Norms for shareholding in mutual funds
Also written Cross-shareholding norms · Cross-holding restriction in mutual funds · Regulation 7B norms
A rule that stops one fund house owning a piece of another: no sponsor, associate or 10% shareholder of one AMC or trustee company may hold 10% or more of, or sit on the board of, another mutual fund's.
In plain language
Competition between fund houses is supposed to be real. If the sponsor of one mutual fund quietly owns a meaningful slice of a rival's asset management company — or puts a director on its board — the rivalry is theatre. Fee levels, scheme launches and the treatment of a common group borrower all stop being independent decisions.
So SEBI draws a line at 10% and applies it in both directions.
How it works
The rule has two limbs, and the second is the one candidates forget.
Limb one — the sponsor side. No sponsor of a mutual fund, its associate or group company, including the AMC of that fund, may — acting through the schemes of the mutual fund or otherwise, individually or collectively, directly or indirectly — have:
- 10% or more of the shareholding or voting rights in the AMC or the trustee company of any other mutual fund; or
- representation on the board of the AMC or the trustee company of any other mutual fund.
Limb two — the shareholder side. Any shareholder holding 10% or more of the shareholding or voting rights in the AMC or trustee company of a mutual fund is subject to exactly the same two restrictions in respect of any other mutual fund.
Notice what each phrase is doing. "Or otherwise" catches a stake held outside the schemes. "Individually or collectively" stops a group splitting 9% five ways. "Directly or indirectly" follows the chain up through holding companies. And board representation is banned outright — there is no percentage below which a directorship becomes acceptable, because a director sees everything regardless of the size of the stake.
A worked example
Bharat Cooperative Bank sponsors Bharat Mutual Fund and holds 51% of Bharat AMC Ltd. Its treasury is offered a block in Nilgiri AMC Ltd, which manages Nilgiri Mutual Fund.
| Proposed position in Nilgiri AMC | Permitted? |
|---|---|
| 6% equity, no board seat | Yes |
| 6% equity plus one nominee director | No — board representation is barred at any stake |
| 10% equity, no board seat | No — 10% or more is the bar, so exactly 10% breaches it |
| 4% held by the bank + 7% held by its wholly owned NBFC | No — 11% collectively and indirectly |
Now reverse the direction. Sundaram Financial Holdings owns 14% of Bharat AMC Ltd. It is not the sponsor and it did not set up the fund — but 14% is above 10%, so limb two catches it. Sundaram may not also take 10% or more of Nilgiri AMC or of Nilgiri Trustee Company, and may not place a director on either board.
The practical compliance work is a quarterly shareholding map: the compliance officer of the AMC has to know not just who the sponsor is, but every shareholder above 10% and what they own elsewhere in the industry. A 10%-plus shareholder who buys into a rival creates a breach at the AMC that the AMC itself did not transact.
Why NISM asks about it
Chapter 14, section 14.11 (Norms for Shareholding in Mutual Funds). It is a short section and therefore an easy place to set a precise question.
The examinable points are the 10% threshold, the fact that it bites at "10% or more" rather than "more than 10%", and the absolute bar on board representation irrespective of stake. The reciprocal second limb — that a 10% shareholder, not only a sponsor, is caught — is the discriminator between a candidate who read the section and one who read the heading.
Common exam traps
- "Ten per cent or more" includes exactly ten per cent. A 10.00% stake is a breach, not a ceiling.
- Board representation is prohibited outright. There is no de minimis stake that makes a nominee director acceptable.
- The rule covers the trustee company as well as the AMC. Candidates read "AMC" and stop.
- It applies to the shareholder, not only to the sponsor. Limb two is the reciprocal half of the rule and is tested more often than limb one.
- This is cross-holding between fund houses, not minimum public shareholding of a listed company, and not the 25%-of-corpus limit on a single investor in a scheme. Three different percentages in the same chapter; keep them apart.
- Holdings "through the schemes of the mutual fund or otherwise" are counted, so a stake parked outside the schemes does not escape.
Where this is taught
Free preparation for NISM Series III-CRelated terms
- Conflict of interestAny interest of the analyst's own — a shareholding, a fee, a relationship — that could bias the research, and which the regulations require to be disclosed rather than merely avoided.
- Asset Management CompanyThe company that runs a mutual fund's schemes day to day — appointed by the sponsor or trustees with SEBI's approval, and paid a fee out of the scheme rather than a share of its profits.
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- SponsorThe person or firm that sets up the mutual fund — applies to SEBI for registration, executes the trust deed in favour of the trustees, and puts up the capital of the AMC.
- Change in control of the AMCWhen ownership of a mutual fund's AMC changes hands, SEBI and the trustees must approve it first and every unit holder must be offered at least 30 calendar days to exit at NAV with no exit load.
- Obligations of trusteesThe duties SEBI places on a mutual fund's trustees: hold scheme property in trust, review every AMC-associate transaction quarterly, and certify to SEBI half-yearly that nothing improper happened.