SEBI (Mutual Funds) Regulations, 1996

What this chapter covers

This chapter carries about 11 per cent of the III-C examination — by some way the heaviest in the syllabus.

LEARNING OBJECTIVES: After studying this chapter, you should know about: Legal Structure and Key Features of Mutual Fund in India · Types of Mutual fund products · Scheme related disclosures, Portfolio disclosures, Board and Committees · Risk Management Framework · Investor Rights and Obligations.

Introduction

Mutual fund is a vehicle (in the form of a "Trust") which mobilizes money from investors, for investing in different markets and securities, in accordance with the stated investment objectives. Through it an investor can invest in equities, bonds, money market instruments and/or other securities that may otherwise be unavailable to them and avail of the professional fund management services offered by an asset management company.

Every scheme of mutual fund has a pre-announced investment objective. Investors invest in a mutual fund scheme whose investment objective reflects their own needs and preference.

14.1 The three-tier structure

SEBI prescribes comprehensive set of guidelines for the functioning of a mutual fund through the "SEBI Mutual Funds (MF) regulations 1996". These regulations stipulate that a mutual fund must be a three-tiered structure consisting of: A Sponsor · A Trustee · An Asset Management Company (AMC).

And the supporting cast: the custodian, registrar and transfer agent (RTA), auditors and the fund accountants play a vital supporting role in aiding the smooth functioning of a mutual fund.

The definitions.

"Mutual fund" means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money market instruments, gold or gold related instruments, silver or silver related instruments, real estate assets and such other assets and instruments as may be specified by SEBI from time to time.

"Sponsor" means any person who, acting individually or in concert with another body corporate, establishes a mutual fund.

"Trustees" mean the trustee company that holds the property of the mutual fund in trust for the benefit of the unit holders.

14.2 Key features

A mutual fund shall be constituted in the form of a Trust, the Deed... registered under the provisions of the Indian Registration Act, 1908, and the mutual fund trust is created by one or more Sponsors.

Every Trust has beneficiaries — and the beneficiaries, in the case of a mutual fund trust, are the investors who invest in various schemes of the mutual fund, called unit-holders.

The operations of the mutual fund trust are governed by a Trust Deed, which is executed between the sponsors and the trustees.

Other features. MFs raise money through the 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 silver or silver related instruments or real estate assets · every mutual fund shall be registered with SEBI · a single mutual fund can float different schemes, but they have to be individually approved by the trustees and all offer documents have to be filed with the SEBI · SEBI lays down certain restrictions on the fees that AMCs can charge... and there is also a cap on the expenses · mutual funds can advertise, but advertisements cannot have statements that are misleading. For instance, no mutual fund can guarantee a return since returns depend on market performance · day to day management of the scheme is handled by an Asset Management Company (AMC). The AMC is appointed by the sponsor or the Trustees · and the record of investors may be maintained by the AMC itself, or through appointed Registrar & Transfer Agent (RTA).

14.3 Key concepts

Units: the investment that an investor makes in a scheme is in the form of a certain number of "Units" in the scheme.

Face Value — typically, every unit has a face value of Rs. 10, and the total number of units issued by a scheme multiplied by its face value (Rs. 10) is the capital of the scheme–its Unit Capital.

Recurring Expenses — the fees or commissions paid for various expenses are charged to the mutual fund scheme, as a percentage to the scheme's assets under management (AUM), and the scheme expenses are deducted while calculating the NAV.

Net Asset Value — the true worth of a unit of the mutual fund scheme, computed in the manner provided in sub-regulation (1) of regulation 48.

Assets Under Management — the sum of all investments made by investors in the mutual fund scheme is the entire mutual fund scheme's size.

Definitions to know exactly.

"Close-ended scheme" means any scheme of a mutual fund in which the period of maturity of the scheme is specified.

"Open-ended scheme" means a scheme of a mutual fund which offers units for sale without specifying any duration for redemption.

"Capital protection oriented scheme" means a mutual fund scheme which is designated as such and which endeavours to protect the capital invested therein through suitable orientation of its portfolio structure.

"Equity related instruments" include convertible debentures, convertible preference shares, warrants carrying the right to obtain equity shares, equity derivatives and such other instrument as may be specified by SEBI.

"Exchange traded fund" means a mutual fund scheme that invests in securities in the same proportion as an index of securities and the units of exchange traded fund are mandatorily listed and traded on exchange platform.

"Index fund scheme" means a mutual fund scheme that invests in securities in the same proportion as an index of securities.

The difference between the two is listing — an ETF's units are mandatorily listed and traded on exchange platform.

"Fund of funds scheme" means a mutual fund scheme that invests primarily in other schemes of the same mutual fund or other mutual funds.

"Gold exchange traded fund scheme" and "Silver exchange traded fund scheme" invest primarily in gold or gold related instruments and in silver or silver related instruments respectively.

"Money market instruments" includes commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, and any other like instruments as specified by the Reserve Bank of India.

"Money market mutual fund" means a scheme of a mutual fund which has been set up with the objective of investing exclusively in money market instruments.

"Networth" means the aggregate of the paid up capital and free reserves after deducting therefrom, miscellaneous expenditure to the extent not written off or adjusted or deferred revenue expenditure, intangible assets and accumulated losses.

"Offer document" means any document by which a mutual fund invites public for subscription of units of a scheme.

"Unit" means the interest of the unit holders in a scheme, which consists of each unit representing one undivided share in the assets of a scheme, and "Unit holder" means a person holding unit in a scheme of a mutual fund.

14.4.1 The Sponsor

The Sponsor is the main body that establishes the Mutual fund and can be compared to a promoter of a company. It could be a bank, a corporate or a financial institution. A private equity fund or a pooled investment vehicle or a pooled investment fund may also be permitted to sponsor mutual funds.

**Its responsibility includes appointing the Trustees with the approval of SEBI and setting up an AMC under the Companies Act, 2013.

Eligibility. The sponsor:

should have a sound track record of carrying out business in the financial services space for not less than five years;

shall ensure that the networth is positive in all the immediately preceding 5 years;

ensure that the positive liquid networth is more than the proposed capital contribution of the sponsor in the AMC;

ensure that in case of change in control of the existing AMC due to acquisition of shares, the positive liquid net worth of the sponsor or funds tied up by the sponsor is to the extent of aggregate par value or market value of the shares proposed to be acquired, whichever is higher;

has net profit after providing for depreciation, interest and tax in each of the immediately preceding 5 years;

has average net annual profit after depreciation, interest and tax during the immediately preceding five years of at least Rs 10 crores;

is a fit and proper person;

should contribute a minimum of 40% to the net worth of the AMC;

and neither it or any of its directors or the principal officer to be employed by the mutual fund should [have] been guilty of fraud or has not been convicted of an offence involving moral turpitude or has not been found guilty of any economic offence.

Where the track record conditions are not met, the Sponsor must instead:

capitalize the asset management company such that the net worth of the AMC is not less than Rs 150 crores;

ensure that the initial capital contributed by the Sponsor to the extent of Rs.150 crores is locked in for 5 years;

appoint experienced personnel in asset management company such that the total combined experience of Chief Executive Officer, Chief Operating Officer, Chief Risk Officer, Chief Compliance Officer and Chief Investment Officer should be at least thirty years.

Rs 150 crore, locked in for five years, and thirty years of combined experience across five named officers.

14.4.2 The Trustee

The main role of a trustee is to ensure that the interest of the unit holders is protected while making sure that the mutual fund complies with all the regulations of SEBI.

Key responsibilities include entering into an investment management agreement with the AMC to define its functioning; all the schemes require prior approval of the Trustees before their launch; the trustees review all the transactions of the AMC on a quarterly basis before filing reports to SEBI on a half-yearly basis; the Trustees would be responsible for the appointment of an AMC to manage the assets of the Fund; SEBI mandates a minimum of 2/3rd independent directors on the AMC Board; and Trustees are required to meet at least 4 times a year to review the functioning of AMC.

Composition: two-thirds of the trustees shall be independent persons and shall not be associated with the Sponsor in any manner. And in case a company is appointed as the Trustee of a mutual fund, the Chairperson of the board of directors of that Trustee company shall be an independent director.

Disqualification. No person shall be eligible to be appointed as a Trustee unless— (a) he is a person of ability, integrity, and standing; and (b) has not been found guilty of moral turpitude; and (c) has not been convicted of any economic offence or violation of any securities laws; and (d) has furnished particulars as specified in Form C of the SEBI MF Regulations.

Two exclusions follow. No asset management company and no director (including independent director), officer or employee of any other asset management company shall be eligible to be appointed as a Trustee of any mutual fund. And a Trustee of a mutual fund cannot be a trustee of any other mutual fund.

Agreements: the trustees and the asset management company shall with the prior approval of SEBI enter into an investment management agreement, containing such clauses as are mentioned in the Fourth Schedule.

Rights of Trustees. They shall approve each new scheme floated by AMC · request any necessary information from the AMC concerning the operations of various schemes · take any necessary action against AMC if they found AMC operations are not as per the SEBI regulations · receive fee for their services · hold the investments of the Fund in trust · seek remedial actions from AMC · and approve the policy for empanelment of brokers by the asset management company.

Obligations of Trustees. Each trustee shall file the details of his transactions with the Mutual Fund. The Trustees:

shall be accountable for and be the custodian of the funds and property of the respective schemes and shall hold the same in trust for the benefit of the unitholders;

shall take steps to ensure that the transactions of the mutual fund are in accordance with the provisions of the trust deed;

shall obtain the consent of the unitholders— (a) whenever required to do so by SEBI in the interest of the unitholders; or (b) whenever required to do so on the requisition made by three-fourths of the unit-holders of any scheme; or (c) when the majority of the trustees decide to wind up a scheme;

shall ensure that no change in the fundamental attributes of any scheme, the fees and expenses payable or any other change which would modify the scheme and affect the interest of the unit holders is carried out by the asset management company;

shall call for the details of transactions in securities by the key personnel of the asset management company in his own name or on behalf of the asset management company and shall report to the Board, as and when required;

shall quarterly review all transactions carried out between the mutual funds, asset management company and its associates;

shall periodically review the service contracts relating to custody arrangements, the investor complaints received and the redressal of the same by the asset management company;

shall ensure that the AMC has been managing the mutual fund schemes independently of other activities, that adequate steps have been taken to ensure that the interest of investors of one scheme are not being compromised with those of any other scheme, that there is no conflict of interest between the manner of deployment of its networth by the asset management company and the interest of the unit-holders, that the broker empanelment policy is approved and the AMC has been diligent in empanelling the brokers, that the AMC has not given any undue or unfair advantage to any associates, and that the AMC enters into transactions only in accordance with these regulations and the scheme;

shall abide by the Code of Conduct as specified in the Fifth Schedule;

shall furnish to the Board on a half-yearly basis,— (a) a report on the activities of the mutual fund; (b) a certificate stating that the trustees have satisfied themselves that there have been no instances of self-dealing or front running by any of the trustees, directors and key personnel of the asset management company; (c) a certificate to the effect that the asset management company has been managing the schemes independently of any other activities.

And the independent trustees shall give their comments on the report received from the asset management company regarding the investments by the mutual fund in the securities of group companies of the Sponsor.

Quarterly review of associate transactions; half-yearly reporting to SEBI.

14.4.3 Due diligence

General Due Diligence: appointment / formation of AMC & its directors · observance of AMC functioning and desirability of its continuance · protection of Trust property · ensuring that all constituents and associations are registered entities · review of service contracts and terms · reporting to SEBI any special developments in the mutual fund.

Specific Due Diligence: appoint independent auditor and obtain from them Internal audit reports of AMC at regular intervals · obtain compliance certificates at regular intervals from the asset management company. Prepare and adhere to a code of ethics for trustees and for AMC and its personnel · maintain records of the decisions of the Trustees and the minutes of the meetings · communicate in writing to the asset management company of the deficiencies and checking on the rectification of deficiencies.

Duties of Independent Directors of the Trustees or AMC — they shall pay attention to the Investment Management Agreement and the compensation paid under the agreement · service contracts with associates - whether the asset management company has charged higher fees than outside contractors for the same services · selection of the asset management company's independent directors · securities transactions involving associates · selecting and nominating individuals to fill independent director's vacancies · code of ethics which is designed to prevent fraudulent, deceptive or manipulative practices by insiders in connection with personal securities transactions · the reasonableness of fees paid to sponsors, asset management company and any others for services provided · principal underwriting contracts and their renewals · and any service contract with the associates of the AMC.

14.4.4 The Asset Management Company

AMC is the investment manager of the Trust. It takes care of the day-to-day operations of the mutual fund and managing the investor's money as well.

Formation: AMC, which is approved by SEBI, is appointed/ formed either by the trustee or the Sponsor.

Supervision: the AMC is supervised by its own board of directors and also the directors of Trustees.

Termination: AMC can be terminated by majority of the trustees or by 75% of the unitholders of the scheme.

Its people: the Chief Investment Officer, the fund managers and analysts, who are together responsible for managing the various schemes launched, and the compliance officer [who] ensures compliance of all the activities of the AMC in line with SEBIs rules and regulations.

Net worth: the AMC of a MF must have a net worth of at least Rs.50 Crores at all times.

Requisites: Director of AMC should have experience in finance and financial services related field · key personnel... should have not been found guilty of moral turpitude or convicted of economic offence or violation of securities laws · the board of directors of AMC should have at least 50% directors, who are not associate of, or associated in any manner with, the sponsor or any of its subsidiaries or the trustees.

Restrictions: an AMC cannot engage in any business other than management and advisory services · a Director of an Asset Management company cannot be on another AMC · an AMC cannot act as a Trustee of any Mutual Fund.

Obligations of the AMC and its directors: take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provisions of the regulations and the trust deed · exercise due diligence and care in all its investment decisions · obtain prior in-principle approval from the recognized stock exchange(s) where units are proposed to be listed · submit to the trustees, quarterly reports on its activities and the compliance with the regulations · appoint registrars and share transfer agents who are registered with SEBI · invest such amounts in such schemes of the mutual fund, based on the risks associated with the schemes, as may be specified by SEBI · and the asset management company and the sponsor of the mutual fund shall be liable to compensate the affected investors and/or the scheme for any unfair treatment to any investor as a result of inappropriate valuation.

The Chief Executive Officer... shall ensure that the mutual fund complies with all the provisions of these regulations and the guidelines or circulars issued; [and] has adequate systems in place to ensure that the Code of Conduct for Fund Managers and Dealers. And the fund managers shall ensure that the funds of the schemes are invested to achieve the objectives of the scheme and in the interest of the unit holders.

The AMC shall not purchase or sell securities through any broker associated with the sponsor, in case deals executed through him is average of 5 per cent or more of the aggregate purchases and sale of securities made by the mutual fund in all its schemes, justification is to be recorded in case it exceeds 5 percent · invest in any of its scheme, unless full disclosure of its intention to invest has been made in the offer documents · utilise the services of the sponsor or any of its associates, employees or their relatives, for the purpose of any securities transaction and distribution and sale of securities · appoint any person as key personnel who has been found guilty of any economic offence or involved in violation of securities laws.

Filings with the Trustees or SEBI: details of transactions in securities by key personnel · detailed bio-data of all its directors along with their interest in other companies within fifteen days of their appointment · any change in the interests of directors to be provided every six months · a quarterly report to the trustees giving details and adequate justification about the purchase and sale of the securities of the group companies of the sponsor or AMC · and each director of the AMC shall file with the trustees on a quarterly basis the details of his transactions of dealing in securities.

14.4.5 Other intermediaries

Custodian — appointed by the mutual fund and SEBI shall be intimated within 15 days of the appointment · responsible for the safe keeping of all the securities bought by the AMC · liable for keeping the investment account of the mutual fund · shall collect dividends and investment payments due on the mutual funds investment · shall track corporate actions like bonus issues, right offers, offer for sale, buy back and open offers for acquisition.

Registrar and Transfer Agent — maintains and updates all the investors records and processes investor application, handle purchase and redemption transactions.

Distributors — appointed by the AMC to sell units; a sponsor or an associate may act as distributors of AMC; AMC has the right to empanel the Distributor and fixes the commission structure; a distributor can act as a distributor for several MFs; for all employees and distributors of MF, NISM certification examination has been made mandatory by SEBI; and all distributors are required to be registered with AMFI and obtain AMFI Registration Number (ARN).

14.5 Schemes

The categories: MF Lite for passively managed schemes · Equity Schemes (11 sub-categories) · Debt Schemes (16 sub-categories) · Hybrid Schemes (6 sub-categories) · Solution Oriented Schemes (2 sub-categories) · Other Schemes (2 sub-categories).

Close-ended funds have fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. For a close-ended or interval scheme, the schemes and plans shall have (a) A minimum of 20 investors and (b) no single investor shall account for more than 25% of the corpus.

Open-ended funds allows the investors to enter and exit at any time, after the NFO — and the same minimum of 20 investors and 25% single-investor cap apply.

Interval Funds combine features of both open-ended and close-ended schemes. They are largely close-ended but become open-ended at pre-specified intervals.

Specialized Investment Funds (SIFs) are a category of investment vehicles introduced by SEBI in India to bridge the gap between Mutual Funds and Portfolio Management Services (PMS). They offer a hybrid structure that combines the regulatory oversight of mutual funds with the flexibility and customization of PMS. SIF has a limit of Minimum ₹10 lakh per investor at the PAN level across all SIF strategies of an AMC. The Accredited Investors are exempt from this limit.

Eligibility runs by one of two routes, and the fund manager of Specialized Investment Funds shall have the relevant NISM certification.

Route 1: Strong Track Record — the mutual fund must have been operational for at least 3 years · it must have maintained an average Asset Under Management (AUM) of at least ₹10,000 crore over the last 3 years · no action should have been taken against the sponsor or Asset Management Company (AMC) under Sections 11, 11B, or 24 of the SEBI Act, 1992 in the past 3 years.

Route 2: Alternate Route — the AMC must appoint a Chief Investment Officer (CIO) for the SIF with at least 10 years of fund management experience and an average AUM of ₹5,000 crore and an additional Fund Manager for the SIF with at least 3 years of fund management experience and an average AUM of ₹500 crore, with the same clean record under Sections 11, 11B, or 24.

Mutual Fund Lite. An applicant must submit a formal application to SEBI in the prescribed format; have a sponsor/promoter with adequate financial strength and a proven track record in financial services or capital markets; meet the minimum net worth criteria specified by SEBI at the time of application; and demonstrate the availability of qualified professionals, systems, technology, and infrastructure required to run the Mutual Fund Lite efficiently and compliantly.

14.5.1 Real estate mutual fund schemes

"Real estate asset" means an identifiable immovable property which is located within India in such city as may be specified by the Board... or in a special economic zone; on which construction is complete and which is usable; evidenced by valid title documents; legally transferable; free from all encumbrances; and not subject matter of any litigation.

But it does not include a project under construction; or vacant land; or deserted property; or land specified for agricultural use; or a property which is reserved or attached by any Government or other authority.

Permissible investments. Every real estate mutual fund scheme shall invest at least 35% of the net assets of the scheme directly in real estate assets, and at least 75% of the net assets... in real estate assets; mortgage backed securities (but not directly in mortgages); equity shares or debentures of companies engaged in dealing in real estate assets or in undertaking real estate development projects, whether listed... or not, with the balance in other securities.

Concentration limits. Unless disclosed in the offer document, no mutual fund shall under all its real estate schemes invest more than 30% of its net assets in a single city · more than 15% of its net assets in the real estate assets of any single real estate project · more than twenty five per cent of the total issued capital of any unlisted company · more than fifteen per cent of the net assets of any of its real estate mutual fund schemes in the equity shares or debentures of any unlisted company.

Sponsor-related bars. No such scheme shall invest in any unlisted security of the sponsor or its associate or group company · any listed security issued by way of preferential allotment by the sponsor or its associate or group company · or any listed security of the sponsor or its associate or group company, in excess of twenty five per cent of the net assets of the scheme.

And two absolute rules: no mutual fund shall transfer real estate assets amongst its schemes, and none shall invest in any real estate asset which was owned by the sponsor or the asset management company or any of its associates during the period of last five years or in which the sponsor or the asset management company or any of its associates hold tenancy or lease rights.

14.5.2 Infrastructure debt fund schemes

"Infrastructure debt fund scheme" means a mutual fund scheme that invests primarily (minimum 90% of scheme assets) in the debt securities or securitized debt instrument of infrastructure companies · infrastructure capital companies · infrastructure projects · special purpose vehicles which are created for the purpose of facilitating or promoting investment in infrastructure · other permissible assets · or bank loans in respect of completed and revenue generating projects.

**The balance may go to equity shares, convertibles including mezzanine financing instruments of companies engaged in infrastructure... or money market instruments and bank deposits.

Concentration: investment in debt instruments or assets of any single infrastructure company or project or SPVs which are created for specific purposes shall not exceed 30% of its net assets.

Sponsor-related bars mirror those for real estate schemes, with listed securities or bank loans of the sponsor group limited to twenty five per cent of the net assets of the scheme, subject to approval of trustees and full disclosures to investors; and assets or securities owned by the sponsor or asset management company or their associates limited to 30% of the net assets, provided the investment is in assets or securities not below investment grade, the sponsor retains at least 30% of the assets or securities... till the assets or securities are held in the scheme portfolio, and trustee approval and full disclosure are obtained.

14.5.3 Launching a scheme

A mutual fund scheme shall be launched by the AMC after the approval of the Trustees and filing of the copy of the offer document with SEBI.

In case no modifications are suggested by SEBI in the offer document within 21 working days from the date of filing, the AMC may issue the offer document.

The AMC shall obtain "in-principle" approval from the recognised stock exchange(s) and execute Listing agreement. The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision, and the offer document and advertisement materials shall not be misleading or contain any statement or opinion which are incorrect or false.

And a limit on the offer period: no scheme of a mutual fund other than the initial offering period of any equity linked savings schemes shall be open for subscription for more than 15 days.

14.5.4 Allotment and refunds

The asset management company shall specify in the offer document, the minimum subscription amount and in case of oversubscription the extent of subscription it may retain, provided that where the asset management company retains the oversubscription, all the applicants applying upto 5000 units shall be given full allotment.

Any amount to be refunded to the applicants shall be done within 5 working days from the date of closure of subscription list and in the event of such failure, interest at a rate of 15% per annum from the expiry of five working days from the date of closure of the subscription list shall be paid.

14.5.5 Transfer, and 14.5.6 winding up

A unit unless otherwise restricted or prohibited under the scheme, shall be freely transferable by act of parties or by operation of law. And a unitholder, in a close ended scheme listed on a recognized stock exchange, who desires to trade in units shall hold units in dematerialised form.

A close-ended scheme shall be wound up on the expiry of duration fixed in the scheme on the redemption of units unless it is rolled over for a further period. Otherwise a scheme is wound up (a) on the happening of any event which, in the opinion of the trustees, requires the scheme to be wound up; or (b) if 75% of the unit holders of a scheme pass a resolution that the scheme be wound up; or (c) if SEBI so directs in the interest of the unitholders.

Notice must follow at once: the trustees shall give notice within one day, disclosing the circumstances leading to the winding up of the scheme, — (a) to SEBI; and (b) in two daily newspapers having circulation all over India, a vernacular newspaper circulating at the place where the mutual fund is formed.

**And redemptions on winding up shall be completed within 10 days from the day of winding up of the scheme(s) and/or plan(s).

Minimum AUM: the minimum subscription amount of debt oriented and balanced schemes at the time of new fund offer shall be at least Rs.20 crore and that of other schemes shall be at least Rs.10 crore, confirmed in the Half Yearly Trustee Reports.

14.7 Investment objectives and limits

A mutual fund may invest moneys collected under any of its schemes only in— (a) securities; (b) money market instruments; (c) privately placed debentures; (d) securitised debt instruments, which are either asset backed or mortgage backed securities; (e) gold or gold related instruments; (ea) silver or silver related instruments; (f) real estate assets; (g) infrastructure debt instrument and assets as specified; (h) any other assets or instruments as may be specified by SEBI.

Unlisted debt is barred, with exceptions: schemes shall not invest in unlisted debt instruments including commercial papers (CPs), other than (i) government securities, (ii) other money market instruments and (iii) derivative products such as Interest Rate Swaps (IRS), Interest Rate Futures (IRF), etc. which are used by mutual funds for hedging.

But schemes may however invest in unlisted Non Convertible Debentures (NCDs) not exceeding 10% of the debt portfolio of the scheme, provided they have a simple structure (i.e. with fixed and uniform coupon, fixed maturity period, without any options, fully paid up upfront, without any credit enhancements or structured obligations) and are rated and secured with coupon payment frequency on monthly basis.

RFQ platform obligations: on monthly basis, Mutual Funds shall undertake minimum 25% of their total secondary market trades by value (excluding Inter Scheme Transfer trades) in Corporate Bonds by placing/seeking quotes through one-to-many mode on the Request for Quote (RFQ) platform of stock exchanges, and minimum 10% of their total secondary market trades by value... in Commercial Papers likewise.

Prudential norm: no Mutual Fund under all its schemes shall own more than 10% of such instruments issued by a single issuer, the restriction applying to debt instruments with special features like subordination to equity and/or convertible to equity upon trigger of a pre-specified event for loss absorption.

Borrowings. The mutual fund shall not borrow except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unitholders. Provided that the mutual fund shall not borrow more than 20 per cent of the net asset of the scheme and the duration of such a borrowing shall not exceed a period of six months. And the mutual fund shall not advance any loans for any purpose if not explicitly specified under the SEBI MF Regulation that it can do so.

Overseas investments. Mutual Funds can make overseas investments subject to a maximum of US $1 billion per Mutual Fund, within the overall industry limit of US $7 billion.

Permissible overseas investments include ADR(s) and/or GDR(s) issued by Indian or foreign companies · equity of overseas companies listed on recognized Stock Exchanges overseas · initial and Follow on Public Offerings for listing at recognized Stock Exchanges overseas · foreign debt securities in the countries with fully convertible currencies, short term as well as long term debt instruments with rating not below investment grade · money market instruments rated not below investment grade · repos in form of investment, where the counterparty is rated not below investment grade; repo shall not however involve any borrowing of funds by Mutual Funds · government securities where the countries are rated not below investment grade · derivatives traded on recognized stock exchanges overseas only for hedging and portfolio balancing with underlying as securities · and short term deposits with banks overseas where the issuer is rated not below investment grade.

14.8 and 14.9 Disclosures

In the offer documents — the tenure for which the fund manager has been managing the scheme... along with the name of scheme's fund manager(s) · scheme's portfolio holdings (top 10 holdings and fund allocation towards various sectors), along with a website link to obtain scheme's latest monthly portfolio holding · and scheme's portfolio turnover ratio.

In the SID additionally — the aggregate investment made in the scheme by: a) AMC's Board of Directors b) Concerned scheme's Fund Manager(s) and c) Other key personnel.

On the website — a separate SID / KIM for each MF scheme, and a dashboard... [providing] the performance and key disclosures pertaining to each scheme managed by AMC such as (a) Scheme's AUM, (b) investment objective, (c) expense ratios, (d) portfolio details, (e) scheme's past performance, updated daily based on previous day NAV, with performance also disclosed on the website of AMFI and confirmed by trustees in the half yearly trustee report.

Annual report of the AMC — displayed on the websites of the mutual funds immediately after approval in Annual General Meetings within a period of 4 months, from the date of closing of the financial year.

Remuneration — under a separate head "Remuneration", the Name, designation and remuneration of the (i) Chief Executive Officer (CEO); (ii) Chief Investment Officer (CIO) and Chief Operations Officer (COO)... (iii) Top ten employees in terms of remuneration drawn for that financial year, disclosed within one month from the end of the respective financial year.

Investor complaints — disclosed on their websites and on the AMFI website within 7 days of the succeeding month, and included in the Report of the Trustees.

Advertisements — submitted to SEBI... within 7 days from the date of issue.

Portfolio disclosures. Portfolios (along with ISIN) as on the last day of the month / half-year for all their schemes go on the AMC and AMFI websites within 10 days from the close of each month/ half-year; for debt schemes- both the portfolio and the yield of the instrument shall be disclosed on fortnightly basis within 5 days of every fortnight; and disclosure to unitholders is mailed to the unitholders within 10 days from the close of each month/ half-year.

Unaudited half yearly results are displayed on the website of AMFI before the expiry of 1 month before the close of each half year.

Large holdings: the number of investors holding over 25% of the NAV in a scheme and their total holdings in percentage terms shall be disclosed in the Statement of Accounts issued after the NFO and also in the Half Yearly and Annual Results.

And commissions: AMCs shall disclose on their respective websites the total commission and expenses paid to distributors.

14.10 Boards and committees

Audit Committee of Trustees — constituted of Trustees with an Independent Trustee being the Chairman, to review the internal audit systems, consider the recommendations of the internal and statutory audit reports and ensure that the rectifications as suggested by internal and external auditors are acted upon.

Audit Committee of the AMC — minimum 3 directors as members; at least two-third members... shall be independent directors; the Chairperson... shall be an independent director, with adequate experience in the areas of finance and financial services; and all members of Audit Committee shall be financially literate.

Meetings: at least 4 meetings shall be called in a financial year. The time gap between meetings shall not be more than one hundred and twenty days between two meetings. Quorum for meeting shall either be two members or one third of the members of the Audit Committee, whichever is greater, with at least two independent directors.

Reporting: the internal auditor shall submit its report to the Audit Committees of AMC and the Board of AMC, and the Audit Committee of AMC shall forward their observations on internal audit report, if any, to the Trustees.

Its powers cover financial reporting, audit and internal controls, and regulatory compliance — including recommending the appointment, re-appointment of statutory auditor and internal auditor, reviewing the Internal Audit Reports of the Schemes... (Including Internal Audit Report of critical activities outsourced by the AMC such as Custodian, Fund Accounting, the Registrar and Transfer Agent activities), reviewing the findings of any internal investigations... where there is suspected fraud or irregularity, reviewing Regulatory Inspection Reports, interacting with the statutory and internal auditors of the Mutual Fund, at least once annually without engagement of management of the AMC, and interacting with the Audit Committee of the Trustees at least once annually.

Valuation Committee — in house committee consisting of senior executives including personnel from accounts, fund management and compliance departments, which shall, on a regular basis review the systems and practices of valuation of securities.

Transaction reporting. Directors of the AMC shall file with the trustees on a quarterly basis details of transactions in securities exceeding Rs.1 lakh. Trustees are required to report to Mutual Funds only those transactions in securities that exceed Rs 5 lakhs in value, filed within one month from the end of respective quarters (March, June, September and December).

Independent directors. An Independent Trustee shall not be associated in any manner with the Sponsor(s), and independent AMC directors shall not be associate of, or associated in any manner with, the sponsor or any of its subsidiaries or the trustees. AMC: at least half of the Board should comprise of Independent Directors. Trustee Board: two-third independent directors on the Board.

Vacancy to be filled in within a period of 3 months, and on appointment their biodata shall be filed with the SEBI for information or approval respectively.

Tenure: an independent trustee and independent director shall hold office for a maximum of 2 terms with each term not exceeding a period of 5 consecutive years, with a cooling off period for appointment on the same AMC & Trustee: 3 years.

Auditors: any audit firm including a limited liability partnership can be auditors of mutual funds, appointed for not more than 2 terms of maximum five consecutive years, reappointable after cooling off period of 5 years.

14.11 to 14.13 Shareholding, stewardship and risk

Shareholding norms. No sponsor of a mutual fund, its associate or group company including the asset management company... shall... have – (a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other mutual fund; or (b) representation on the board of the asset management company or the trustee company of any other mutual fund. And any shareholder holding 10% or more of the share-holding or voting rights in one fund's AMC or trustee company is subject to the same bar.

Stewardship. AMCs shall disclose their general policies and procedures for exercising the voting rights and, in the annual report, the actual exercise of their proxy votes on corporate governance matters, including changes in the state of incorporation, merger and other corporate restructuring, and anti-takeover provisions · changes to capital structure · stock option plans and other management compensation issues · social and corporate responsibility issues · and appointment and Removal of Directors.

**They must record and disclose specific rationale supporting their voting decision (for, against or abstain) with respect to each vote proposal, publish a summary of the votes cast, and make disclosure of votes cast on their website (in machine readable spreadsheet format) on a quarterly basis, within 10 working days from the end of the quarter. Annually they must obtain certification on the voting reports... from a "scrutinizer".

**A fund with no economic interest on the day of voting... may be exempted from compulsorily casting of votes; the vote shall be cast at Mutual Fund Level, scheme-level voting being allowed subject to recording of detailed rationale; fund managers shall submit a declaration on quarterly basis to the Trustees that the votes cast by them have not been influenced by any factor other than the best interest of the unit holders; and all Mutual Funds shall mandatorily follow the Stewardship Code in relation to their investment in listed equities.

Risk Management Framework. It shall provide a set of principles or standards, which inter alia comprise the policies, procedures, risk management functions and roles & responsibilities of the management, the Board of AMC and the Board of Trustees, with "mandatory elements" and "recommendatory elements". The AMC shall perform a self-assessment of their RMF and practices and submit a report, thereon, to its Board along with the roadmap for implementation, and compliance with the RMF should be reviewed annually.

Stress tests. AMCs should have stress testing policy in place to conduct stress test on all Liquid Fund and Money Market Mutual Fund (MMMF) Schemes, carried out internally at least on a monthly basis, on a) Interest rate risk; b) Credit risk; c) Liquidity & Redemption risk, evaluating the impact on the scheme and its Net Asset Value (NAV). All AMCs must also have a policy and system for in-house credit risk assessment/ due diligence of debt and money market instruments/ products at all points of time.

Cyber security. Mutual Funds/ AMCs are mandated to conduct comprehensive cyber audit at least 2 times in a financial year, submitting a declaration from the Managing Director (MD)/ Chief Executive Officer (CEO) certifying compliance.

Technology Committee — comprising experts proficient in technology with at least one independent external expert with adequate experience in the area of technology in Mutual Fund industry, reviewing the cyber security and cyber resilience framework.

14.14 Reports

Offsite inspection data: Mutual Funds shall submit the daily data in monthly file as per the specified formats on quarterly basis within 10 calendar days from end of the quarter.

And to the tax authorities: mutual funds are required to submit the Annual Information Return (AIR) under section 285BA of the Income Tax Act.

14.15 Insider trading in mutual fund units

SEBI vide amendment to these Regulations introduced Chapter II A in November 2022, making the Regulations strictly applicable in relation to the dealing in the units of a mutual fund by Insiders.

Connected Person shall mean any person who is or has during the two months prior to the concerned act been associated with the mutual fund, asset management company and trustees, directly or indirectly, in any capacity.

Two months here, against six months under the ordinary PIT definition.

Deemed connected persons include an immediate relative of connected persons · Sponsor, holding company or associate company or subsidiary company of the Sponsor or Asset management company and Trustees · Board of Directors and key management personnel of sponsor of the mutual fund · Directors or employees of registrar and share transfer agents, custodians or valuation agencies · an official of a stock exchange for dissemination of information · Directors or employees of auditor, legal advisor or consultants · a banker of the mutual fund or asset management company · and a concern, firm, trust, HUF, company or association wherein a director of an asset management company and Trustees or his immediate relative or banker of the company, has more than ten per cent of the holding or interest.

**UPSI here means information pertaining to a scheme of a mutual fund which is not yet generally available and which upon becoming generally available, is likely to materially impact the net asset value or materially affect the interest of unit holders, and includes a change in the accounting policy · a material change in the valuation methodology · restrictions on redemptions · winding up of schemes · creation of segregated portfolio · the triggering of the swing pricing framework and the applicability of the swing factor · material changes in the liquidity position · and default in the underlying securities material to the concerned mutual fund scheme.

Obligations of the Board of the AMC: with trustee approval, frame a policy for determination of legitimate purpose; ensure that parties execute NDAs and the recipient of UPSI is explained about the obligations arising therefrom; ensure maintenance of Structured Digital Database (SDD)... [with] a feature of audit trail, time-stamping and preservability for 8 years; frame Code of Conduct; and determine the Designated Persons in consultation with the compliance officer.

Disclosure: AMCs have to disclose the details of holdings in the units of its mutual fund schemes, on an aggregated basis, held by the designated persons of the AMC, trustees, and their immediate relatives on the platform of stock exchanges, and individual transactions must be reported by the concerned person to the compliance officer of the AMC within 2 business days.

Compliance officer duties: determining the closure period of the trading window; pre deal approval, which is valid for 7 trading days from date of approval; and reporting not less than once in a year to the AMC board, the Chairman of the Audit Committee and the trustees.

Contra trades: Designated persons (DPs) are restricted from entering into opposite transactions within two months of the previous transaction.

Two months for mutual fund units — against six months for securities under Schedule B of the PIT Regulations.

Review: the Audit Committee of an asset management company shall review compliance with the provisions of Insider Trading regulations at least once in a financial year. Every AMC must, with trustee approval, formulate written policies and procedures for inquiry in case of leak and a whistle-blower policy, initiate appropriate inquiries and promptly inform SEBI... of such leaks, inquiries and result of such inquiries.

14.16 and 14.17 General obligations and investor rights

Books: every asset management company shall keep and maintain proper books of account, records and documents, for each scheme and preserved for 8 years, prepared in accordance with Indian Accounting Standards (IND AS); the financial year for all the schemes shall end as of March 31st of each year; the exit load charged, if any, shall be credited to the scheme; and all expenses should be clearly identified and appropriated in the individual schemes.

Auditor: every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company and is appointed by the Trustees.

Annual report: the scheme-wise annual report or abridged summary is provided to unitholders within 4 months from the date of closure of the relevant accounting year, and every AMC shall within 4 months from the date of closure of each financial year forward to SEBI, a copy of the Annual Report.

Redemption proceeds: the transfer of redemption or repurchase proceeds to the unitholders shall be made within three working days from the date of receipt of such requests; and for schemes investing at least 80% of total assets in such permissible overseas investments... within five working days.

Delay: interest for the period of delay in transfer of redemption or repurchase or dividend shall be payable to unitholders at the rate of 15% per annum, and such Interest shall be borne by AMCs, with details reported as part of Compliance Test Reports and investors informed about the rate and amount of interest paid to them.

Consolidated Account Statement: issued on or before 15th day of the succeeding month for each calendar month.

Allotment confirmation: sent by way of email and/or SMS's... as soon as possible but not later than 5 working days from the date of closure of the initial subscription list.

Change of distributor: AMCs shall ensure compliance with the instruction of the investor informing his desire to change his distributor and / or go direct, without compelling that investor to obtain a "No Objection Certificate" from the existing distributor.

Change in control of the AMC requires prior approval of the trustees and SEBI, a written communication about the proposed change... sent to each unitholder with newspaper advertisements, and the unitholders are given an option to exit on the prevailing Net Asset Value (NAV) without any exit load within a time period not less than 30 calendar days from the date of communication.

14.18 Certification of intermediaries

No Mutual Fund shall deal with any intermediary... in relation to selling and marketing of Mutual Fund units unless they have cleared the mandatory certification examination being offered by NISM.

One exemption: senior citizens with experience in distributing Mutual Funds units are exempt from taking the mandatory certification examination if they have completed 50 years of age and have experience of 5 years as on September 30, 2003 — they must still attend a mutual fund training programme and a certificate to that effect endorsed by a mutual fund should be submitted to AMFI.

**The examination is the NISM-Series-V-A: Mutual Fund Distributors Certification Examination. A new cadre of distributors who shall be allowed to sell units of simple and performing MF schemes — postal agents, retired government and semi-government officials (class III and above or equivalent) with a service of at least 10 years OR retired teachers with a service of at least 10 years, OR retired bank officers with a service of at least 10 years — take NISM-Series-V-B: Mutual Fund Foundation Certification examination and then approach AMFI for registration.

**AMCs must also operate a due diligence process for Distributors to satisfy "fit and proper" criteria, monitor them so that they do not indulge in any malpractice or unethical practice, report non-compliance to the Board of AMC and in the Half yearly Reports, and observe the Code of Conduct for Mutual Fund intermediaries prescribed by AMFI.

The chapter's review questions confirm that trustees review all transactions between the mutual fund, the AMC and its associates on a quarterly basis; that overseas investment is capped at US $1 billion per fund within an industry limit of US $7 billion; and that a vacancy in the office of an independent director must be filled within 3 months.