Legal and Regulatory Environment — SEBI, investor rights, grievance redressal and the AMFI codes

Where this chapter sits

Chapter 10 carries 8% of the paper, and it is the last one. It also matters beyond the exam — the AGNI code in section 10.3.2 is the conduct standard you will personally be held to.

Three things dominate: the advertisement and celebrity rules, the nine investor rights, and the AGNI code.

10.1 SEBI's role

Securities markets in India are regulated by the Securities and Exchange Board of India (SEBI). It regulates, among other entities, mutual funds, depositories, custodians, registrars and transfer agents (RTAs) and credit rating agencies in the country.

The Preamble: "...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto".

The three aspects the regulations cover:

• Disclosures by issuers of securities, e.g. companies that issue shares or debentures, and mutual funds that issue mutual fund units
• Efficiency of transactions in the securities markets
• Low transaction costs

And four areas needing separate attention: deliberate speculation in stock markets · insider trading · excessive risks taken by mutual funds · inadequate collateral by issuers of debt securities.

Why it matters: if such activities are unchecked, the trust of the investors would be lost in the functioning of the markets, which eventually may lead to drying up of precious financial resources. This would further dry up the investment activity, or channelling of household savings in capital markets that the economy needs for growth.

The reforms

SEBI issued the mutual fund regulations initially in 1996, which was replaced by the Mutual Fund Regulation 2026. Through every amendment, the objective has always remained to protect the interests of the mutual fund investors, and to empower investors to take informed investment decisions.

Scheme categorization and rationalization. The objective was to reduce the number of schemes to one per category in the open-ended arena, so that investors do not get confused. The circular mandated that there can be only one scheme per category within the fund house, with definition of various categories based on market capitalization... to bring-in uniformity.

Segregated portfolios. During the 2018 credit crisis, SEBI laid down the provision for creating segregated portfolios for protecting the interests of the unitholders and giving fair treatment to all investors in case of a credit event and to deal with liquidity risk.

Winding up. The units of mutual fund schemes which are in the process of winding-up... have to be listed on recognized stock exchange. But pursuant to listing, trading on stock exchange mechanism will not be mandatory for investors, rather, if they so desire, may avail an optional channel to exit provided to them. And initially, trading in units of such a listed scheme that is under the process of winding up, shall be in dematerialised form.

The 2008 measures. In the year 2008, when there was global liquidity crisis, SEBI brought many reforms such as allowing premature redemption in case of FMPs, disallowing the phrase "liquid plus" while naming mutual fund schemes.

TRI benchmarking. A Price Return Index considers only the price movement of its constituents and thus captures only the capital gains... On the other hand, a Total Returns index takes into account all dividends/interest payments... in addition to the capital gains.

Why TRI is the fair comparison: a Mutual Fund scheme takes into consideration, capital gains as well as the dividend earnings/interest income of the instruments in which it has invested while calculating the return generated by the scheme. TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes.

SEBI stipulated that all Mutual Fund Schemes be benchmarked against Total Return Indices from February 01, 2018 onwards.

And on portfolio limits: SEBI regulations and circulars also mandate exposure limits for investments by mutual fund schemes to ensure that investors get a diversified portfolio and the schemes remain true-to-label.

The overall result: the advertisements, valuation of securities, calculation of NAV – each of these aspects are very tightly regulated. Such approach ensures that the Indian mutual fund industry remains one of the most regulated and transparent investment options for investors.

Other regulators

Wherever applicable, mutual funds need to comply with regulations issued by other regulators also.

RBI regulates the money market and foreign exchange market in the country. Therefore, mutual funds need to comply with RBI's regulations regarding investment in the money market, investments outside the country, investments from people other than Indians resident in India, remittances (inward and outward) of foreign currency etc.

And exchanges: stock exchanges are regulated by SEBI. Every stock exchange has its own listing, trading and margining rules. Mutual Funds need to comply with the rules of the exchanges with which they choose to have a business relationship.

10.1.3 Investment restrictions

Mutual fund is a managed investment vehicle. It is a pass-through vehicle—in that the risks and the returns are passed on to the unitholders. The investors have no control, over the investment management of the mutual fund.

That is precisely why the restrictions exist: it is in this context that SEBI has laid down regulations pertaining to investment universe, restrictions and portfolio diversification for investment by mutual fund schemes. Such regulations intend to control the risks taken by the mutual fund managers.

Regulation 39 permits investment 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 · (f) silver or silver-related instruments · (g) any other asset or instrument as may be specified by the Board from time to time.

Seven heads, the last one open-ended.

10.1.4 The advertisement code

Advertisement issued by mutual funds shall be in terms of Fifth Schedule of SEBI (Mutual Fund) Regulations, 2026:

• Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise and shall not be misleading
• Advertisements shall not contain statements that are false, misleading, biased or deceptive, based on assumption/projections and shall not contain any testimonials or any ranking based on any criteria
• Advertisements shall not be so designed as likely to be misunderstood or likely to disguise the significance of any statement
• Advertisements shall not carry any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to nature and risk and return profile of the product
• No celebrities shall form part of the advertisement
• Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. Extensive use of technical or legal terminology or complex language and the inclusion of excessive details which may detract the investors should be avoided
• Advertisements shall contain information that is timely and consistent with the disclosures made in the Scheme Information Document, Statement of Additional Information and the Key Information Memorandum
• No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons

The standard warning: advertisements shall be accompanied by a standard warning in legible fonts which states 'Mutual Fund investments are subject to market risks, read all scheme related documents carefully.' No addition or deletion of words shall be made to the standard warning.

And in other languages: advertisements in vernacular language(s) shall contain the standard warning as specified in previous clause in the vernacular language.

In audio-visual media: both the visual and the voice-over reiteration containing 14 words running for at least 5 seconds may be considered as clear and understandable.

14 words, 5 seconds. Note this differs from the investment adviser code, which uses 20 words and 10 seconds.

On IDCW advertising: all advertisements shall disclose the IDCW declared or paid in rupees per unit along with the face value of each unit of that scheme and the prevailing NAV at the time of declaration of the IDCW.

For closed-ended maturity payouts: AMC shall advertise that "the entire distributable surplus at the time of maturity or at the completion of the interval period shall be distributed."

And a warning below every payout figure: all advertisements shall disclose, immediately below the pay-out figure (in percentage or in absolute terms) that the NAV of the scheme, pursuant to pay out would fall to the extent of payout and statutory levy (if applicable).

Performance advertising

When the scheme has existed more than three years:

• Performance advertisement... shall be provided in terms of CAGR for the past 1 year, 3 years, 5 years and since inception — and since inception... shall be made since the date of allotment of units in the scheme
• Point-to-point returns on a standard investment of Rs. 10,000 shall also be shown in addition to CAGR
• Information based on period computed from the last day of month-end preceding the date of advertisement, shall be provided
• It should be clearly mentioned whether the disclosed performance is of regular or direct plan, with a footnote that different plans have different expense structures
• If the same fund manager has not managed the scheme for the full period... the same should be disclosed in the footnote

Short-track-record rules:

Where the scheme has been in existence for less than six months past performance shall not be provided.

If the scheme has been in existence for more than six months but less than one year, then simple annualized growth rate of the scheme for the past 6 months from the last day of month-end preceding the date of advertisement shall be provided.

And for very short-horizon funds: in case of Overnight funds, Liquid funds and Money Market funds... the performance can be advertised by simple annualisation of yields if a performance figure is available for at least 7 days, 15 days and 30 days provided it does not reflect an unrealistic or misleading picture.

The standardised comparison benchmarks:

Other schemes by the same fund manager. When the performance of a particular mutual fund scheme is advertised, the advertisement shall also include the performance data of all the other schemes managed by the fund managers of that particular scheme, in CAGR for a period of 1 year, 3 years and 5 years.

And where there are many: in case the number of schemes managed by a fund manager is more than six, then the AMC may disclose the total number of schemes managed by that fund manager along with the performance data of top 3 and bottom 3 schemes.

Top 3 and bottom 3 — not just the flattering ones. And AMCs shall ensure that a true and fair view of the performance of the fund manager is communicated.

Celebrity endorsements

No celebrities shall form part of the advertisement — that is the general rule.

But there is one exception: SEBI has permitted celebrity endorsements at the industry level for the purpose of increasing awareness of Mutual Funds as a financial product category.

Three conditions:

• The celebrity endorsements shall not promote a scheme of a particular Mutual Fund or be used as a branding exercise of a Mutual Fund house/AMC
• Expenses towards such celebrity endorsements shall be limited to the amounts that are aggregated by Mutual Funds at industry level for the purpose of conducting investor education and awareness initiatives
• Prior approval of SEBI shall be required for issuance of any endorsement

Industry level only, never a particular fund or scheme.

Unauthenticated news

SEBI has issued guidelines to all market intermediaries relating to the circulation of unauthenticated news:

• Proper internal code of conduct and controls should be put in place — staff should not encourage or circulate rumors or unverified information obtained from client, industry, any trade or any other sources without verification
• Access to Blogs/Chat forums/Messenger sites etc. should either be restricted or under supervision or access should not be allowed
• Logs for any usage of such Blogs/Chat forums/Messenger sites... have to be treated as records
• Any market related news received by them... should be forwarded only after the same has been seen and approved by the concerned Intermediary's Compliance Officer

And liability runs both ways: if an employee fails to do so, he/she shall be deemed to have violated the various provisions contained in SEBI Act/Rules/Regulations etc. and shall be liable for action. The Compliance Officer shall also be held liable for breach of duty in this regard.

10.1.5 Investors' rights

Right to beneficial ownership. Unit-holders have proportionate right to the beneficial ownership of the assets of the scheme. Investor can ask for a Unit Certificate for his Unit-holding. Units may be held in demat, and units of all mutual fund schemes held in dematerialised form are freely transferable — however, in case of Equity Linked Savings Scheme (ELSS), free transferability of units (whether in demat or physical form) is curtailed for the statutory minimum holding period.

Right to change the distributor. Investors can choose to change their distributor or opt for direct investing. This needs to be done through a written request by the investor. In such cases, AMCs will need to comply, without insisting on any kind of 'No Objection Certificate' from the existing distributor.

Right to inspect documents. Unit-holders have the right to inspect key documents such as the Trust Deed, Investment Management Agreement, Custodial Services Agreement, RTA agreement and Memorandum & Articles of Association of the AMC.

Right to appoint nominees. The investors can appoint upto 10 nominees, who will be entitled to the 'Units' in the event of the demise of the investors. The investor can also specify the percentage distribution between the nominees. If no distribution is indicated, then an equal distribution between the nominees will be presumed.

Right to pledge. Investors can pledge their mutual fund units. This is normally done to offer security to a financier.

Right to grievance redressal. SEBI has mandated that the status of complaints redressed should be published by each AMC in their annual report. The same should be available on the website of the mutual fund and on AMFI's website.

And a real consequence: pending investor complaints can be a ground for SEBI to refuse permission to the AMC to launch new schemes.

Rights on change in fundamental attributes. If there is a change in the fundamental attributes of a mutual fund scheme, then the unitholders are provided the option to exit at the prevailing NAV without any exit load.

No change may be carried out unless:

a. written communication (including digital modes such as email/SMS etc.) about the proposed change is sent to each unit holder; b. details, as specified by the Board, are appropriately displayed on the website of asset management company; and c. unit holders are given an option to exit at the prevailing Net Asset Value without any exit load.

Right to terminate the AMC. 75 percent of unit holders can terminate the appointment of an AMC. Also, 75 percent of the unitholders (unitholding) can pass a resolution to wind up a scheme.

The Trustees are bound to obtain consent of the unit-holders: whenever required to do so by SEBI, in the interest of the unit-holders · whenever required to do so by 75 percent of the unit-holders · when the majority of the trustees decide to wind-up a scheme or prematurely redeem the units of a close ended scheme.

And on legal recourse: if an investor feels that the trustees have not fulfilled their obligations, then he can file a suit against the trustees for breach of trust. Under the law, a trust is a notional entity, therefore investors cannot sue the trust but they can file suits against trustees.

Right to unclaimed amounts. AMC is expected to make a continuous effort to remind the investors through letters to claim their dues. The Annual Report has to mention the unclaimed amount and the number of such investors for each scheme.

The three-year rule:

• If the investor claims the money within 3 years, then payment is based on prevailing NAV i.e. after adding the income earned on the unclaimed money
• If the investor claims the money after 3 years, then payment is based on the NAV at the end of 3 years

Where the money sits meanwhile: the mutual fund has to deploy unclaimed dividend and redemption amounts in the money market and in a separate plan of Liquid scheme floated by mutual funds especially for investing the unclaimed amounts. AMC can recover investment management and advisory fees on management of these unclaimed amounts, at a maximum rate of 0.50 percent per annum and there shall be no exit loads charged on this plan.

Rights to services. Investors are entitled to account statements, statements of portfolios, half-yearly disclosures etc. And SEBI has mandated mutual funds to disclose details of debt and money market securities transacted in their schemes portfolio, including inter-scheme transfers, on a daily basis with a time lag of 15 days.

Proceeds of illiquid securities. Where a written-off security later recovers: if the amounts are substantial and recovered within 2 years, then the amount is to be paid to the old investors. In other cases, the amount is to be transferred to the Investor Education Fund maintained by each mutual fund.

And a caution about the limits of investor protection: the principle of caveat emptor (let the buyer beware) applies to mutual fund investments. So, the unit-holder cannot seek legal protection on the grounds of not being aware, especially when it comes to the provisions of law, and matters fairly and transparently stated in the Scheme Documents.

Also: a proposed investor i.e. someone who has not invested in the scheme does not have the same rights.

10.2 Grievance redressal

In the event of any issue with the AMC or mutual fund scheme, the investor can first approach the investor service centre. If the issue is not redressed, even after taking it up at senior levels in the AMC, then the investor can write to SEBI with the details.

SCORES

SCORES— SEBI Complaint Redress System is a web based centralized grievance redress system of SEBI. SCORES enables investors to lodge and follow up their complaints and track the status of redressal of such complaints online from the website (https://scores.sebi.gov.in/) from any location.

This enables the market intermediaries and listed companies to receive the complaints online from investors, redress such complaints and report redressal online. All the activities starting from lodging of a complaint till its closure by SEBI is online and works in an automated environment.

And for those without access: an investor, who is not familiar with SCORES or does not have access to SCORES, can lodge complaints in physical form at any of the offices of SEBI. Such complaints are scanned and then uploaded in SCORES for processing.

Entities against which complaints are handled by SEBI include: listed companies/registrar & transfer agents · brokers/stock exchanges · depository participants/depository · mutual funds · Portfolio Managers · other entities (KYC Collective investment scheme, Merchant banker, Credit rating, Foreign institutional investor etc.)

SMART ODR

SEBI has introduced an Online Dispute Resolution Portal (ODR Portal), a platform for resolution of disputes arising in the Indian Securities Market with Market participant including Mutual Funds.

ODR Portal named SMART ODR Portal – 'Securities Market Approach for Resolution Through ODR' is being made available for investors on https://smartodr.in/login.

When it may be used: the ODR portal offers a platform to investors to file any complaints in case the investor is not satisfied with the resolution of the complaints raised directly with the Asset Management Company or through the SCORES platform of SEBI.

And three conditions: investors can raise the dispute resolution process through the ODR portal only when within the applicable law of limitation and when it is not under consideration under SCORES guidelines or not pending before any court.

10.3 The AMFI codes

The AMFI Code of Ethics (ACE) — for AMCs and Trustees

The AMFI Code of Ethics (ACE) sets out the standards of good practices to be followed by the Asset Management Companies in their operations and in their dealings with investors, intermediaries and the public.

How it relates to the regulations: SEBI (Mutual Funds) Regulation, 2026 requires all Asset Management Companies and Trustees to abide by the Code of Conduct as specified in the Fourth Schedule to the Regulation. The AMFI Code has been drawn up to supplement that schedule, to encourage standards higher than those prescribed by the Regulations.

While the SEBI Code of Conduct lays down broad principles, the AMFI Code of Ethics (ACE) sets more explicit standards for AMCs and Trustees.

The ten headings:

1.0 Integrity — members and their key personnel... shall observe high standards of integrity and fairness in all dealings. And schemes must be run in the interest of all classes of unit holders and not in the interest of: sponsors · directors of Members · members of Board of Trustees or directors of the Trustee company · brokers and other market intermediaries · associates of the Members · a special class selected from out of unitholders.

2.0 Due Diligence — render high standards of service · exercise due diligence · exercise independent professional judgment.

3.0 Disclosures — timely dissemination to all unitholders of adequate, accurate, and explicit information presented in a simple language. Transactions with associates or any significant unitholder must be submitted to the Board of Trustees... justifying its fairness to the scheme and disclosed through annual and half yearly reports. And personal dealing by key personnel must be disclosed to the compliance officer... at least on half yearly basis.

4.0 Professional Selling Practices — members shall not use any unethical means to sell, market or induce any investor to buy their products and shall not make any exaggerated statement regarding performance. Communications must not present a mutual fund scheme as if it were a new share issue · not create unrealistic expectations · not guarantee returns except as stated in the SID · convey in clear terms the market risk and the investment risks · not induce investors by offering benefits which are extraneous to the scheme · not misrepresent.

5.0 Investment Practices — manage schemes in accordance with the fundamental investment objectives and investment policies stated in the SID and take investment decisions solely in the interest of the unit-holders, and not knowingly deal with any director, officer, or employee of the member or of the Trustee Company.

6.0 Operations — avoid conflicts of interest · no front running (buying or selling of any securities ahead of transaction of the fund, with access to information regarding the transaction which is not public...) · no self-dealing (using their position to engage in transactions with the fund by which they benefit unfairly at the expense of the fund and the unit-holders) · nothing fraudulent, deceptive or manipulative · no creating a false market, price rigging or manipulation, passing of price sensitive information.

Also: employees, officers and directors of the Members shall not work as agents/brokers for selling of the schemes except as employees; no change in the fundamental attributes... without the prior approval of unitholders; and avoid excessive concentration of business with any broking firm.

7.0 Reporting Practices — comparable and standardized valuation policies · uniform performance reporting on the basis of total return · scheme-wise segregation of cash and securities accounts.

8.0 Unfair Competition — no statement or practice likely to be harmful to the interests of other Members.

9.0 Observance of Statutes, Rules and Regulations — abide by the letter and spirit.

10.0 Enforcement — make observance of the Code a condition of employment · make violation a ground for revocation of contractual arrangement without redress · require each officer and employee to sign a statement that he/she has received and read a copy of the Code · designate one person with primary responsibility · file regular reports to the Trustees on a half yearly and annual basis · and maintain records of all activities and transactions for at least three years.

Two definitions worth noting: a Significant Unit holder means any entity holding 5 percent or more of the total corpus of any scheme managed by the member. And fundamental investment policies... means the investment objectives, policies, and terms of the scheme, that are considered fundamental attributes... on the basis of which unitholders have invested.

AGNI — the code for intermediaries

AMFI has also framed a set of guidelines and code of conduct for intermediaries (known as AMFI Guidelines & Norms for Intermediaries (AGNI), consisting of individual agents, brokers, distribution houses and banks engaged in selling of mutual fund products.

The enforcement sequence on a breach:

1. Write to the intermediary (enclosing copies of the complaint and other documentary evidence) and ask for an explanation within 3 weeks
2. In case explanation is not received within 3 weeks, or if the explanation is not satisfactory, AMFI will issue a warning letter indicating that any subsequent violation will result in cancellation of AMFI registration
3. If there is a proven second violation by the intermediary, the registration will be cancelled, and intimation sent to all AMCs

And: the intermediary has a right of appeal to AMFI.

The code itself:

Consider investor's interest as paramount and take necessary steps to ensure that the investor's interest is protected in all circumstances.

Be fully conversant with the key provisions of the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) as well as the operational requirements of various schemes.

Provide full and latest information of schemes... and recommend schemes appropriate for the investor's risk profile and needs.

Highlight risk factors of each scheme, desist from misrepresentation and exaggeration and urge investors to go through SAI/SID/KIM before deciding to make investments.

Disclose to the investors all material information including all the commissions (in the form of trail or any other mode) received for the different competing schemes of various Mutual Funds from amongst which the scheme is being recommended.

Abstain from indicating or assuring returns in any type of scheme, unless the SID is explicit in this regard.

Do not collude with investors in faulty business practices such as bouncing of cheques, wrong claiming of dividend/redemption cheques, splitting of applications in the schemes to circumvent regulations.

Do not undertake commission driven malpractices such as:

a. recommending inappropriate products solely because the intermediary is getting higher commissions there from b. encouraging over transacting and churning of Mutual Fund investments to earn higher commissions c. splitting of applications to earn higher transaction charges/commissions

Abstain from making negative statements about any AMC or scheme and ensure that comparisons, if any, are made with similar and comparable products along with complete facts.

Maintain confidentiality of all investor details, deals and transactions.

Keep investor's interest and suitability to their financial needs as paramount and... extra commission or incentive should never form the basis for recommending a scheme.

Shall not rebate commission back to investors and abstain from attracting investors through temptation of rebate/gifts etc.

On the application form — take reasonable steps to ensure the contact details are investor's own details, and not of any third party, abstain from filling wrong/incorrect information or information of their own or of their employees, officials or agents... even if requested by the investor to do so, and abstain from tampering in any way with the application form.

On certification: obtain NISM certification and register themselves with AMFI and obtain an Employee Unique Identification Number (EUIN)... apart from AMFI Registration Number (ARN), ensure employees quote the EUIN in the Application Form, and renew the NISM certification and AMFI registration... on timely basis. Also comply with the Know Your Distributor (KYD) norms.

On documentation: be diligent in attesting/certifying investor documents and performing In Person Verification (IPV) of investors for the KYC process, and provide AML/CFT documents as required.

On due diligence: intermediaries satisfying the criteria specified by SEBI for due diligence exercise, shall maintain the requisite documentation in respect of the "Advisory" or "Execution Only" services provided by them.

On claw-back: intermediaries shall refund to AMCs, either by set off against future commissions or payment, all incentives of any nature, including commissions received, that are subject to claw-back.

On fraudulent practice: selling of units... by making false or misleading statement, concealing or omitting material facts of the scheme, concealing the associated risk factors of the schemes or not taking reasonable care to ensure suitability of the scheme to the investor will be construed as fraudulent/unfair trade practice.

And on identification: MFDs shall mention/display a tagline, "AMFI-registered Mutual Fund Distributor" along with/below their name, in a clear and legible font of at least font size 12, in all forms of printed communication. MFD shall display their name and tagline in a clear and legible font in all forms of communication i.e., website, mobile app, printed or electronic materials, business card, sign board etc.

Font size 12, on everything.