1. Securities and Exchange Board of India (SEBI) is the regulator of Securities market in general including mutual funds, Stock Exchanges, Custodians, Registrar and Transfer Agents, Depositories, etc.
  2. Mutual Funds are regulated by SEBI through SEBI (Mutual Funds) Regulations, 1996 and also through various circulars, including Master Circulars, issued from time to time which are available at its website sebi.gov.in
  3. Apart from SEBI, Mutual funds need to comply with rules and regulations of other Regulator organisations like those of RBI for example when mutual funds invest in money market or outside the country or accept investment from people outside the country or receive and pay remittances in foreign exchange, they have to comply with RBI’s regulations.
  4. Mutual funds also need to comply with certain other bodies like Stock Exchanges relating to its own listing, trading and margining rule.
  5. Self-Regulatory Organisations (SRO) like ICAI, BSE, NSE, MSEI etc. are formed by market players to micro regulate their members. The difference between statutory regulatory bodies set up by Government of India and an SRO is that regulatory bodies are responsible for laying down broad policy framework whereas SROs are responsible for micro-regulations of its members.
  6. A person aggrieved by SEBI’s ruling can file an appeal with Securities Appellate Tribunal (SAT).
  7. Association of Mutual Funds of India (AMFI) promotes interest of Mutual Fund Industry with AMCs as its members with the objectives of creating awareness about mutual funds, setting high professional and ethical standards, promote best business practices and code of conduct, undertake studies and research on MF industry and to represent the MF industry.
  8. AMFI has laid down a Code of Ethics (ACE) which are a set of good practices to be followed by Asset Management Companies while dealing with investors, intermediaries and public.
  9. SEBI (Mutual Funds) Regulations, 1996 requires Asset management Companies to follow Code of Conduct laid down in its Fifth Schedule. AMFI’s Code of Ethics supplement SEBI’s Code of Conduct and lays down even higher standards. SEBI’s Code of Conduct lays down broad principles. AMFI’s Code of Ethics goes into much more detail.
  10. AMFI Guidelines & Norms for Intermediaries (AGNI) is the Code of Conduct for Intermediaries like individual agents, brokers, distribution houses and banks.
  11. If this code of conduct is violated by intermediaries, AMFI can seek explanation within 3 weeks, issue warning letter to cancel its registration if there is no/unsatisfactory explanation and cancel the registration if there is a second violation by the intermediary.
  12. The intermediary has a right to file an appeal to AMFI against the cancellation of his registration.
  13. SEBI has laid down guidelines for circulation of unauthenticated news whereby intermediary should lay down internal controls and Code of Conduct for his employees, temporary staff and voluntary workers such that they should not circulate rumours or unverified news and there should be restricted /Supervised access to Blogs/ Chat Forums /Messenger sites for which logs should be maintained.
  14. If employees of intermediary receive any market related news by email, this news should not be forwarded unless the same has been verified as authentic by Intermediary’s Compliance Officer otherwise the employee and the compliance officer would be considered to have violated SEBI Act/ Rules/ Regulations.
  15. SEBI has mandated a Due Diligence Process by AMCs for Distributors of Mutual Funds who qualify either of the following four criteria :
  • Multiple Point Presence (More than 20 locations).
  • AUM raised over ?100 crore across industry in non-institutional category but including high networth individual (HNIs).
  • Commission received over ?1 crore p.a. across industry.
  • Commission received over ?50 Lakhs from a single mutual fund.
  1. While empanelling distributors and during review process, AMCs are required to check if the distributors fulfil “fit and proper” criteria by checking factors like
  • Business model, experience and proficiency in the business
  • Record of regulatory/ statutory levies, fines and penalties, legal suits, customer compensations made; causes for these and resultant corrective actions taken
  • Review of associates and subsidiaries on above factors
  • Organisational controls to ensure that the following processes are delinked from sales and relationship management processes and personnel:
  • Customer risk/ investment objective evaluation
  • MF scheme evaluation and defining its appropriateness to various customer risk categories.
  1. Distributor’s relationship with his client can be categorized in two categories of Advisory and “Execution Only”
  • Advisory – Distributor offers advice, will sell only appropriate product which is best suited for investor based on his risk appetite.
  • Execution only–If the distributor is just executing the transaction, he is still required to do the following –
  • If the distributor believes that the investment which the investor is about to do is not appropriate, he shall send a written communication to the investor informing him that it is unsuitable. The communication should be acknowledged by the investor.
  • The distributor will have to obtain investor’s confirmation that the transaction is execution only and that he had received distributor’s advice about inappropriateness of the proposed investment before the transaction.
  • On such execution transactions investor is only required to pay standard transaction charges.
  1. A mutual fund distributor can sell mutual fund products of its group/ affiliate/ associate, provided the distributor makes full disclosure of the same.
  2. While reviewing compliance and risk management functions of the distributor, Criteria used by the distributor to review the products and the periodicity of such review will be checked whereas while checking the factors determining the risk appetite of the customer, categorization of the investment and periodicity of such review will be checked.
  3. The other kinds of due diligence that will be performed will include review of transactions, review of personnel engaged, audit observations on MF business, Customer relationship management process, service standards, grievance handling mechanism and review of sample survey of Investors.
  4. Investment Restrictions for Schemes
SEBI has placed various restrictions on mutual fund schemes for the protection of investors which are detailed below.
  1. General Restrictions
  • Mutual Funds will buy and sell securities on delivery basis.
  • Mutual funds will not give loans.
  • Scheme will not invest in unlisted or privately placed securities of associate or group company of the sponsor. Investment in listed securities of the group companies of the sponsor will be limited to 25 percent of net assets.
  • A scheme may invest in other schemes of the same mutual fund or other mutual funds up to 5% of NAV of the Scheme.
  • A mutual fund under all of its schemes shall not own more than 10 percent of the paid up capital of a company bearing voting rights.
  1. Restrictions on Investment in Debt Securities are:
  • A scheme shall not invest more than 10 percent of its net assets value (NAV) in debt security of a single issuer which can be raised to 12 percent with the approval of trustees.
  • A scheme shall not invest more than 10 percent of its net assets in unrated securities of a single issuer and total investment in such securities will not exceed 25 percent of its net assets.
  • A scheme shall not park more than 15 percent of its net assets in short term deposits of a scheduled commercial bank and 20 percent with the approval of trustees.
  1. Group Exposure
  • Mutual funds/ AMC shall not invest more than 25 percent of net assets of its scheme in one sector except Financial Services Sector.
  • Additional exposure to financial service sectors not exceeding 10 percent shall be allowed only if the exposure is being taken in Housing Finance Companies (HFCs) provided securities are rated AA and above.
  1. Restrictions on Investment in Equity Securities
  • At least 80 percent of ELSS funds should be invested in equity and equity linked securities.
  • A scheme shall not invest more than 10 percent of its net assets in equity shares and equity related instruments of one company.
  • An open-ended scheme will not invest more than 5 percent of its net assets in unlisted equity shares and equity related instruments. For Close-ended scheme, this limit is 10%.
  1. Investment Objective is broad investment charter through which an investor can determine the asset class in which the scheme will invest i.e. equity, debt, etc. Examples of investment objective are:
  • Investment objective of diversified equity scheme – To generate capital appreciation from a portfolio of predominantly equity related securities.
  • Investment objective of diversified debt scheme – To generate income by investing predominantly in a wide range of debt and money market securities.
  • Investment objective of a balanced scheme – To achieve growth by investing in equity and equity related investments, balanced with income generation by investing in debt and money market instruments.
  1. Investment Policy describes in detail the kind of portfolio that will be maintained for Example The portfolio will comprise of mid -cap stocks, Investment will be made in large-cap stocks or that 65% of the investment will be made in equity and equity related securities and the rest will be invested in short term debt securities and money market instruments.
  2. Investment Strategy will be decided by many factors like Investment Horizon, Selection of Securities, right buying price, right time to sell and different asset classes.
  3. Service Standards of a Mutual Fund towards its Investors are summarised below.
  • Maximum duration of an NFO is 15 days. Units are to be allotted or refunds to be made within 5 business days of closure of NFO.
  • If there is a delay in payment of refund then interest @ 15 percenta. for the delay period needs to be paid. This interest cannot be charged to the scheme.
  • Re-opening Period – Open ended schemes must re-open for sale/ repurchase within 5 business days of allotment.
  • Statement of Account (SOA) are to be sent to the investor for NFO–Within 5 business days of closure of NFO and for post NFO Investments–Within 5 business days of receiving request from investor.
  • For SIP/ SWP/ STP–Statement of Account to be sent for Initial Transaction – Within 10 business days and for Ongoing – Within 10 business days of the end of calendar quarter.
  • Statement of Account to be sent on specific request – Within 5 business days.
  • Consolidated Statement of Account–Statement of investments across all mutual funds mapped by PAN of the investor to be sent every month when there is a transaction.
  • Demat – An investor can receive units (both open-ended and closed-ended) in his Demat account. Units in demat form are freely transferable.
  • Transferability of ELSS units– During the statutory minimum holding period of ELSS (3 years), units cannot be transferred.
  • If an investor asks for a Unit Certificate, the mutual fund has to provide it within 5 business days. The Certificate is of no transactional use as it is non-transferable.
  • NAV Calculation – NAV of a scheme shall be calculated daily and published on the website of AMFI and the Mutual Fund. Mutual funds shall also send latest NAV to investor through SMS if requested.
  • An investor can appoint up to 3 nominees (in case of investor’s demise) along with the distribution percentage. If no percentage specified, units will be distributed equally.
  • Pledge Units – Units of a mutual scheme can be pledged as security against loan taken by investor.
  • Dividend Warrants – Dividend Warrants must be sent within 30 days of dividend declaration and Redemption Cheques must be sent within 10 days of receipt of redemption request. If there is delay in sending redemption cheques or dividend warrants, interest @ 15 percent has to be paid. This interest cannot be charged to the scheme.
  1. Other Rights of an Investor
  • Investors can change their distributors or invest in a direct format.
  • Dematerialised Form – If an investor chooses to, he can hold mutual fund units in dematerialised form.
  • Statement of portfolio – Mutual Funds shall, within 10 days of end of half year (31st March and 30th September), send to investor a complete statement of its scheme Portfolio.
  • Annual Report on Redressal of Complaints will be prepared by mutual funds for complaints received against Mutual Fund, Authorised Persons. Distributors and Its Employees in SEBI prescribed format and to be published on AMFI’s website, mutual fund’s website and in the annual report of mutual fund.
  • Scheme-wise Annual Report or its abridged summary will be sent by mutual funds to unit holders within 4 months of the end of financial year.
  • Consolidated Account Statement (CAS) will be sent to investors on a monthly basis. Half yearly CAS will be issued to all investors except those who have no mutual fund investments or where no commission has been paid to distributors against their investment.
  • If an investor has a complaint, he can go to Investor Service Centre or to senior officials in the AMC. If complaints are still not resolved, he can write to SEBI.
  • If there are pending investor complaints, SEBI may refuse to grant permission to AMC to launch a new scheme. Moreover, Offer Document of a scheme mentions number of investor complaints received and number of complaints redressed.
  • Changes in fundamental attributes of a scheme cannot be made by AMC/ trustee unless all Unit Holders are informed and an advertisement is given in two newspapers and existing unit holders are given opportunity to exit the scheme at existing NAV without exit load. This window must remain open for at least 30 days.
  • AMC’s appointment to a mutual fund can be terminated by majority of Trustees or 75% of Unit Holders.
  • A Scheme can be wound up if a resolution is passed by 75% of Unit Holders (in practice, Unit Holding).
  • Investor can file suit against Trustees / AMC for breach of trust if he feels they have not fulfilled their obligations.

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[WATU 11]

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