CHAPTER 3

LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA

 KEY FEATURES OF A MUTUAL FUND

• It is established as a trust
• It raises money through sale of units to the public or a section of the public
• The units are sold under one or more schemes
• The schemes invest in securities (including money market instruments) or gold or
gold-related instruments or real estate assets.
 LEGAL STRUCTURE

• Mutual funds are constituted as Trusts. Therefore, they are governed by the Indian Trusts Act,
1882
• The mutual fund trust is created by one or more Sponsors, who are the main persons behind the
mutual fund business.
• Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the
investors who invest in various schemes of the mutual fund.
• The operations of the mutual fund trust are governed by a Trust Deed, which is executed
between the sponsors and the trustees. SEBI has laid down various clauses that need to be part
of the Trust Deed.
• The Trust acts through its trustees. Therefore, the role of protecting the interests of the
beneficiaries (investors) is that of the Trustees. The first trustees are named in the Trust Deed,
which also prescribes the procedure for change in Trustees.
• To perform the trusteeship role, either individuals may be appointed as trustees or a
Trustee company may be appointed. When individuals are appointed as trustees, they are
jointly referred to as ‘Board of Trustees’. A trustee company functions through its Board of
Directors.
• Day to day management of the schemes is handled by an Asset Management Company
(AMC). The AMC is appointed by the sponsor or the Trustees.
• The trustees execute an investment management agreement with the AMC, setting out its
responsibilities.
• Although the AMC manages the schemes, custody of the assets of the scheme (securities,
gold, gold-related instruments & real estate assets) is with a Custodian, who is appointed
by the Trustees.
• Investors invest in various schemes of the mutual fund. The record of investors and their
unit-holding may be maintained by the AMC itself, or it can appoint a Registrar & Transfer
Agent (RTA).
KEY CONSTITUENTS OF A MUTUAL FUND
 SPONSORS
• Registration of a mutual fund is made by the sponsor(s). Sponsors are the main people behind the mutual fund
operation.
• Eligibility Criteria-
• Should have a sound track record and reputation of fairness and integrity.
• Should be carrying on business in financial services for not less than 5 years.
• Should have positive net worth in all the immediately preceding 5 years.
• Net worth in the immediately preceding year should be more than the amount that the sponsor contributes to the
capital of the AMC.
• Should have earned profits, in three of the previous five years.

• The sponsor needs to contribute a minimum 40 percent of the net worth of the AMC. Further, anyone
who holds 40 percent or more of the net worth of share-holding in the AMC is considered to be a sponsor
and should therefore fulfil the eligibility criteria mentioned above.
 BOARD OF TRUSTEES

• SEBI Regulations stipulate that:

• Every trustee must be a person of ability, integrity and standing.
• A person who is guilty of moral turpitude cannot be appointed as a trustee.
• A person convicted of any economic offence or violation of any securities law cannot be
appointed as trustee.
• No AMC and no director (including independent director), officer, employee of an AMC shall
be eligible to be appointed as a trustee of a mutual fund.
• No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as
trustee of any other mutual fund.
• Prior approval of SEBI needs to be taken, before a person is appointed as
Trustee.
• The sponsor will have to appoint at least 4 trustees. If a trustee company
has been appointed, then that company would need to have at least 4
directors on the Board. At least two-thirds of the trustees on the Board of
the trustee company would need to be independent trustees i.e. not
associated with the sponsor in any way.
 RIGHTS AND RESPONSIBILITIES OF
TRUSTEES:
• The trustees have to file details of their securities dealings on a quarterly
basis with the mutual fund.
• On a quarterly basis the trustees shall review the transactions of the
mutual fund with the AMC and its associates. They shall also review the
net worth of the AMC on a quarterly basis and ensure that any shortfall is
made up.
• The trustees shall file half-yearly reports to SEBI.
 ASSET MANAGEMENT COMPANY

• Key personnel of the AMC should not have worked for any asset management company
or mutual fund or any intermediary during the period when its registration was
suspended or cancelled at any time by SEBI.
• Prior approval of the trustees is required, before a person is appointed as director on the
board of the AMC.
• Further, at least 50 percent of the directors should be independent directors i.e. not
associate of or associated with the sponsor or any of its subsidiaries or the trustees.
• The AMC needs to have a minimum net worth of Rs. 50 crore.
• The appointment of an AMC can be terminated by a majority of the trustees, or by 75
percent of the Unit-holders.
 CUSTODIAN

• The custodian has custody of the assets of the fund. As part of this role, the custodian
needs to accept and give delivery of securities for the purchase and sale transactions of
the various schemes of the fund.
• Thus, the custodian settles all the transactions on behalf of the mutual fund schemes.