Regulation Of

Mutual Funds &

SEBI Regulatory
Initiative Mutual
Funds
 • The primary authority for regulating MFs in
India is SEBI.
• SEBI requires all MFs to be registered with it.
• The SEBI mutual funds regulation 1996,outlined
Regulation of the board framework of the authorisation
mutual funds process and selection criteria.
• SEBI regulation clearly state that all funds and
scheme operational under them would be
bound by their regulation.
  Certain structural changes have also been made in the mutual
fund industry, as part of which mutual funds are required to set
up asset management companies with fifty percent independent
directors, separate board of trustee companies, consisting of a
minimum fifty percent of independent trustees and to appoint
independent custodians.
 This is to ensure an arm’s length relationship between trustees,
fund managers and custodians, and is in contrast with the
situation prevailing earlier in which all three functions were
Formation often performed by one body which was usually the sponsor of
the fund or a subsidiary of the sponsor.
 Thus, the process of forming and floating mutual funds has been
made a tripartite exercise by authorities. The trustees, the asset
management companies (AMCs) and the mutual fund
shareholders form the three legs. SEBI guidelines provide for
the trustees to maintain an arm’s length relationship with the
AMCs and do all those things that would secure the right of
investors.
  In January 1993, SEBI prescribed registration of mutual
funds taking into account track record of a sponsor, integrity
in business transactions and financial soundness while
granting permission.
 This will curb excessive growth of the mutual funds and
protect investor’s interest by registering only the sound
Registration promoters with a proven track record and financial strength.
In February 1993, SEBI cleared six private sector mutual
funds viz. 20th Century Finance Corporation, Industrial
Credit & Investment Corporation of India, Tata Sons, Credit
Capital Finance Corporation, Ceat Financial Services and
Apple Industries.
  The offer documents of schemes launched by mutual funds
and the scheme particulars are required to be votted by SEBI.
Documents  A standard format for mutual fund prospectuses is being
formulated.
  The current SEBI guidelines on mutual funds prescribe a
minimum start-up corpus of Rs.50 crore for a open-ended
scheme, and Rs.20 crore corpus for closed-ended scheme,
failing which application money has to be refunded.
 The idea behind forwarding such a proposal to SEBI is that in
Minimum the past, the minimum corpus requirements have forced
AMCs to solicit funds from corporate bodies, thus reducing
corpus mutual funds into quasi-portfolio management outfits. In
fact, the Association of Mutual Funds in India (AMFI) has
repeatedly appealed to the regulatory authorities for
scrapping the minimum corpus requirements.
  In September 1993, mutual funds were allowed to exercise
their voting rights. Department of Company Affairs has
Voting Rights reportedly granted mutual funds the right to vote as full-
fledged shareholders in companies where they have equity
investments.
  SEBI guidelines say that mutual funds can invest a maximum
of 25 per cent of resources mobilised into money-market
instruments in the first six months after closing the funds and
a maximum of 15 per cent of the corpus after six months to
meet short term liquidity requirements.
Investment in  Private sector mutual funds, for the first time, were allowed
to invest in the call money market after this year’s budget.
money market However, as SEBI regulations limit their exposure to money
markets, mutual funds are not major players in the call
money market. Thus, mutual funds do not have a significant
impact on the call money market.
SEBI  The Securities and exchange board of India (SEBI) is the regulator
of thr securities and commodity market in India owned by the
government of India. It was established on 12th April 1988 and
given statutory powers on 30 January 1992 through the SEBI
act,1992.
  In order to contain frequent churning of the investors in
mutual fund schemes and to clarify expense structure in SEBI
(Mutual Funds) Regulations, 1996 with greater precision,
Rationalisatio SEBI decided to rationalise the initial issue expenses.
 Accordingly, for the purpose of meeting the expenses
n of Initial connected with sales and distribution of schemes, close ended
schemes were permitted to charge initial issue expenses to
Issue the scheme.
Expenses and  In order to bring in more transparency and clarify to the
investors in terms of the expenses charged to them in close
Dividend end schemes, SEBI Board decided that: a) Henceforth, there
Distribution would not be provision of charging initial issue expenses and
amortization of the same, b) All mutual fund schemes would
Procedure now meet the sales, marketing and such other expenses
connected with sales and distribution of schemes from the
entry load.
Undertaking  To address the concerns regarding launch of similar products,
mutual fund trustees were required to certify that the scheme
from Trustees approved by them is a new product and is not a minor
modification of an existing scheme/ product.
for New  However, the said certification shall not be applicable to fixed
Scheme Offer maturity plans and close-ended schemes but shall be
applicable to close-ended schemes with a feature of
Document conversion into open-ended scheme on maturity.
  SEBI amended the SEBI (Mutual Funds) Regulations, 1996 to
Launch of specify the methodology for the valuation of gold for the
purpose of Gold Exchange Traded Funds (GETFs).
Gold Accordingly, the gold held by a GETF scheme shall be valued
at the AM fixing price of London Bullion Market Association
Exchange (LBMA) in US dollars per troy ounce for gold having a
fineness of 995.0 parts per thousand, subject to prescribed
Traded Funds adjustments. During the year two GETF schemes were
launched.
Short Selling
and Securities  Enabling provisions were made for a mutual fund to engage
Lending and in short selling of securities as well as lending and borrowing
of securities.
Borrowing
(SLB)
 Load on
Bonus Units  The practice of charging entry load on bonus units issued to
unit holders by mutual funds was taken up with AMFI. Based
and Units on the recommendations of AMFI Working Group on
Allotted on Standardisation of Key Operational Areas, it was decided that
AMCs would not charge entry as well as exit load on bonus
Reinvestment units and on units allotted on reinvestment of dividend.

of Dividend
Dedicated  Finance Minister in his Budget speech for 2007- 08,
announced that to promote the flow of investment to the
Infrastructure infrastructure sector, mutual funds would be permitted to
Funds launch and operate dedicated infrastructure funds.
  Presently Offer Documents (OD) and Key Information
Memorandum (KIM) of mutual fund schemes are prepared as
per format prescribed by SEBI. It was felt that due to
regulatory and other changes over a period of the ODs not
 Simplificatio only became lengthy and complex but also highly technical
and legalistic.
n of Offer  Consequently, ODs appeared to have become less-user
Documents friendly. SEBI in consultation with AMFI is working on the
modalities for simplification of OD. The simplified version of
OD would help the investor in making investment decision by
concentrating on the scheme specific details.
 Reduction in  The limit on investment and advisory for index fund schemes
Expenses was reduced to 0.75 per cent of weekly average net assets and
the total expenses of the scheme including the investment
charged by and advisory fees to 1.5 per cent of the weekly average net
assets. The reduced expenses and investment and advisory
Index Fund fees was made applicable to exchange traded index funds
also.
Scheme
Investment in
ADRs/
GDRs/  The aggregate ceiling for overseas ments by mutual funds was
Foreign raised to USD four billion and subsequently to USD five
billion as an industry vide ceiling and within this overall
Securities and limit, mutual funds can make overseas investments subject to
a maximum of USD 300 million. The permissible investments
Overseas in which overseas investments could be made by mutual
funds were expanded.
ETFs by
Mutual
Funds
  SEBI directed mutual funds to dispatch the statement of
accounts to the unit holders under Systematic Investment
Plan (SIP) / Systematic Transfer Plan (STP) / Systematic
Withdrawal Plan (SWP) once every quarter ending March,
June, September and December within ten working days of
the end of the respective quarter. However, the first
statement of accounts under SIP/STP/ SWP shall be issued
Dispatch of within ten working days of the initial investment.

Statement of  In case of specific request received from investors, mutual

funds shall provide the statement of accounts to the investors
Accounts within five working days from the receipt of such request
without any charges. Further, soft copy of the account
statement shall be mailed to the investors under
SIP/STP/SWP to their e-mail address on a monthly basis, if
so desired by the investors.
 SEBI further advised mutual funds to provide account
statements to the unit holders who have not transacted
during the last six months to ensure better information flow.