Chapter 3: Legal and Regulatory Environment

Learning Objective

The focus of this unit is on the overall regulatory environment of mutual funds in India, with a focus on the investor.

SEBI regulates mutual funds, depositories, custodians and registrars & transfer agents in the country.

AMFI is an industry body, but not a self regulatory organization.

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.

AMFI has framed AGNI, a set of guidelines and code of conduct for intermediaries, consisting of individual agents, brokers, distribution houses and banks engaged in selling of mutual fund products.

Investment objective defines the broad investment charter. Investment policy describes in greater detail, the kind of portfolio that will be maintained. Investment strategies are decided on a day-to-day basis by the senior management of the AMC. At least 65% of the corpus should, in the normal course, be invested in the
kind of securities / sectors implied by the scheme’s name.

Statement of accounts is to be sent to investors within 5 days of closure of the NFO.

Investor can ask for a Unit Certificate for his Unit Holding. This is different from a Statement of Account.

NAV has to be published daily, in at least 2 newspapers

NAV, Sale Price and Re-purchase Price is to be updated in the website of AMFI and the mutual fund

The investor/s can appoint a nominee, who will be entitled to the Units in the event of the demise of the investor/s.

The investor can also pledge the units. This is normally done to offer security to a financier.

Dividend warrants have to be dispatched to investors within 30 days of declaration of the dividend

Redemption / re-purchase cheques would need to be dispatched to investors within 10 working days from the date of receipt of request.

Unit-holders have proportionate right to the beneficial ownership of the assets of the scheme.

Investors can choose to change their distributor or go direct. In such cases, AMCs will need to comply, without insisting on No

Objection Certificate from the existing distributor. Investors can choose to hold the Units in dematerialised form. The mutual fund / AMC is bound to co-ordinate with the RTA and

Depository to facilitate this. 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.

The mutual fund has to publish a complete statement of the scheme portfolio and the unaudited financial results, within 1 month from the close of each half year. In lieu of the advertisement, the mutual fund may choose to send the portfolio statement to all Unit-holders.

Debt-oriented, close-ended / interval, schemes /plans need to disclose their portfolio in their website every month, by the 3rd working day of the succeeding month.

Scheme-wise Annual Report, or an abridged summary has to be mailed to all unit-holders within 6 months of the close of the financial year.

The Annual Report of the AMC has to be displayed on the website of the mutual fund. The Scheme-wise Annual Report will mention that Unit-holders can ask for a copy of the AMC’s Annual Report.

The trustees / AMC cannot make any change in the fundamental attributes of a scheme, unless the requisite processes have been complied. This includes option to dissenting unit-holders to exit at the prevailing Net Asset Value, without any exit load. This exit window has to be open for at least 30 days.

The appointment of the AMC for a mutual fund can be terminated by a majority of the trustees or by 75% of the Unit-holders (in practice, Unit-holding) of the Scheme. 75% of the Unit-holders (in practice, Unit-holding) can pass a resolution to wind-up a scheme 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.

Under the law, a trust is a notional entity. Therefore, investors cannot sue the trust (but they can file suits against trustees, as seen above).

The principle of caveat emptor (let the buyer beware) applies to mutual fund investments.

The investor can claim his moneys from the scheme within 3 years. Payment will be based on prevailing NAV. If the investor claims the money after 3 years, then payment is based on the NAV at the end of 3 years

If a security that was written off earlier is now recovered, within 2 years of closure of the scheme, and if the amounts are substantial, then the amount is to be paid to the old investors. In other cases, the amount is to be transferred to the Investor Education Fund maintained by each mutual fund.

PAN No. and KYC documentation is compulsory for mutual fund investments. Only exception is micro-SIPs.
Investors need to give their bank account details along with the redemption request.

Adequate safeguards exist to protect the investors from the possibility of a scheme going bust.

• In 1992, Government of India constituted SEBI (Securities & Exchange Board of India) by an act of parliament.
• It is mandatory for all the MFs to register with SEBI
• Mutual Funds are regulated by the SEBI (Mutual Fund) Regulations, 1996.
• SEBI is the regulator of all funds, except offshore funds.
• Bank-sponsored mutual funds are jointly regulated by SEBI and RBI
• If there is a bank-sponsored fund, it can not provide a guarantee without RBI permission.
• RBI regulates money and government securities markets, in which mutual funds invest.
• Listed mutual funds are subject to the listing regulations of stock exchanges.
• Since the AMC and Trustee Company are companies, any complaints against their board can be made to the CLB (Company Law Board)
• Investors can not sue the trust, as they are the same as the trust and cannot sue themselves.
• UTI does not have a separate sponsor and AMC.
• UTI is governed by the UTI Act, 1963 and is voluntarily under SEBI Regulations.

RBI – The Money Market Regulator

• RBI act as Supervisor of Bank owned Mutual Funds
• Bank MF comes under regulatory of RBI
• All MF come under SBI regulation but bank owned AMC came under RBI regulation.
• RBI banned all non banking entities access to the inter-bank call money market.
• This means that liquid funds can no longer invest in the call money market.
• The ministry of Finance supervises both the RBI & SEBI
• In 2003, a Securities Appellate Tribunal (SAT) has been created to provide the apex appear mechanism for any decision taken by SEBI.
• SAT works as independent judicial authority.

CLB, DCA, RoC

• AMC are registered under companies act 1956 and hence answerable to regulatory authorities empowered by the companies act.
• Registrar of Companies (RoC) is the legal interface for all companies
• RoC, in turns is supervised by the Department of Company Affairs (DCA)
• Above DCA there is the Company Law Board (CLB) which is part of Ministry of Law & Justice of the Govt. of India.

Self Regulatory Organisations (SRO)

• Stock Exchanges are Self Regulatory Organisations supervised by SEBI
• Many closed ended schemes are listed on stock exchanges through a signing agreement between the fund and the stock exchange.
• SRO is an association representing a group of market participants which is specially empowered by the apex regulatory authority to exercise pre-defined authority over the regulation of their members.
• Theses activities of the funds are regulated by respective SROs that report to the main regulatory body like SEBI
• The SROs are given powers to regulate the criterion & procedures for admission of its members, set a code of conduct for their members market activities, and determine the professional rules & by laws of the association & so on.
• To become SRO, need granted specific powers & approval by the government, appropriate laws & recognition by the regulatory authority.
• SROs are the second tier in the regulatory structure
• SROs get their powers from the apex regulating agency, act on their instructions and regulate their own members in a limited manner.
• SROs cannot do any legislation on their own.
• All stock exchanges are SROs
• Stock Exchanges in most countries are granted the status of SRO
• AMFI is an industry association of mutual funds. AMFI is not yet a SEBI registered SRO. AMFI is not a SRO.

Association of Mutual Fund in India (AMFI)

• AMFI was incorporated in 1995
• AMFI has the powers to deny registration to distributors for failing the test or violating AMFI code of conduct given in AGNI (AMFI Guidelines & Norms for Intermediaries)
• For all employees and distributors of MF, AMFI certification test has been made mandatory by SEBI
• All distributors are also required to be registered with AMFI & obtain AMFI Registration Number (ARN)
• AMFI is regulated by its own board made up of its members.

AMFI main objectives

• To promote the interest of MFs and units holders, interact with SEBI, RBI, and Government for same.
• To set and maintain ethical, commercial and professional standards in the industry
• To recommend and promote best business practices and code of conduct in the MF industry.
• To increase public awareness and understanding for MF
• To develop a team of well trained professional MF distributors
• Implement a training and certification for all intermediaries engaged in MF industry.

Rights of Investor

• Investors are beneficial owner of scheme asset which they own.
• Investors are entitled to receive dividends declared in a scheme within 30 days.
• Redemption proceeds have to be sent to investors within 10 days otherwise investor has the right to receive dividend with interest, borne by AMC.
• If an investor fails to claim the dividend or redemption proceeds he has rights to claim up to a period of 3 years from the due date at the then prevailing NAV
• Mutual funds have to allot units within 30 days of the IPO/NFO
• Mutual funds have to publish their half yearly results in at least one national daily and publish their entire portfolios, at least once in 6 months. Such disclosures should be done within 30 days from 6 monthly account closing dates of the fund.
• Trustees will have to ensure that any information having a material impact on the unit holder’s investments should be made publicly the mutual fund.
• If 75% of the unit holders so decide, 1) The scheme can be wound up 2) Meeting of unit holders can be called 3) Appointment of the AMC of the mutual fund can be terminated.
• If there is any change in the fundamental attributes of the scheme, the unit holders have to be notified through a letter. they also have a right to repurchase at NAV without any load, before such change is effected.

Investors Obligations

• Study OD
• Provide PAN
• Monitor their investment

Investors Complaints Redressal Mechanism

• Investor Grievances can be addressed to Trustee
• SEBI is the primary body to address MF complaints
• Investors cannot seek redressal under Companies Act since fund investors are neither share holders nor depositors in AMC

Limitations of Investor

• Investors can not sue the trust as they are not distinct from the trust
• Investors can lodge complaints with SEBI for non-compliance.
• Investors can not be compensated if the performance of the fund is below expectations.