UNIT V

MUTUALFUNDS:
REGULATIONS AND
GOVERANCE
Prasanna.E
MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
In this unit, you i!! un"#rstan" th# sa!i#nt $#atur#s o$ th# !#%a! stru&tur# o$ 'utua! $un"s
in In"ia an" th# ro!# o$ (#y &onstitu#nts that 'a(# u) th# o*#ra!! 'utua! $un" #&o+
syst#'.
Mutua! $un"s in In"ia ar# %o*#rn#" ,y SE-I .Mutua! Fun"/ R#%u!ations, 0112, as
a'#n"#" ti!! "at#.
Th# r#%u!ations )#r'it 'utua! $un"s to in*#st in s#&uriti#s in&!u"in% 'on#y 'ar(#t
instru'#nts, or %o!" or %o!" r#!at#" instru'#nts or r#a! #stat# ass#ts.
Mutua! $un"s ar# &onstitut#" as Trusts. Th# 'utua! $un" trust is &r#at#" ,y on# or 'or#
S)onsors, ho ar# th# 'ain )#rsons ,#hin" th# 'utua! $un" o)#ration.
E*#ry trust has ,#n#$i&iari#s. Th# ,#n#$i&iari#s, in th# &as# o$ a 'utua! $un" trust, ar#
th# in*#stors ho in*#st in *arious s&h#'#s o$ th# 'utua! $un".
In or"#r to )#r$or' th# trust##shi) ro!#, #ith#r in"i*i"ua!s 'ay ,# a))oint#" as trust##s
or a Trust## &o')any 'ay ,# a))oint#".
3h#n in"i*i"ua!s ar# a))oint#" trust##s, th#y ar# 4oint!y r#$#rr#" to as -oar" o$
Trust##s. A trust## &o')any $un&tions throu%h its -oar" o$ Dir#&tors.
Day to "ay 'ana%#'#nt o$ th# s&h#'#s is han"!#" ,y an AMC.
Th# AMC is a))oint#" ,y th# s)onsor or th# Trust##s. A!thou%h th# AMC 'ana%#s th#
s&h#'#s, &usto"y o$ th# ass#ts o$ th# s&h#'# .s#&uriti#s, %o!", %o!"+r#!at#"
instru'#nts 5 r#a! #stat# ass#ts/ is ith a Custo"ian, ho is a))oint#" ,y th# Trust##s.
In*#stors in*#st in *arious s&h#'#s o$ th# 'utua! $un". Th# r#&or" o$ in*#stors an"
th#ir unit+ho!"in% 'ay ,# 'aintain#" ,y th# AMC its#!$, or it &an a))oint a R#%istrar 5
Trans$#r A%#nt .RTA/.
Th# s)onsor n##"s to ha*# a 'ini'u' 678 shar# ho!"in% in th# &a)ita! o$ th# AMC.
Th# s)onsor has to a))oint at !#ast 6 trust##s 9 at!#ast to+thir"s o$ th#' n##" to ,#
in"#)#n"#nt. Prior a))ro*a! o$ SE-I n##"s to ,# ta(#n, ,#$or# a )#rson is a))oint#" as
Trust##.
AMC shou!" ha*# n#torth o$ at !#ast Rs07&ror#. At !#ast :78 o$ th# "ir#&tors shou!"
,# in"#)#n"#nt "ir#&tors. Prior a))ro*a! o$ th# trust##s is r#;uir#", ,#$or# a )#rson is
a))oint#" as "ir#&tor on th# ,oar" o$ th# AMC.
Mutua! $un"s in In"ia ha*# a <+ti#r stru&tur# o$ S)onsor+Trust##+AMC.
Th# 'utua! $un" is $or'#" as trust in In"ia, an" not as a &o')any.
In th# US 'utua! $un"s ar# $or'#" as in*#st'#nt &o')ani#s.
In*#stor=s 'on#y is h#!" in th# Trust .th# 'utua! $un"/.
The Sponsor:
S)onsor is "#$in#" un"#r th# SE-I r#%u!ations as any )#rson ho, a&tin% a!on#
or in &o',ination ith anoth#r ,o"y &or)orat#, #sta,!ish#s a 'utua! $un".
S)onsor is th# )ro'ot#r o$ th# $un".
S)onsor &ou!" ,# a ,an(, a &or)orat# or a $inan&ia! institution.
S)onsors th#n $or' Trust an" a))oint -oar" o$ Trust##s.
Th# s)onsor a!so a))oints Custo"ian.
>
MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
As )#r SE-I r#%u!ations, s)onsor 'ust &ontri,ut# at !#ast 678 o$ th# n#t orth o$
th# AMC an" )oss#ss a soun" $inan&ia! tra&( r#&or" o*#r $i*# y#ars )rior to
r#%istration.
S)onsor si%ns th# trust "##" ith th# trust##s.
S)onsor &r#at#s th# AMC an" th# trust## &o')any an" a))oints th# ,oar" o$
"ir#&tors o$ &o')ani#s, ith SE-I a))ro*a!.
S)onsor shou!" ha*# at !#ast a : y#ar tra&( r#&or" in th# $inan&ia! s#r*i&#s
,usin#ss an" shou!" ha*# 'a"# )ro$it in at !#ast < out o$ th# : y#ars.
Th# AMC=s &a)ita! is &ontri,ut#" ,y th# s)onsor.
S)onsor shou!" &ontri,ut# at !#ast 678 o$ th# &a)ita! o$ th# AMC.
Q) Discuss the right and responsibilities of trustees.
Q) Write a short note i) Trustee
The Trustees:
A 'utua! $un" in In"ia is $or' as Trust un"#r In"ian Trust A&t, 0??>.
Th# trust+'$ is 'ana%#" ,y -oar" o$ Trust##s.
Th# ,oar" o$ Dir#&tors i.#. Trust##s "o not 'ana%# th# )ort$o!io o$ s#&uriti#s
"ir#&t!y rath#r th#y a))oint as AMC .Ass#t Mana%#'#nt Co')any/
Trust##s #nsur# that $un" is 'ana%#" ,y stat#" o,4#&ti*# an" as )#r SE-I
r#%u!ations.
Trusts a!ays or( $or th# int#r#st o$ unit ho!"#rs.
Th# trust is &r#at#" throu%h a "o&u'#nt &a!!#" Trust D##" that is #@#&ut#" ,y
s)onsor in $a*ors o$ Trust##s.
Th# Trust##s ,#in% th# )ri'ary %uar"ians o$ unit ho!"#r=s $un"s an" ass#ts.
Trust##s 'ust #nsur# that th# in*#stor=s int#r#sts ar# sa$#%uar"#" an" that th#
AMC o)#rations ar# as )#r r#%u!ation !ai" "on ,y SE-I.
SE-I 'an"at#s a 'ini'u' o$ >A<
r"
in"#)#n"#nt "ir#&tors on th# ,oar" o$ th#
trust## &o')any.
Trust##s ar# a))oint#" ,y th# s)onsor ith SE-I a))ro*a!.
Trust##s ar# r#;uir#" to '##t at !#ast 6 ti'#s a y#ar to r#*i# th# AMC.
Th# trust##s 'a(# sur# that th# $un"s ar# 'ana%#" a&&or"in% to th# in*#stor=s
'an"at#.
Rights of Trustees:
<
MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
Th# trust## a))oints AMC ith )rior a))ro*a! o$ SE-I.
Th#y a!so a))ro*# #a&h n# s&h#'# $!oat#" ,y AMC.
Th#y ha*# th# ri%ht to r#;u#st any n#&#ssary in$or'ation $ro' th# AMC
&on&#rnin% th# o)#rations o$ *arious s&h#'#s.
Th# trust##s 'ay ta(# any n#&#ssary a&tion a%ainst AMC i$ th#y $oun" AMC
o)#rations ar# not as )#r th# SE-I r#%u!ations.
Mana%#s th# 'utua! $un" an" !oo( a$t#r th# o)#rations o$ th# a))oint#" AMC.
Trust##s a))ro*# #a&h MF s&h#'# $!oat#" ,y AMC
Trust##s r#&#i*# $## $or th#ir s#r*i&#s.
Th# in*#st'#nts ar# h#!" ,y th# Trust##
Trust##s &an s##( r#'#"ia! a&tions $ro' AMC
Trust##s &an "is'iss th# AMC
Th# trust##s ha*# th# ri%ht to #nsur# that, ,as#" on th#ir ;uart#r!y r#*i# o$
AMC=s n#t orthB any short$a!! in th# n#t orth is 'a"# ,y th# AMC.
Obligations of Trustees:
To #nsur# that $un"s transa&tions as )#r SE-I r#%u!ations
To #nsur# that th# )ro)#r (#y )#rson o$ AMC has ,##n a))oint#". An" a!so
o)#rations o$ oth#r sta$$s o$ AMC.
To #nsur# that th# "u# "i!i%#n&# .&ar#/ has ,##n %i*#n $or #')an#!'#nt o$
,ro(#rs.
Trust##s Mana%#s th# Mutua! Fun" an" !oo( a$t#r th# o)#rations o$ th#
a))oint#" AMC
Th# in*#st'#nts ar# h#!" ,y th# Trust##
At !#ast 6 '#',#rs shou!" ,# th#r# in -oar" o$ Trust##s.
>A< '#',#rs in th# -oar" o$ Trust##s shou!" ,# in"#)#n"#nt.
S)onsors #@#&ut# an" r#%ist#r Trust D##" in $a*ors o$ Trust##s.
Trust## o$ on# MF &annot ,# a trust## o$ anoth#r MF, un!#ss h#Ash# is an
in"#)#n"#nt trust## in ,oth th# &as#s.
Th# a))oint'#nt o$ a!! trust##s has to ,# "on# ith )rior a))ro*a! o$ SE-I.
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MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
Trusts ar# $or'#" throu%h CTrust D##"D
Trust #nsur#s that AMC has not %i*#n any un"u# a"*anta%# to any asso&iat#s.
Trust## #nsur#s that AMC is 'ana%in% th# $un" as )#r SE-I r#%u!ations
M##tin% o$ Trust##s shou!" h#!" on&# in #*#ry to 'onths.
SE-I &at#%oriE#s th# O,!i%ations o$ Trust##s as
o G#n#ra! Du# Di!i%#n&# 5
o S)#&i$i& Du# Di!i%#n&#
0. General Due Diligence
A))oint'#nt o$ AMC 5 its "ir#&tors
O,s#r*an&# o$ AMC $un&tionin% an" "#sira,i!ity o$ its
&ontinuan&#
Prot#&tion o$ Trust )ro)#rty
Ensurin% that a!! &onstitu#nts an" asso&iations ar# r#%ist#r#"
#ntiti#s
R#*i# o$ s#r*i&# &ontra&ts an" t#r's
R#)ortin% to SE-I any s)#&ia! "#*#!o)'#nts in th# 'utua!
$un"
>. Specific Due Diligence
Trust 'ust a))oint in"#)#n"#nt au"itor an" o,tain $ro'
th#' )#rio"i& int#rna! au"it r#)orts $ro' AMC
O,tain &o')!ian&# t#st r#)orts $ro' th# AMC on&# #*#ry
to 'onths.
Th#s# r#)orts ar# to ,# "is&ussin% in '##tin% o$ trust##s.
Trust##s s#t a &o"# o$ #thi&s $or trust##s an" $or AMC
)#rsonn#!
Q) What are the qualifications and obligations of A!" #$plain.
Q) Dra% out the qualifications and obligations of A!.
Q) #$plain briefl& the constitution and 'anage'ent of an A! %ith reference to the
eligibilit& criteria( restrictions on )usiness acti*ities and obligation.
A!+Appoint'ents and ,unctions
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MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
Th# ro!# o$ AMC is to a&t as in*#st'#nt 'ana%#r o$ trust
Th# AMC .as a))oint#" ,y trustAs)onsor/ r#;uir# a))ro*in% ,y a SE-I
Th# AMC su)#r*ision un"#r its on ,oar" o$ "ir#&tors an" a!so th# "ir#&tors o$
trust##s an" SE-I
Th# trust##s ar# #')o#r#" to t#r'inat# th# a))oint'#nt o$ AMC an" a))oint a
n# AMC ith )rior a))ro*a! o$ SE-I an" unit ho!"#rs.
Th# AMC is th# na'# o$ th# TrustB 'ana%# "i$$#r#nt in*#st'#nt s&h#'#s as )#r
in*#st'#nt 'ana%#'#nt a%r##'#nt ith th# trust##s.
Th# AMC o$ a MF 'ust ha*# a n#t orth o$ at !#ast Rs.07 Cror#s at a!! ti'#s.
Dir#&tor o$ AMC shou!" ha*# &o')!#t# $inan&# )ro$#ssiona! #@)#ri#n&#.
Th# AMC &annot a&t as a trust## o$ any oth#r MF.
Th# AMC a!ays a&t in th# int#r#st o$ unit ho!"#rs .in*#stor/
Th# AMC %#ts a $## $or 'ana%in% th# $un"s, a&&or"in% to th# 'an"at# o$ th#
in*#stors
At !#ast F o$ th# AMC=s -oar" shou!" ,# o$ in"#)#n"#nt '#',#rs
An AMC &an not #n%a%# in any ,usin#ss oth#r than )ort$o!io a"*isory an"
'ana%#'#nt
An AMC o$ on# $un" &annot ,# Trust## o$ anoth#r $un"
AMC shou!" ,# r#%ist#r#" ith SE-I
AMC si%ns an in*#st'#nt 'ana%#'#nt a%r##'#nt ith th# trust##s
Obligation of A! - its directors
In*#st'#nt o$ th# $un" a&&or"in% to th# SE-I r#%u!ation 5 trust "##".
Th#y ar# ans#ra,!# to th# trust##s an" 'ust su,'it ;uart#r!y r#)orts to th#'
on AMC a&ti*iti#s an" &o')!ian&# ith SE-I r#%u!ations
Ea&h "ay NAV is u)"at#" on AMFI #,sit# ,y 1 )'
In th# #*#nt o$ '#r%#r or &onso!i"ation o$ s&h#'#s, th# unit ho!"#rs ar# inti'at#"
throu%h a !#tt#r %i*in% th#' o)tion to #@it at )r#*ai!in% NAV ithout #@it !oa".
!ustodians - Depositories
For sa$#(##)in% o$ )hysi&a! s#&uriti#s o$ MF &usto"ian is a))oint#" ,y ,oar" o$
trust##s.
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MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
Th# &usto"ian shou!" ,# r#%ist#r#" ith SE-I. D#'at#ria!iE#" $or's o$ s#&uriti#s
ar# h#!" in th# &usto"y o$ D#)ositori#s Parti&i)ant.
Th# in*#stor=s $un" an" th# in*#st'#nts ar# h#!" ,y th# &usto"ian, ho is th#
%uar"ian o$ th# $un"s an" ass#ts o$ th# in*#stors.
S)onsor an" th# Custo"ian &annot ,# th# sa'# #ntity
,unction of !ustodian
R#s)onsi,!# $or th# s#&uriti#s h#!" in th# 'utua! $un"s )ort$o!io
G##) an in*#st'#nt r#&or" o$ th# 'utua! $un"
Co!!#&t "i*i"#n"s an" in*#st'#nt )ay'#nts "u# on th# 'utua! $un"s in*#st'#nt
Tra&( &or)orat# a&tions !i(# ,onus issu#s, ri%ht o$$#rs, o$$#r $or sa!#, ,uy ,a&(
an" o)#n o$$#rs $or a&;uisition.
Q) Dra% out the qualifications and obligations of A!.
Registrars - Transfer Agents
Th#y ar# r#s)onsi,!# $or issuin% an" r#"##'in% units o$ th# MF an" )ro*i"in%
oth#r MF r#!at#" s#r*i&#s to in*#stors
R#%ist#r an" Trans$#r .R5T/ A%#nts 'ana%# th# sa!# an" r#)ur&has# o$ units
an" (##) th# unit ho!"#rs a&&ounts.
,unctions of Registrars
Pro&#ss in*#stors a))!i&ation
R#&or" "#tai!s o$ in*#stors
S#n" in$or'ation to in*#stor
Pro&#ss "i*i"#n" )ayout
In&or)orat# &han%#s in in*#stor in$or'ation
G##)in% in*#stor in$or'ation u) to "at#
Distributors
AMC a))oints a "istri,utor .a!so &a!!#" MF a"*isor, a%#nt, ,ro(#r, int#r'#"iari#s
#t&/ ho s#!!s units MF to in*#stors on th# ,#ha!$ o$ $un"hous#.
H
MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
A s)onsor or an asso&iat# 'ay a&t as "istri,utors o$ AMC. For #@a')!#, -an(
hi&h is s)onsor o$ Mutua! Fun" Co')any 'ay a&t as "istri,utor a!so $or s#!!in%
its 'utua! $un"s )ro"u&ts
AMC has th# ri%ht h#th#r to i')an#!#" .a))oint/ or not "istri,utor $or s#!!in% his
MF s&h#'#.
Th#y a!so ha*# th# ri%ht o$ &o''ission stru&tur# hi&h th#y o$$#r to "istri,utor
Iou 'ay $in" "i$$#r#nt &o''ission stru&tur# $or "i$$#r#nt AMC s&h#'#.
A "istri,utor &an a&t $or s#*#ra! or a!! MF
For a!! #')!oy##s an" "istri,utors o$ MF, AMFI &#rti$i&ation t#st has ,##n 'a"#
'an"atory ,y SE-I
A!! "istri,utors ar# r#;uir#" to ,# r#%ist#r#" ith AMFI an" o,tain AMFI
R#%istration Nu',#r .ARN/
Th# &o''ission r#&#i*#" ,y th# "istri,utors is s)!it into initia! &o''ission hi&h
is )ai" on 'o,i!iEation o$ $un"s an" tria! &o''ission hi&h is )ai" "#)#n"in% on
th# ti'# th# in*#stors stay ith th# $un".
,und ergers - Ta.eo*ers
A runnin% $un" &onstitution &an &han%# in th# $o!!oin% )ossi,!# ays
0. Trust##s 'ay "#&i"# to &han%# th# AMC an" han"o*#r th# s&h#'# to a n#
AMC
>. Th# s&h#'# 'ay ,# '#r%#" ith anoth#r s&h#'# o$ th# sa'# AMC
<. Th# AMC is ta(#n o*#r ,y anoth#r s#t o$ s)onsors
6. On# AMC 'ay '#r%# ith anoth#r AMC
:. Just th# s&h#'#s 'ay ,# ta(#n o*#r ,y anoth#r s#t o$ trust##s
Transa&tion Ty)# Trust##
A))ro*a!
SE-I
A))ro*a!
Ki%h Court
A))ro*a!
AMC Ta(#o*#r ,y n# s)onsor I#s I#s No
AMC M#r%#r I#s I#s I#s
Trust##s &han%in% AMC I#s I#s No
S&h#'#s ta(#n o*#r ,y anoth#r AMC I#s I#s No
S&h#'# M#r%#r I#s I#s No
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MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
#$a'ple of A! erger + K- 5 Taurus 9 To MF &o')ani#s in In"ia hi&h '#r%#"
usin% th# AMC '#r%#r rout#
#$a'ple of A! Ta.eo*er + Luri&h a&;uir#" Thr#a"n##"!# %!o,a!!y an" ,ou%ht out ITC
Thr#a"n##"!#=s In"ia ,usin#ss. Luri&h si'i!ar!y a&;uir#" G#')#r T#nti#th C#ntury
Finan&#. In r#&#nt ti'#s A!!ian&# as ta(#n o*#r ,y -ir!a.
#$a'ple of Sche'e Ta.eo*er 9 Luri&h $ina!!y #@it#" MF ,usin#ss in In"ia an" so!" a!!
its s&h#'#s in In"ia to KDFC .t#&hni&a!!y th# AMC as not so!" ,ut 4ust th# s&h#'#s/
Q) Write a short note ii) !ustodians
3hat Is a Mutua! Fun" Custo"ianM
Mutua! $un"s ar# r#;uir#" to ha*# a &usto"ian as )art o$ $un"Ns o)#rations. Mutua! $un"s
ar# )oo!s o$ in*#stor ass#ts an" th# &usto"ian )rot#&ts th# ass#ts in th# )oo!.
I"#nti$i&ation
A 'utua! $un" &usto"ian is a ,an( or trust &o')any that ho!"s th# ass#ts o$ th# $un".
Th# &usto"ian sa$#%uar"s an" )rot#&ts th# sto&(s, ,on"s or oth#r s#&uriti#s that
&o')ris# th# *a!u# $or th# 'utua! $un" shar#ho!"#rs.
Kistory
Th# In*#st'#nt Co')any A&t o$ 0167 is th# 'a4or !a that %o*#rns th# o)#ration o$
'utua! $un"s. Th# A&t r#;uir#s $un" ass#ts to ,# (#)t s#)arat# $ro' a $un"Ns in*#st'#nt
a"*is#r.
F#atur#s
Th# 'utua! $un" &usto"ian 'aintains &usto"y o$ th# $un"Ns ass#ts an" (##)s th#'
s#)arat# $ro' oth#r ass#ts th# in*#st'#nt a"*is#r 'ay ha*# or 'ana%#. Th# ass#ts
that ,#!on% to th# 'utua! $un" in*#stors &annot ,# us#" $or any oth#r )ur)os#.
Fun&tion
Ko!"in% a 'utua! $un"Ns ass#ts ith a thir" )arty &usto"ian )r#*#nts $rau" ,y th#
in*#st'#nt &o')any an" 'aintains th# ass#ts o$ th# shar#ho!"#rs i$ th# 'utua! $un"
&o')any shou!" ha*# $inan&ia! trou,!# or %o ,an(ru)t.
Consi"#rations
-#si"#s sa$#%uar"in% a $un"Ns ass#ts, th# &usto"ian i!! usua!!y )#r$or' oth#r "uti#s
su&h as a&tin% as th# $un"Ns trans$#r a%#nt. Th# &usto"ian i!! (##) tra&( o$
shar#ho!"#rs an" th#ir *a!u#s, &o!!#&t "i*i"#n"s an" s#tt!# s#&uriti#s transa&tions.
Q) Discuss the role of /T0 %ith respect to ,.
Unit Trust o$ In"ia as th# $irst 'utua! $un" s#t u) in In"ia in th# y#ar 012<. In #ar!y
0117s, Go*#rn'#nt a!!o#" )u,!i& s#&tor ,an(s an" institutions to s#t u) 'utua! $un"s.
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MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
In th# y#ar 011>, S#&uriti#s an" #@&han%# -oar" o$ In"ia .SE-I/ A&t as )ass#". Th#
o,4#&ti*#s o$ SE-I ar# 9 to )rot#&t th# int#r#st o$ in*#stors in s#&uriti#s an" to )ro'ot#
th# "#*#!o)'#nt o$ an" to r#%u!at# th# s#&uriti#s 'ar(#t.
As $ar as 'utua! $un"s ar# &on&#rn#", SE-I $or'u!at#s )o!i&i#s an" r#%u!at#s th#
'utua! $un"s to )rot#&t th# int#r#st o$ th# in*#stors. SE-I noti$i#" r#%u!ations $or th#
'utua! $un"s in 011<. Th#r#a$t#r, 'utua! $un"s s)onsor#" ,y )ri*at# s#&tor #ntiti#s
#r# a!!o#" to #nt#r th# &a)ita! 'ar(#t. Th# r#%u!ations #r# $u!!y r#*is#" in 0112 an"
ha*# ,##n a'#n"#" th#r#a$t#r $ro' ti'# to ti'#. SE-I has a!so issu#" %ui"#!in#s to th#
'utua! $un"s $ro' ti'# to ti'# to )rot#&t th# int#r#sts o$ in*#stors.
A!! 'utua! $un"s h#th#r )ro'ot#" ,y )u,!i& s#&tor or )ri*at# s#&tor #ntiti#s in&!u"in%
thos# )ro'ot#" ,y $or#i%n #ntiti#s ar# %o*#rn#" ,y th# sa'# s#t o$ R#%u!ations. Th#r#
is no "istin&tion in r#%u!atory r#;uir#'#nts $or th#s# 'utua! $un"s an" a!! ar# su,4#&t to
'onitorin% an" ins)#&tions ,y SE-I. Th# ris(s asso&iat#" ith th# s&h#'#s !aun&h#"
,y th# 'utua! $un"s s)onsor#" ,y th#s# #ntiti#s ar# o$ si'i!ar ty)#. It 'ay ,# '#ntion#"
h#r# that Unit Trust o$ In"ia .UTI/ is not r#%ist#r#" ith SE-I as a 'utua! $un" .as on
January 0:, >77>/.
Q) #$plain the guidelines of S#)0 on ,s.
Q) Discuss the S#)0 guidelines related to ,s.
Q) Discuss the S#)0 guidelines on ,s.
Q) )riefl& e$a'ine the guidelines issued b& S#)0 for the regulation of ,s in 0ndia.
Guidelines 0ssued
SE-I is th# r#%u!atory authority o$ Mutua! Fun"s. SE-I has th# $o!!oin% ,roa"
%ui"#!in#s )#rtainin% to 'utua! $un"s :
.0/ MFs shou!" ,# $or'#" as a Trust un"#r In"ian Trust A&t an" shou!" ,# o)#rat#"
,y Ass#t Mana%#'#nt Co')ani#s .AMCs/.
.>/ MFs n##" to s#t u) a -oar" o$ Trust##s an" Trust## Co')ani#s. Th#y shou!"
a!so ha*# th#ir -oar" o$ Dir#&tors.
.</ Th# n#t orth o$ th# AMCs shou!" ,# at !#ast Rs.07 &ror#.
.6/ AMCs an" Trust##s o$ a MF shou!" ,# to s#)arat# an" "istin&t !#%a! #ntiti#s.
.:/ Th# AMC or any o$ its &o')ani#s &annot a&t as 'ana%#rs $or any oth#r $un".
.2/ AMCs ha*# to %#t th# a))ro*a! o$ SE-I $or its Arti&!#s an" M#'oran"u' o$
Asso&iation.
.H/ A!! MF s&h#'#s shou!" ,# r#%ist#r#" ith SE-I.
.?/ MFs shou!" "istri,ut# 'ini'u' o$ 178 o$ th#ir )ro$its a'on% th# in*#stors.
.1/ Th#r# ar# oth#r %ui"#!in#s a!so that %o*#rn in*#st'#nt strat#%y, "is&!osur#
nor's an" a"*#rtisin% &o"# $or 'utua! $un"s.
#ligibilit& !riteria
O Must ,# r#%ist#r#" ith SE-I
O S)onsor to satis$y &on"itions su&h as
-#in% in Finan&ia! S#r*i&# -usin#ss
Positi*# N#t 3orth $or !ast : y#ars
N#t Pro$it in < out o$ : y#ars
R#)utation o$ $airn#ssAInt#%rity in ,usin#ss transa&tions
07
MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
P
r#'ainin% $or'a!iti#s su&h as Contri,ution to th# N3 o$ AMC.at!#ast 678 o$ n#t+
orth o$ AMC/, a))oint'#nt o$ Trust##s, So on.
O MF in th# $or' o$ Trust 5 Cont#nts o$ Trust D##" has ,##n )r#s&ri,#" ,y th# SE-I.
Who can be Trustee
0. P#rson o$ a,i!ity, int#%rity an" stan"in% ho has not ,##n %ui!ty o$ 'ora!
tur)itu"#s &on*i&t#" o$ any E&o+ o$$#n&#AVio!ation o$ S#&uriti#s Las #t&.
>. >A<r" o$ Trust##s shou!" ,# in"#)#n"#nt )#rsons not asso&iat#" ith s)onsors.
<. Trust##s to a))oint AMC ith th# )rior a))ro*a! o$ SE-I.
6. Trust##s to #nt#r into an In*#st'#nt A%r##'#nt ith AMC an" Custo"ian.
:. Trust##s ha*# ri%ht to o,tain $ro' AMC a!! in$or'ationA"ata &on&#rnin% th#
o)#rations o$ th# Various S&h#'#s o$ MF 'ana%#" ,y it.
A!
i/ A))oint'#nt o$ AMC &an ,# t#r'inat#" ,y a 'a4ority o$ Trust## or H:8 o$ th#
unit ho!"#rs o$ th# s&h#'#.
ii/ Crit#ria $or a))oint'#nt o$ AMC in&!u"# soun" tra&( r#&or", a"#;uat#
)ro$#ssiona! #@)#ri#n&#, not %ui!ty o$ 'ora! tur)itu"#, non+&on*i&tion o$ any
#&ono'i& o$$#n&#A*io!ation o$ any #&ono'i& o$$#n&#A*io!ation o$ S#&uriti#s Las.
iii/ At !#ast :78 in"#)#n"#nt Dir#&tors.
i*/ N#t 3orth Not !#ss than Rs. 07 Crs.
*/ AMC &annot a&t as a Trust## o$ MF
i/ AMC &an un"#rta(# ,usin#ss o$ )ort$o!io 'ana%#'#nt s#r*i&#s,
Mana%#'#nt 5 a"*isory s#r*i&#s to o$$shor# $un"s, *#ntur# Ca)ita! $un"s,
insuran&# $un"s, $inan&ia! &onsu!tan&y an" E@&han%# o$ r#s#ar&h on &o''#r&ia!
,asis )ro*i"#" th#s# A&ti*iti#s "o not &on$!i&t ith th# a&ti*iti#s o$ MF.
It is o,!i%atory $or an AMC to ta(# a!! r#asona,!# st#)s an" #@#r&is# "u#
"i!i%#n&# to #nsur# that th# in*#st'#nts o$ $un"s &on$or's to th# )ro*isions o$
th# SE-I r#%u!ations an" th# trust "##". It &an )ur&has#As#!! s#&uriti#s u)to a
'a@i'u' o$ : )#r&#nt o$ th# tota!, throu%h a ,ro(#r asso&iat#" ith th#
)ro'ot#r. It shou!" "is&!os# "#tai!s o$ a!! transa&tion ithAthrou%h th#
s)onsorAasso&iat# &o')ani#s. Th# AMC has to $i!# "#tai!s o$ s#&uriti#s
transa&tions ,y its (#y )#rsonn#! in th#ir on na'# or on ,#ha!$ o$ th# AMC, to
th# trust##sASE-I. D#tai!s o$ transa&tions ith asso&iat#s shou!" a!so ,#
$i!#"Ar#)ort#". Th# AMC has to $i!# "#tai!s o$ its "ir#&tors an" transa&tions ith
s)onsorAasso&iat# &o')ani#s, ith th# trust##sASE-I. Th# AMCs ar# )rohi,it#"
$ro' a))ointin% as (#y )#rsonn#!, any )#rson $oun" %ui!ty o$ any #&ono'i&
o$$#n&# or in*o!*#" in *io!ation o$ s#&uriti#s !as.
!ustodian
i/ MF &annot a))oint a Custo"ian in hi&h :78 or 'or# o$ th# *otin% ri%htA"ir#&torshi)
is h#!" ,y s)onsor asso&iat#s.
ii/ Custo"ian A%r##'#nt, S#r*i&# Contra&t an" t#r's o$ a))oint'#nt r#;uir# )rior
a))ro*# o$ th# trust##s.
iii/Shou!" ,# r#%ist#r#" ith SE-I.
1aunch of , Sche'e
i/ Laun&h a$t#r a))ro*a! ,y th# trust##s an" $i!in% o$ o$$#r Do&u'#nt ith SE-I
00
MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
ii/ O$$#r Do&u'#nt to &!ari$yA'#ntion o,4#&ti*#s o$ th# S&h#'# an" &ontain a!!
"is&!osur#s to #na,!# in*#stors to 'a(# an in$or'#" in*#st'#nt "#&ision.
iii/ O$$#r Do&u'#nt 5 A"*#rtis#'#nt shou!" not ,# 'is!#a"in% or &ontain in&orr#&t
in$or'ation.
2e% S#)0 Guidelines for utual ,unds
The Securities and #$change )oard of 0ndia 3S#)0) has brought in s%eeping changes
for the 'utual fund industr&. The i'pact of %hich %ill be felt on the in*estor in
'ore %a&s than one.
0/ ,irst( for 2e% ,und Offers 32,Os): Th#y i!! onl& be open for 45 da&s. .ELSS
$un"s thou%h i!! &ontinu# to stay o)#n $or u) to 17 "ays/ It i!! sa*# in*#stors $ro' a
)ro!on%#" NFO )#rio" an" ,#in% haran%u#" ,y a"*isors an" a"*#rtis#'#nts. Th#
'oti*ation ,#hin" th# ru!# s##'s to ,# si')!# 9 i$ you &an in*#st anyti'#, hy (##)
NFO )#rio" !on%M

>/ NFOs can onl& be in*ested at the close of the 2,O period. Ear!i#r, Mutua! $un"s
ou!" (##) an NFO o)#n $or <7 "ays, an" th# 'inut# th#y r#&#i*#" th#ir $irst &h#;u#,
th# 'on#y ou!" ,# "ir#&t!y in*#st#" in th# 'ar(#tB &r#atin% a s(##" a&&ountin% $or
thos# that #nt#r#" !at#r sin&# th#y %#t a $i@#" NFO )ri&#.

Th# 'ar(#t r#%u!ator has &orr#&t#" this ,y #@t#n"in% A))!i&ation Su))ort#" ,y -!o&(#"
A'ount .AS-A/ to 'utua! $un"s. This i!! ,#&o'# #$$#&ti*# startin% Ju!y 0
st
this y#ar.

-y the AS)A process 3Application Supported b& )loc.ed A'ount) on# &an &ontinu#
to #arn int#r#st in th# ,an( a&&ount unti! th# NFO &!os#s .r#'#',#r th#r# is usua!!y no
r#4#&tion or Co*#rsu,s&ri)tionD in a 'utua! $un" NFO/ hi&h '#ans that th# &h#;u#
%o#s $or &!#arin% a$t#r th# NFO has &!os#" irr#s)#&ti*# o$ h#n it as s#nt. Th# $un"
'ana%#r i!! ,# a,!# to in*#st on&# th# NFO &!os#s.

</ Di*idends can no% onl& be paid out of actuall& reali6ed gains. I')a&t: it i!! r#"u&#
,oth th# ;uantu' o$ "i*i"#n"s announ&#", an" th# '#asur#s us#" ,y MFs to %arn#r
in*#stor 'on#y usin% "i*i"#n" as a &arrot to #nti&# n# in*#stors.

6/ E;uity Mutua! $un"s ha*# ,##n as(#" to )!ay a 'ore acti*e role in corporate
go*ernance o$ th# &o')ani#s th#y in*#st in. This i!! h#!) 'utua! $un"s ,#&o'# 'or#
a&ti*# an" not 4ust that, th#y 'ust r#*#a!, in th#ir annua! r#)orts $ro' n#@t y#ar, hat
th#y "i" in #a&h C*ot#D. SE-I has no 'a"# it 'an"atory $or $un"s to "is&!os# h#th#r
th#y *ot#" $or or a%ainst 'o*#s .su%%#st#" ,y &o')ani#s in hi&h th#y ha*# in*#st#"/
su&h as '#r%#rs, "#'#r%#rs, &or)orat# %o*#rnan&# issu#s, a))oint'#nt an" r#'o*a!
o$ "ir#&tors. MFs ha*# to "is&!os# it on th#ir #,sit# as #!! as annua! r#)orts.

:/ E;uity Fun"s #r# a!!o#" to &har%# 08 'or# as 'ana%#'#nt $##s i$ th# $un"s
#r# Cno+!oa"DB ,ut sin&# SE-I has ,ann#" #ntry !oa"s, this e$tra 47 has also been
re'o*ed.

2/ SE-I has a!so as(#" Mutua! Fun"s to re*eal all co''ission paid to it8s sponsor or
associate co'panies( e'plo&ees and their relati*es.
0>
MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE

H/ Regarding the ,und+of+,und 3,O,) 9 Th# 'ar(#t r#%u!ator has stat#" that
in$or'ation "o&u'#nts that Ass#t Mana%#'#nt Co')ani#s .AMCs/ ha*# ,##n #nt#rin%
into r#*#nu# sharin% arran%#'#nts ith o$$shor# $un"s in r#s)#&t o$ in*#st'#nts 'a"#
on ,#ha!$ o$ Fun" o$ Fun" s&h#'#s &r#at# &on$!i&t o$ int#r#st. K#n&#$orth, AMCs sha!!
not #nt#r into any r#*#nu# sharin% arran%#'#nt ith th# un"#r!yin% $un"s in any
'ann#r an" sha!! not r#&#i*# any r#*#nu# ,y hat#*#r '#ansAh#a" $ro' th# un"#r!yin%
$un".

Th#s# %ui"#!in#s s#t ,y th# SE-I i!! !#a" to %r#at#r trans)ar#n&y $or th# &o''on
in*#stor. SE-I $or'u!at#s )o!i&i#s an" r#%u!at#s th# 'utua! $un"s to )rot#&t th# int#r#st
o$ th# in*#stors. 3ith th#s# %ui"#!in#s $a!!in% in )!a&# it ou!" &r#at# ,#tt#r trust an"
trans)ar#n&y an" an in*#sta,!# #n*iron'#nt that ou!" attra&t in*#stors ith %r#at#r
$aith an" &on$i"#n&#.
Sebi issues guidelines for 'utual funds
Mutua! $un"s &annot in*#st 'or# than 07 )#r &#nt o$ th# tota! n#t ass#ts o$ a s&h#'# in
th# short+t#r' "#)osits o$ a sin%!# ,an(, th# S#&uriti#s an" E@&han%# -oar" o$ In"ia
sai" on Mon"ay.
Announ&in% %ui"#!in#s $or )ar(in% o$ $un"s in short+t#r' "#)osits o$ s&h#"u!#"
&o''#r&ia! ,an(s .SC-s/ ,y 'utua! $un"s, th# r#%u!ator sai" that in*#st'#nt &a)
ou!" a!so ta(# into a&&ount th# "#)osit s&h#'#s o$ th# ,an(Ns su,si"iari#s.
Th# S#,i has a!so "#$in#" Nshort t#r'N $or $un"sN in*#st'#nt )ur)os#s as a )#rio" not
#@&##"in% 10 "ays.
-#si"#s, th# )ar(in% o$ $un"s in short+t#r' "#)osits o$ a!! SC-s has ,##n &a))#" at 0:
)#r &#nt o$ th# n#t ass#t *a!u# .NAV/ o$ a s&h#'#, hi&h &an ,# rais#" to >7 )#r &#nt
ith )rior a))ro*a! o$ th# trust##s.
Th# )ar(in% o$ $un"s in short+t#r' "#)osits o$ asso&iat# an" s)onsor SC-s to%#th#r
shou!" not #@&##" >7 )#r &#nt o$ tota! "#)!oy'#nt ,y th# MF in short+t#r' "#)osits, it
a""#".
Th# S#,i sai" that th#s# %ui"#!in#s ar# ai'#" at #nsurin% that $un"s &o!!#&t#" in a
s&h#'# ar# in*#st#" as )#r th# in*#st'#nt o,4#&ti*# stat#" in th# o$$#r "o&u'#nt o$ an
MF s&h#'#.
Th# n# %ui"#!in#s ou!" ,# a))!i&a,!# to a!! $r#sh in*#st'#nts h#th#r in a n#
s&h#'# or an #@istin% on#. In &as#s o$ an #@istin% s&h#'#, h#r# th# s&h#'# has
a!r#a"y )ar(#" $un"s in short+t#r' "#)osits, th# ass#t 'ana%#'#nt &o')any has ,##n
%i*#n thr##+'onths ti'# to &on$or' to th# n# %ui"#!in#s.
Th# S#,i has a!so as(#" th# trust##s o$ a $un" to #nsur# that no $un"s ar# )ar(#" ,y a
s&h#'# in short t#r' "#)osit o$ a ,an(, hi&h has in*#st#" in that )arti&u!ar s&h#'#.
Th# S#,i %ui"#!in#s say that ass#t 'ana%#'#nt &o')ani#s .AMCs/ sha!! not ,#
)#r'itt#" to &har%# any in*#st'#nt an" a"*isory $##s $or )ar(in% o$ $un"s in short+t#r'
"#)osits o$ ,an(s in &as# o$ !i;ui" an" "#,t+ori#nt#" s&h#'#s.It has a!so as(#" th#
trust##s to "is&!os# "#tai!s o$ a!! su&h $un"s )ar(#" in short+t#r' "#)osits in ha!$+y#ar!y
)ort$o!io stat#'#nts un"#r a s#)arat# h#a"in% an" has sai" that AMCs shou!" a!so
&#rti$y th# sa'# in its ,i+'onth!y &o')!ian&# t#st r#)ort.
0<
MUTUAL FUND ANALYSIS
UNIT V: MUTUAL RUND REGULATIONS AND GOVERANCE
A!! th# short+t#r' "#)osits ,y 'utua! $un"s shou!" ,# h#!" in th# na'# o$ th# s&h#'#
&on&#rn#" on!y, it a""#".
MF is s#t+u) in th# $or' o$ a trust hi&h has
S)onsor
Trust##s
Ass#t Mana%#'#nt Co')any
Custo"ian
Th# s)onsors s#t+u) th# Trust as Pro'ot#rs. Th# trust##s ho!" th# )ro)#rty in
th# trust $or th# ,#n#$it o$ unit+ho!"#rs. Th#y ar# *#st#" ith %#n#ra! )o#rs o$
su)#rint#n"#n&# an" "ir#&tion o*#r th# AMC. Th#y 'onitor th# )#r$or'an&# o$ AMC
an" &o')!ian&#s ith th# SE-I r#%u!ations.
Th# AMC 'ana%#s th# $un"s.
06