part 3)

Fund Manager's Responsibilities: The fund managers shall ensure that the funds of the schemes are invested to achieve the objectives of the scheme and in the interest of the unit holders.
Asset Management Company (AMC) Restrictions:
- AMC shall not purchase or sell securities through any broker associated with the sponsor, if deals executed through him exceed 5% of the aggregate purchases and sales of securities made by the mutual fund in all its schemes.
- AMC shall not invest in any of its scheme unless full disclosure of its intention to invest has been made in the offer documents.
- AMC shall not utilize the services of the sponsor or any of its associates, employees, or their relatives for securities transactions and distribution.
- AMC shall not appoint any person as key personnel who has been found guilty of any economic offence or involved in violation of securities laws.

Role of Other Intermediaries

Custodian:
- Appointed by the mutual fund and SEBI shall be intimated within 15 days of the appointment.
- Responsible for the safekeeping of all securities bought by the AMC.
- Liable for keeping the investment account of the mutual fund.
- Collects dividends and investment payments due on the mutual fund's investment.
- Tracks corporate actions like bonus issues, right offers, offer for sale, buyback, and open offers for acquisition.
Registrar and Transfer Agent (RTA):
- Maintains and updates all investors' records.
- Processes investor applications, handles purchase and redemption transactions by investors in various schemes and plans.
Distributors:
- Appointed by the AMC to sell mutual fund units to investors on behalf of the fund house.
- A sponsor or an associate may act as distributors of AMC.
- AMC has the right to empanel the distributor for selling its MF scheme.
- AMC fixes the commission structure offered to the distributors.
- A distributor can act as a distributor for several MFs.
- All employees and distributors of MF must pass the NISM certification examination.
- All distributors are required to be registered with AMFI and obtain an AMFI Registration Number (ARN) after qualifying the NISM certification examination.

Schemes of Mutual Fund

Scheme Categorization:
- Equity Schemes (11 sub-categories)
- Debt Schemes (16 sub-categories)
- Hybrid Schemes (6 sub-categories)
- Solution-Oriented Schemes (2 sub-categories)
- Other Schemes (2 sub-categories)
Close-Ended Funds: Have fixed maturity, and investors can buy units only during the NFO.
Open-Ended Funds: Allow investors to enter and exit at any time after the NFO.
Interval Funds: Combine features of both open-ended and close-ended schemes.
Specialized Investment Funds (SIF):
- A category of investment vehicles introduced by SEBI to bridge the gap between Mutual Funds and Portfolio Management Services (PMS).
- Offer a hybrid structure that combines the regulatory oversight of mutual funds with the flexibility and customization of PMS.
- Minimum investment limit of ₹10 lakh per investor at the PAN level across all SIF strategies of an AMC.
- Accredited Investors are exempt from this limit.
Eligibility Criteria for SIF:
- Route 1: Strong Track Record
  - The mutual fund must have been operational for at least 3 years.
  - It must have maintained an average Asset Under Management (AUM) of at least ₹10,000 crore over the last 3 years.
  - No action should have been taken against the sponsor or Asset Management Company (AMC) under Sections 11, 11B, or 24 of the SEBI Act, 1992 in the past 3 years.
- Route 2: Alternate Route
  - The AMC must appoint a Chief Investment Officer (CIO) for the SIF with at least 10 years of fund management experience and an average AUM of ₹5,000 crore.
  - An additional Fund Manager for the SIF with at least 3 years of fund management experience and an average AUM of ₹500 crore.
  - No action should have been taken against the sponsor or AMC under Sections 11, 11B, or 24 of the SEBI Act, 1992 in the past 3 years.

Other Specialized Fund Schemes

Real Estate Mutual Fund Schemes:
- Invest at least 35% of the net assets directly in real estate assets.
- Invest at least 75% of the net assets in real estate assets, mortgage-backed securities, or equity shares/debentures of companies engaged in real estate development.
- Balance may be invested in other securities.
Infrastructure Debt Fund Schemes:
- Invest primarily (minimum 90% of scheme assets) in debt securities or securitized debt instruments of infrastructure companies or projects.
- Balance may be invested in equity shares, convertibles, or money market instruments.
- Investment in debt instruments or assets of any single infrastructure company or project shall not exceed 30% of its net assets.

SEBI (Mutual Fund) Regulations, 1996 (Part 4)

Investment Restrictions: A mutual fund scheme shall not invest:
- In excess of twenty five per cent of the net assets of the scheme
- Without the approval of trustees and full disclosures to investors
- In assets or securities owned by the sponsor or asset management company or their associates in excess of 30% of the net assets of the scheme, unless:
  - The investment is in assets or securities not below investment grade
  - The sponsor or its associates retains at least 30% of the assets or securities
  - Approval for such investment is granted by the trustees and full disclosures are made to the investors
Launching of a Mutual Fund Scheme:
- A mutual fund scheme shall be launched by the AMC after the approval of the Trustees and filing of the copy of the offer document with SEBI
- The offer document shall contain disclosures to enable investors to make informed investment decisions
- The offer document and advertisement materials shall not be misleading or contain incorrect statements
Allotment of Units and Refunds:
- The asset management company shall specify the minimum subscription amount and the extent of subscription it may retain in case of oversubscription
- All applicants applying up to 5000 units shall be given full allotment
- Any amount to be refunded to the applicants shall be done within 5 working days from the date of closure of subscription list
Transfer of Units:
- A unit shall be freely transferable by act of parties or by operation of law, unless restricted or prohibited under the scheme
- A unitholder in a close-ended scheme listed on a recognized stock exchange shall hold units in dematerialized form
Winding up of Schemes:
- A close-ended scheme shall be wound up on the expiry of its duration or redemption of units, unless rolled over for a further period
- A scheme may be wound up if 75% of the unit holders pass a resolution to do so, or if SEBI directs it in the interest of the unitholders
Redemption and Reporting:
- Redemptions shall be completed within 10 days from the day of winding up of the scheme
- Compliance with guidelines shall be reported in Compliance Test Reports (CTRs) and Half Yearly Trustee Reports (HYTRs)
Investment Objectives:
- A mutual fund may invest in securities, money market instruments, privately placed debentures, securitised debt instruments, gold or gold related instruments, silver or silver related instruments, real estate assets, infrastructure debt instrument, and other assets or instruments specified by SEBI
- Mutual fund schemes shall not invest in unlisted debt instruments, except for government securities, money market instruments, and derivative products for hedging
Scheme Related Disclosures:
- Mutual funds shall provide additional disclosures in the offer documents, including the tenure of the fund manager, scheme's portfolio holdings, and portfolio turnover ratio
- Disclosures shall be made on the website of the mutual fund, including the performance and key disclosures of each scheme
Annual Report and Disclosure:
- The annual report of the AMC shall be displayed on the website of the mutual fund immediately after approval in Annual General Meetings
- Disclosures shall be made regarding executive remuneration, investor complaints, and the investor charter
- Mutual funds shall disclose details of investor complaints on their website and on the AMFI website within 7 days of the succeeding month
- The investor charter shall be displayed on the website and at prominent places in the office, specifying services provided to investors, rights of investors, and grievance redressal mechanism

SEBI (Mutual Fund) Regulations, 1996 (Part 5)

Advertisement Filings: Mutual Funds must submit advertisements to SEBI within 7 days of issue through email to mf_advertisement@sebi.gov.in.
Portfolio Disclosures: Mutual Funds/AMCs must disclose their portfolio (with ISIN) on their website and AMFI's website within 10 days of each month/half-year.
Disclosure to Unitholders: Unitholders must be mailed portfolio disclosures within 10 days of each month/half-year.
Advertisements: Mutual Funds must publish half-yearly portfolio advertisements on their website, AMFI's website, and in a national newspaper, and send them to unitholders via SMS, phone, email, or written request.
Unaudited Half-Yearly Financials: Mutual Funds must display unaudited half-yearly results on AMFI's website before the end of each half-year.
Annual Report or Abridged Summary: Scheme-wise annual reports must be hosted on the Mutual Fund/AMC website and AMFI's website, with a link provided.
Disclosure of Large Unit Holdings: The number of investors holding over 25% of the NAV and their total holdings must be disclosed in the Statement of Accounts.
Commission Disclosure: Mutual Funds/AMCs must disclose total commission and expenses paid to distributors on their website.

Board and Committees

Audit Committee of Trustees: Constituted with an independent trustee as chairman, responsible for reviewing internal audit systems and ensuring rectification of audit findings.
Audit Committee of Asset Management Companies: Constituted with at least 3 directors, 2/3 of whom are independent, responsible for overseeing financial reporting, audit process, and compliance.
Valuation Committee: An in-house committee reviewing valuation systems and practices.
Review of Transactions: Directors of the AMC must file quarterly details of transactions exceeding Rs. 1 lakh, while trustees must report transactions exceeding Rs. 5 lakhs.
Independent Directors: At least half of the AMC Board and 2/3 of the Trustee Board must comprise independent directors, with a maximum tenure of 2 terms of 5 consecutive years.

Norms for Shareholding in Mutual Funds

Sponsor Shareholding: No sponsor or associate can hold 10% or more of the shareholding or voting rights in another mutual fund's AMC or trustee company.
Shareholder Representation: No shareholder holding 10% or more of the shareholding or voting rights can have representation on the board of another mutual fund's AMC or trustee company.

Stewardship Code for Public Listed Companies

Voting Rights: AMCs must disclose their policies and procedures for exercising voting rights on their website and in annual reports.
Voting Decisions: AMCs must record and disclose the rationale behind their voting decisions, including votes cast in favor, against, or abstained from.
Quarterly Disclosure: AMCs must publish a summary of votes cast on their website on a quarterly basis, within 10 working days of the quarter's end.

SEBI (Mutual Fund) Regulations, 1996 (Part 6)

Voting Requirements: Asset Management Companies (AMCs) must obtain certification on voting reports on an annual basis from a scrutinizer. Mutual Funds with no economic interest on the day of voting may be exempt from compulsorily casting votes.
Voting at Scheme Level: Voting at the scheme level is allowed, subject to recording detailed rationale for the same. Fund Managers/Decision makers must submit a declaration on a quarterly basis to the Trustees that votes cast have not been influenced by any factor other than the best interest of unit holders.
Stewardship Code: All Mutual Funds must mandatorily follow the Stewardship Code in relation to their investment in listed equities.

Risk Management Framework

Definition: The Risk Management Framework (RMF) provides a set of principles or standards, comprising policies, procedures, risk management functions, and roles & responsibilities of the management, the Board of AMC, and the Board of Trustees.
Mandatory Elements: RMF has 'mandatory elements' that must be implemented by AMCs, and 'recommendatory elements' that address other leading industry practices.
Self-Assessment: AMCs must perform a self-assessment of their RMF and practices and submit a report to their Board along with a roadmap for implementation.

Stress Tests

Stress Testing Policy: AMCs must have a stress testing policy in place to conduct stress tests on all Liquid Fund and Money Market Mutual Fund (MMMF) schemes.
Risk Parameters: Schemes must be tested on risk parameters such as interest rate risk, credit risk, and liquidity & redemption risk.
Evaluation: Stress tests must evaluate the impact of various risk parameters on the scheme and its Net Asset Value (NAV).

Cyber Security and Cyber Resilience Framework

Definition: Mutual Funds/AMCs must have a robust cyber security and cyber resilience framework to provide essential facilities and services and perform critical functions in the securities market.
Comprehensive Cyber Audit: Mutual Funds/AMCs must conduct a comprehensive cyber audit at least twice a year and submit a declaration from the Managing Director (MD)/Chief Executive Officer (CEO) certifying compliance with all SEBI Circulars and advisories related to cyber security.

Technology Committee

Definition: AMCs are advised to constitute a Technology Committee comprising experts proficient in technology, including at least one independent external expert.
Roles: The committee shall review the cyber security and cyber resilience framework for Mutual Funds/AMCs.

Reports

Monthly Cumulative Report: AMCs must submit a monthly cumulative report to SEBI by the 3rd working day of each month.
New Scheme Report: AMCs must submit a new scheme report to SEBI within 10 working days from the date of allotment.
Quarterly Compliance Test Reports: AMCs must submit quarterly compliance test reports to SEBI by the 21st day of the succeeding month.

Responsibilities of AMC(s) and Trustees

Management Information System: AMC(s) must develop a suitable Management Information System for reporting to the Trustees.
Half-Yearly Report: The half-yearly report on the activities of the mutual fund must be submitted by the trustees to SEBI, covering all issues mentioned in the prescribed format.

SEBI Prohibition of Insider Trading Regulations

Definition: The SEBI Prohibition of Insider Trading Regulations applies to dealing in the units of a mutual fund by Insiders.
Connected Person: A connected person is defined as any person associated with the mutual fund, asset management company, and trustees, directly or indirectly, in any capacity.
Unpublished Price Sensitive Information (UPSI): UPSI refers to any information pertaining to a scheme of a mutual fund that is not yet generally available and may materially impact the net asset value or affect the interest of unit holders.
Restrictions on Communication: No insider shall communicate, provide, or allow access to any UPSI to any person, including other insiders, except where such communication is in furtherance of legitimate purposes, performance of duties, or discharge of legal obligations.

SEBI (Mutual Fund) Regulations, 1996 (Part 7)

Compliance Officer: The compliance officer of the AMC is responsible for determining the closure period during which a designated person cannot transact in units of the mutual fund.
Pre-deal approval: Every designated person is required to take prior approval of the Compliance Officer before dealing in the Units of the Mutual Fund Scheme, and such approval is valid for 7 trading days from the date of approval.
Code of Conduct: The Chief Executive Officer or Managing Director of every AMC shall formulate a code of conduct to regulate, monitor, and report dealings in mutual fund units by the Designated Persons and their immediate relatives.
Designated Persons: Include Head of the asset management company, Directors, Chief Investment Officer, Chief Risk Officer, Chief Operation Officer, Chief Information Security Officer, Fund Managers, Dealers, Research Analysts, and other employees as designated by the asset management company and/or trustees.
Institutional Mechanism for Prevention of Insider Trading: The Chief Executive Officer/Managing Director of an asset management company with the approval of the trustee shall put in place adequate and effective systems of internal controls to prevent insider trading.
Review of Compliance: The Audit Committee of an asset management company shall review compliance with the provisions of Insider Trading regulations at least once in a financial year and shall verify that the systems for internal control are adequate and are operating effectively.
Whistle-blower Policy: Every asset management company shall formulate a whistle-blower policy that is brought to the notice of their employees to enable them to report instances of leak of unpublished price sensitive information.
Contra-trade Restrictions: Designated persons are restricted from entering into opposite transactions within two months of the previous transaction.
General Obligations: Every asset management company shall keep and maintain proper books of account, records, and documents for each scheme and preserve them for 8 years.
Financial Statements: The financial statements and accounts of the mutual fund schemes shall be prepared in accordance with Indian Accounting Standards (IND AS).
Investor Rights & Obligations: The transfer of redemption or repurchase proceeds to the unitholders shall be made within three working days from the date of receipt of such requests.
Certification and Registration of Intermediaries: No Mutual Fund shall deal with any intermediary unless they have cleared the mandatory certification examination being offered by NISM.
Code of Conduct for Intermediaries: Mutual Funds are required to monitor the activities of their distributors, agents, brokers to ensure that they do not indulge in any malpractice or unethical practice while selling or marketing Mutual Funds units.
Empanelment of Intermediaries: Empanelment of intermediaries by Mutual Funds, payment of commissions, brokerage, and/or sub-brokerage shall be in accordance with parameters and guidelines specified by SEBI and AMFI from time to time.
Certification Programme: The NISM-Series-V-A: Mutual Fund Distributors Certification Examination is the requisite examination for distributors, agents, or any other persons employed or engaged in the sale and/or distribution of mutual fund products.

SEBI (Mutual Fund) Regulations, 1996 (Part 8)

Eligible Distributors: Retired teachers with a service of at least 10 years, or retired bank officers with a service of at least 10 years, or other similar persons (such as Bank correspondents), or as may be notified by AMFI/AMC from time to time. These distributors are required to take the NISM-Series-V-B: Mutual Fund Foundation Certification examination and then approach AMFI for registration.
Specialised Investment Fund (SIF): A type of collective investment vehicle designed for sophisticated or institutional investors who can understand and bear higher investment risks.
Key features of SIFs:
- Wide investment flexibility: Few restrictions on asset allocation.
- Investor suitability: Open only to well-informed or qualified investors.
- Regulatory oversight: Subject to periodic reporting and compliance norms to ensure transparency.
- Risk diversification: Allows sophisticated strategies while maintaining prudential risk limits.

Review Questions

Trustees are required to review all transactions between mutual funds, asset management company and its associates on a quarterly basis.
Funds can make overseas investments subject to a maximum of US $ 1 billion per Mutual Fund, within the overall industry limit of US $ 7 billion.
Vacancy in the office of the independent director of the MF must be filled within a period of 3 months.