2.1.  Definition of Mutual Funds

Mutual Fund in India has been defined in SEBI (Mutual Fund) Regulations, 1996 as a “Fund established in the form of a trust to raise monies through the sale of Units to public or a section of public under one or more schemes for investing in securities including money market instruments or Gold or Gold related instruments or Real Estate Assets”

2.1.1.  Essential features of a mutual funds

  • It has to be formed as a Trust.
  • It has to sell Units to general public or a section of public to raise money for investment purposes.
  • Units can be sold under one or more schemes.
  • The Investment is made in securities (Including Money market Instruments) or Gold or Gold related instruments or Real Estate Assets.

2.2. Legal Structure of Mutual Funds

2.2.1.  Trust, Sponsors, Trustees and Beneficiary

  • The legal structure of Mutual Funds in India has been specified by SEBI. Controls have been put in place in order to protect the interest of the Investor.
  • SEBI has mandated that the Mutual Funds in India have to be constituted as Trusts under Indian Trusts Act,1882. Investors are the beneficiaries of the Mutual Fund Trust.
  • Trust is to be formed by “Sponsors” who are behind the business. The Trust acts through the Trustees who are responsible for protecting the interest of investor (Beneficiary).
  • Trust  Deed governs  operations of the mutual fund. A Trust Deed is executed between trustees and the sponsors. Several Clauses of Trust deed have been laid down by SEBI. First Trustees are named in the deed. The Trustees can be changed subsequently as per procedure specified in the Deed. Either Individuals could be appointed as trustees or a Trustee Company may be appointed.

2.2.2.  AMC, Custodian and Registrar

  • An Asset Management Company (AMC) is appointed by sponsors or trustees to manage day to day business of Mutual Fund Schemes.
  • The responsibilities of AMC are specified through an Investment Management Agreement executed between the Trustees and the AMC.
  • A Custodian appointed by the Trustees handles the custody of scheme assets like Securities, Gold, Real Estate Assets etc. whereas AMC manages the scheme.
  • AMC can appoint a Registrar & Transfer Agent (RTA) to maintain the record of unit holders or can maintain the same itself.

2.3.  Main Agencies/ Constituents of a Mutual Fund

  • As detailed above, Sponsors,Trustees and AMC are the key constituents of a mutual fund. Their qualification and functions have been detailed below:

2.3.1. Sponsors, their Qualifications and Role

  • The Sponsors apply to SEBI for registration of Mutual Fund and subsequently invest in the capital of AMC.
  • To be eligible, sponsor should possess a good track record and reputation in the business of financial services for a minimum period of 5 years. They should have a positive net worth in all immediately preceding 5 years.
  • Net worth in the immediately preceding year should be more than the capital contributed by sponsor in AMC. Moreover, Sponsor should have earned profits after providing for depreciation, interest  and tax in three of the last 5 years including the latest year.
  • Sponsor has to contribute at least 40% of net worth of AMC. Anybody holding 40% or more of the net worth of AMC is considered to be a sponsor and hence required to comply with the eligibility criteria.
  • A sum of Rs. 1 Lac is to be contributed by the sponsor to the corpus of Mutual Fund as initial contribution.
  • Sponsors may be Institutional, Entirely foreign, predominantly foreign or predominantly Indian entity.

2.3.2. Trustees, their Qualifications and Role

  • Trustees have a critical role in ensuring that mutual fund complies with all the regulations and protects the investor interest. Prior approval of SEBI is required before appointment of any person as Trustee.
  • As per SEBI regulations, Trustee should be a competent person with standing and integrity. Any person guilty of moral turpitude/convicted of any economic offence or violation of securities law is disqualified to be appointed as trustee.
  • Any AMC or its director, officer or employee are not eligible to become Trustees of Mutual Fund.
  • Trustee of one Mutual Fund is not eligible to become trustee of any other mutual fund.
  • Sponsor will need to appoint at least four trustees or a Trustee company with at least four directors on board. At least two thirds of trustees should be independent i.e. not associated with the sponsors. What are the key Rights, Roles & Responsibilities of Trustees

  • To execute an Investment Management Agreement with AMC specifying the functioning of AMC in managing operations of the Mutual Fund.
  • Trustees may seek any information from AMC that may be required for proper discharge of the responsibilities of Trustees.
  • Before any scheme is launched, Trustees need to ensure that all key personnel like fund managers, R&T Agent, Compliance officer etc. have been appointed and the systems are in place.
  • To review the service contracts of agencies like custodians, transfer agency etc. to ensure that investor interest have been protected. Also to ensure that all service providers are registered with SEBI.
  • Trustees are responsible to ensure all transaction entered into by AMC are in line with scheme objectives and are compliant with related regulations.
  • Trustees need to take corrective action and inform SEBI of any irregularities or of any violation of regulations.
  • No change will be allowed in the fundamentals of scheme or any other change which may compromise the interest of investors unless communication is done with investors and an option is given to them for exit at NAV without any exit load.
  • Trustees need to, on a quarterly basis, declare their securities dealings with mutual fund. They will review the transactions of Mutual Fund with AMC and its associates. Every quarter they will review the net worth of AMC and ensure that any shortfall is made up .
  • Trustees will periodically review investor complaints and their redressal. They will ensure that trust property is properly protected.
  • The Trustees shall periodically review the reports of Auditors and compliance officers and shall file half yearly reports to SEBI.
  • If an investor feels that the trustees have not fulfilled their obligations, then he can file a suit against the trustees for breach of trust.

2.3.3. Qualifications, Role and Responsibilities of Asset Management Company (AMC) Qualifications & Disqualifications

  • The AMC will be appointed by Sponsor/Trustee with the approval of SEBI for handling day to day operations of Mutual Fund.
  • The directors of the AMC will be adequately professionally experienced in the related field. The key personnel should not have been found guilty of moral turpitude or convicted of any economic offence or violation of securities law.
  • Key personnel of AMC should not have worked for any AMC or any intermediary during the period when its registration was suspended or cancelled by SEBI.
  • A person can be appointed as director on the board of AMC only with the prior approval of trustees. A minimum of 50% of the directors should be independent directors i.e. not associated with sponsor or its subsidiaries or trustees.
  • An AMC needs to have a minimum net worth of Rs. 50 crores. Any change in controlling interest of AMC is possible only with prior approval of SEBI and Trustees. Such change needs to be communicated to all unit holders in writing as specified. In case of such change unit holders have to be given an option to exit at NAV without any exit load. Roles & Responsibilities

  • For conducting the business of mutual fund, AMC needs to arrange for offices and infrastructure, engaging employees, software, handle publicity and promotion, interact with various service providers and regulators.
  • AMC has to exercise due diligence to ensure that its investment activities are not violative of any regulations of SEBI or Trust deed and that such activities have been discharged with due care.
  • The appointment of the AMC can be terminated by 75% of the unit holders or by a majority of trustees. Any Change in AMC is subject to prior approval of SEBI and Unit holders.
  • AMCs are generally headed by a Managing Director, Executive Director or Chief Executive Officer and generally assisted by Chief Investment Officer, Fund Managers, Chief Marketing Officer, Chief Operating Officer, Securities Analysts, Compliance Officer. 

Chief Investment Officer (CIO): is responsible for overall investment of the fund. As per SEBI regulations, Each Fund scheme will have a Fund manager and the fund managers report to CIO. One Fund manager may handle more than one scheme.

Chief marketing Officer (CMO): is responsible for mobilising money under various schemes. Sales team, channel managers and publicity teams report to and support CMO.

Chief Operating Officer (COO): is responsible for day to day business operations of AMC and he reports to CEO.

Securities Analyst: is responsible for providing research inputs relating to fundamental and Technical analysis and support Fund Managers. Some AMCs have “Economist” also to analyse economy and provide inputs on the same.

Securities Dealers: are responsible for putting the investment transactions through the market. In the secondary market, sale/purchase investment transaction of securities are executed by the dealers.

Compliance Officer: is responsible for carrying out due diligence and signing the certificate in offer documents, ensuring that all related regulations have been complied with and all required registration/ approvals for intermediaries are in place. Compliance Officer generally reports to CEO and works closely with trustees on compliance issues.

  • A seed capital of 1% of amount raised subject to a maximum of Rs. 50 lacs is required to be invested by AMC in all open ended growth option mutual fund schemes through the lifetime of the scheme.

2.4.  Other Service Providers

  • Custodians, Registrar & Transfer Agents, Auditors, Fund Accountants, Distributors, Collecting Bankers, KYC Registration Agencies, Central KYC and payment Aggregators are other important service providers. These have been discussed below:

2.4.1.  Custodian

  • Trustees appoint Custodian. A Custodial agreement is entered into between trustees and custodian. Custodian needs to be registered with SEBI.
  • A Custodian is responsible for the custody of fund assets and accepts and gives delivery of securities against purchase/sale transactions of investment of the scheme.
  • Custodian monitors and tracks corporate actions like dividend, Bonus and Rights issues of companies where the scheme has invested.
  • If 50% or more of the shares of a custodian is owned by the sponsor / its associates / its subsidiary or if 50% or more of the directors of a custodian represent the interest of the sponsor or its associates, the custodian can not be appointed for mutual fund operation of the sponsor or its associate or subsidiary company unless certain specific conditions are fulfilled.

2.4.2.  Registrar & Transfer Agents (RTA)

  • RTAs are responsible for maintaining the records of the unit holders and serve as Investor Service Centers at various locations. They process the investor transactions of purchase/redemption and manage funds relating to such transaction. They manage updating of information in investor accounts, called folios.
  • AMC is responsible for appointment of RTAs. It is not compulsory to appoint a RTA. AMC can choose to handle the RTA activity in house.
  • All RTAs are required to be registered with SEBI as such.

2.4.3. Fund Accountants and Auditors

  • Fund accountant calculates and updates the NAV and maintains the accounts of the Fund schemes. AMC can either do this activity in house or engage service provider. SEBI registration is not required for accounting function.
  • Auditors are responsible for the audit of Fund. Accounts of Mutual Funds schemes are required to be maintained independent of the accounts of AMC
  • Similarly the auditor appointed for audit of fund scheme will need to be different from the auditor of AMC.
  • Scheme auditor is appointed by Trustees, AMC auditor is appointed by AMC.

2.4.4.  Distributors

  • Distributors are required to pass the certification test (NISM-Series-VA) and register with AMFI. They need to get empanelled with AMCs to perform the distribution function.
  • They have a critical role in selling units to investors in the schemes of mutual funds with whom they are empanelled.
  • Any Individual, Institutions, broking companies and banks can be distributors.

2.4.5.  Collecting Bankers

  • AMCs appoint Collecting bankers who maintain the bank account of the scheme in which the investors money goes for the investment they have made.
  • Leading collection banks provide a large base of the bank branches where the money against investment is collected.
  • The banks enable collection and payment of funds for the schemes.

2.4.6.  KYC Registration Agencies

  • SEBI has mandated a unified KYC for entire securities market through KYC Registration Agencies (KRA) registered with SEBI.
  • Any new investor has to comply with the KYC formalities.
  • In person verification (IPV) by any SEBI registered intermediary is mandatory for KYC registration for all investors.
  • Qualified distributors can also carry out in person verification provided they are KYD compliant.

2.4.7.  Central KYC (cKYC)

  • The initiative of the cKYC is aimed at a system which allows investors to complete their KYC only once before dealing with various entities across the financial sector.
  • cKYC is managed by CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest of India) which is authorised by Government of India to function as Central KYC Registry (cKYCR).
  • It reduces the burden of KYC documents submission and verification every time when the investor deals with a financial entity for the first time.
  • In addition to the basic information of KYC, cKYC seeks certain additional information from the investor like investor’s maiden name, Mother’s name, FATCA information etc. This is sought to better understand the profile of new entrants in the market as also to curb the money laundering in the first instance.
  • For cKYC, the investor needs to go to a financial intermediary like a bank, NBFC, Stock Broker, AMC or Distributor, get in person verification done and KYC documents checked. After completion of this process, investor is allotted a 14 digit KYC Identification Number (KIN) within 4 to 5 working days by CERSAI. After this, investor is said to be KYC Compliant.

2.4.8.  Payment Aggregators

  • Payment aggregators like Tech Process, Bill Desk etc. are the service providers who facilitate online payment processing.
  • Mutual Fund houses are allowed to accept Credit Card and Bank Transfers without having to set up a merchant account with banks. The Aggregator facilitates the payment from customer via credit cards or bank transfers to the mutual funds. It is the Aggregator who pays to the Mutual Fund.

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