Institutional investors
Also written Institutional investor · Non-individual investors
Organisations rather than individuals that invest in mutual funds — companies, partnership firms, associations of persons, societies and trusts, banks and FIs, and FPIs — each acting through authorised signatories.
In plain language
The workbook splits mutual fund investors into two broad groups: individual investors and institutional investors. It says plainly that the steps to invest and the papers needed are different for each.
An individual invests for himself or his family. He signs his own forms. An institution cannot hold a pen. It acts only through officials it allows to sign for it. So the registrar asks more questions. Who is this investor? Is this body allowed to make this investment? Who approved it? Which of its people may sign?
Chapter 2 also uses the term in a wider sense, for the share market. There it means financial institutions, venture capital firms, mutual funds, foreign financial institutions and banks. These are skilled investors. They can judge a business, its risks and the returns it may earn. Large institutional shareholders take an active part in the affairs of the company. Some even get a seat on the board.
How it works
Section 12.2 lists the institutional investors in Indian mutual funds:
| Type | Set up under |
|---|---|
| Private and public companies | Indian Companies Act; governed by MoA, AoA and a board |
| Partnership firms | A partnership deed |
| Association of Persons (AoP) | A charter defining their activities |
| Societies and trusts | Social, religious or educational objectives |
| Banks and financial institutions | Banking Regulation Act; FIs by an Act or as corporations |
| Foreign Portfolio Investors (FPIs) | Registration as FPI with SEBI |
| Overseas Corporate Bodies (OCBs) | — currently prohibited from investing in Indian mutual funds |
Opening a folio. A corporate investor provides, in addition to the usual information:
- a copy of the Memorandum and Articles of Association, clearly highlighting that such investment is permissible;
- a Board resolution for the investment;
- a list of signatories and operating instructions;
- KYC documents for all authorised signatories.
Changing signatories. When officials leave or move, the institution submits a certified true copy of the Board resolution authorising the change and an instruction letter signed by the existing authorised signatory, with names and specimen signatures of the new ones — so the RTA validates each transaction against the updated list.
Changing name or status (for instance private to public limited, or partnership to company) needs the name change certificate from the Registrar of Companies, plus a fresh authorisation to invest, board approval and list of signatories.
A worked example
Illustrative numbers and names.
Sahyadri Textiles Pvt Ltd wants to park Rs 25 crore of surplus cash in a liquid fund.
Documents. Its finance manager sends the application with a copy of the MoA and AoA highlighting the clause permitting investments, a board resolution approving the investment, the list of authorised signatories — the CFO and a director, signing jointly — and KYC documents for both. The RTA opens the folio and records both specimen signatures.
A size check. Every scheme must have at least 20 investors, and no single investor may exceed 25 percent of AUM. If the liquid fund manages Rs 90 crore, Sahyadri's stake after investing would be:
25 ÷ (90 + 25) = 21.7%
within the limit. In a small scheme of Rs 60 crore, the same Rs 25 crore would be 25 ÷ 85 = 29.4% — above 25 percent.
A signatory change. Two years later the CFO leaves. A redemption signed by the new CFO arrives before the RTA has been told. It fails signature validation. The company must first submit a certified true copy of the board resolution authorising the change and an instruction letter signed by an existing authorised signatory — here, the director — with the new CFO's specimen signature. Only then does the redemption pass.
A name change. When Sahyadri becomes a public limited company, the folio must be moved to the new name using the Registrar of Companies' name change certificate — otherwise transactions in the old name are not valid.
Why NISM asks about it
Chapter 12 (Investors in Mutual Funds) sets out the institutional categories in section 12.2 and corporate documentation in section 12.3.2; its sample questions ask what institutional investors include (all the options — companies, firms and AoPs, societies and trusts) and which investor type is not eligible (Overseas Corporate Body). Chapter 15 (Non-Financial Transactions) covers change in corporate name or status and change in authorised signatories, and its sample question answer is a copy of the Board resolution authorising the change. Chapter 2 uses the term for institutional shareholders in companies.
Common exam traps
- OCBs are currently prohibited from investing in Indian mutual funds. They appear in the list precisely so they can be the wrong answer.
- FPIs must be registered with SEBI as FPIs.
- A signatory change needs a certified Board resolution, not the MoA or AoA — those are distractors in the Chapter 15 sample question.
- The instruction letter is signed by the existing authorised signatory, not the incoming one.
- The MoA and AoA must show that the investment is permissible. A board resolution alone is not enough for a corporate folio.
- KYC is needed for every authorised signatory, not only the company.
- HUF is an individual investor category in the workbook, not an institutional one, even though a Karta acts for it.
- The 20/25 rule applies to every scheme except ETFs: an institution cannot hold more than 25 percent of a scheme's AUM.
Where this is taught
- Series II-A · Chapter 2: Characteristic of Equity Sharesintroduced here
- Series II-B · Chapter 2: Characteristic of Equitiesintroduced here
- Series XIX-E · Chapter 1: Investments Landscapeintroduced here
- Series XIX-D · Chapter 1: Investments Landscapeintroduced here
- Series II-B · Chapter 12: Investors in Mutual Funds
Related terms
- Assets under ManagementThe total value of the money a scheme or a fund house manages — the current NAV multiplied by units outstanding — and the base on which the expense ratio is charged.
- Folio numberThe unique account number a fund house allots to an investor, under which the registrar holds that investor's units across every scheme of the fund, along with the bank mandate, address and signature.
- Power of AttorneyA legal document by which you authorise somebody else — often your stock broker or depository participant — to operate your demat and bank account on your behalf. It is optional, and revocable.
- Registrar and Transfer AgentThe SEBI-registered agency that keeps the investor records of a mutual fund — processing purchases and redemptions, updating folios and unit capital, and issuing account statements.
- Non-Institutional InvestorThe residual public-issue category for applicants who are neither retail individual investors nor qualified institutional buyers — in practice anyone bidding for more than Rs 2 lakh without being a QIB.
- Know Your CustomerThe identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.
- Individual investorsInvestors who buy mutual fund units for themselves or their family — resident adults, minors through a guardian, HUFs, NRIs/PIOs and eligible foreign nationals — as distinct from institutions.
- Classes of InvestorThe workbook's three-way split of who buys securities — institutional, non-institutional and retail — sorted by the size of the cheque and the sophistication of the strategy.
- Institutional distributorsThe workbook's name for the largest non-individual mutual fund distributors — the distribution companies and the banks — which sell through salaried staff in a branch network rather than through one agent.