Obligations of trustees
Also written Trustee obligations · Duties of mutual fund trustees · Obligations of the trustees
The 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.
In plain language
A mutual fund in India is a trust, and a trust needs somebody whose only job is to look after the beneficiaries. That is the trustee.
The asset management company runs the money and earns a fee for doing so. The sponsor owns the AMC and wants it to be profitable. Neither of those two is a natural guardian of the unit holder. The trustee is the third tier precisely because it has no such conflict — it does not manage money, does not sell schemes and does not answer to the sponsor.
So the regulations do not ask the trustee to be helpful. They give it a list of things it must do, and a list of things it must stop the AMC doing.
How it works
The obligations run on a calendar, and the calendar is what gets examined.
Continuously. Trustees are accountable for, and custodians of, the funds and property of each scheme, and hold them in trust for the unit holders. They must ensure every transaction of the fund accords with the trust deed, that the AMC manages the schemes independently of its other activities, that one scheme's investors are not sacrificed to another's, and that there is no conflict between how the AMC deploys its own net worth and the interests of unit holders.
Quarterly. Trustees must review all transactions carried out between the mutual fund, the AMC and the AMC's associates. The AMC feeds this with its own quarterly report on its activities and its compliance with the regulations, due by the 21st of the succeeding month, and a quarterly report justifying any purchase or sale of securities of group companies of the sponsor or the AMC.
Half-yearly. Trustees furnish SEBI a report on the activities of the mutual fund, plus two certificates: one that they have satisfied themselves there were no instances of self-dealing or front running by any trustee, AMC director or key personnel, and one that the AMC has managed the schemes independently of any other activity. The Half Yearly Trustee Report is due within two months of the end of the half year.
When something changes. Trustees must obtain unit holder consent when SEBI requires it in investors' interest, when three-fourths of the unit holders of a scheme requisition it, or when a majority of trustees decide to wind a scheme up. They must ensure the AMC makes no change to a scheme's fundamental attributes, its fees and expenses, or anything else that modifies the scheme and affects unit holders' interest.
Trustees also approve the AMC's broker empanelment policy, periodically review custody service contracts and the AMC's handling of investor complaints, abide by the code of conduct in the Fifth Schedule, and file their own dealings — a trustee reports to the mutual fund only those transactions in securities exceeding Rs 5 lakh, within one month of the end of the relevant quarter.
A worked example
Meridian Trustee Company Ltd is the trustee of Meridian Mutual Fund. At the quarterly review for the quarter ended 30 September, the AMC's report (filed 21 October) discloses:
| Transaction | Counterparty | Value |
|---|---|---|
| Brokerage paid on equity deals | Meridian Securities Ltd (sponsor's broking arm) | Rs 6.4 crore |
| Total brokerage paid, all schemes | All empanelled brokers | Rs 88 crore |
| Purchase of NCDs of Meridian Housing Finance | Sponsor group company | Rs 240 crore across 3 debt schemes |
Two things follow immediately.
The broker check. Deals through a sponsor-associated broker are 6.4 ÷ 88 = 7.3% of aggregate purchases and sales — above the 5% line, so the AMC must have recorded a justification. The trustees look for it; there is none on file. They minute the deficiency and communicate it in writing to the AMC, then check at the next quarter that it has been rectified.
The group-company check. The Rs 240 crore of sponsor-group paper needs the AMC's quarterly justification report and the independent trustees' comments on it. One independent trustee notes that the same NCDs were bought across three schemes on the same day at the same price, and asks whether the pricing was tested against a secondary market quote.
On 30 November — within two months of the half year ended 30 September — Meridian Trustee Company files its Half Yearly Trustee Report with SEBI. The self-dealing and front running certificate is signed, but the report also records the broker-justification lapse and the corrective step taken. The next HYTR must state what was done about it: the format expressly asks for corrective steps taken on non-compliance reported in the earlier report.
Why NISM asks about it
Chapter 14 (SEBI (Mutual Funds) Regulations) devotes three sections to this — 14.4.2 on the trustee, 14.4.3 on general and specific due diligence, and 14.14 on reports. It is the densest examinable block in the fund half of the paper.
The questions are frequency questions and threshold questions: Trustees are required to review all transactions between the mutual fund, the AMC and its associates on a ______ basis (quarterly — this is an actual review question in the workbook), how often must trustees meet (at least four times a year), what value of trustee transaction must be reported (above Rs 5 lakh), within what period is the Half Yearly Trustee Report due (two months). Learn the calendar, not the prose.
Common exam traps
- Quarterly review, half-yearly report. Trustees review AMC-associate transactions every quarter but report to SEBI every six months. Swapping the two is the single most common error on this chapter.
- Rs 5 lakh is the trustee threshold; Rs 1 lakh is the AMC director threshold. Directors of the AMC file details of transactions in securities exceeding Rs 1 lakh with the trustees quarterly. Trustees report only those exceeding Rs 5 lakh. Two numbers, two people.
- Two-thirds of trustees are independent; only half the AMC board is. The workbook's section 14.4.2 says SEBI mandates two-thirds independent directors on the AMC board, but sections 14.4.4 and 14.10.5 both say at least half of the AMC board and two-thirds of the trustee board. The two-thirds figure belongs to the trustees; take the 50% figure for the AMC.
- Consent of unit holders needs three-fourths on requisition, but winding up needs only a majority of trustees. Different bodies, different fractions. Separately, a scheme is wound up if 75% of unit holders pass a resolution to that effect.
- A trustee of one mutual fund cannot be a trustee of another, and no AMC — or any director, officer or employee of any other AMC — is eligible to be a trustee at all.
- Trustees approve the broker empanelment policy; they do not empanel brokers. The obligation is to ensure the AMC was diligent, not to do the AMC's job.
Where this is taught
Free preparation for NISM Series III-CRelated terms
- Audit committeeThe committee responsible for reviewing the financial statements and nominating the auditors.
- 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.
- Front runningPlacing an order while in possession of information not publicly available regarding a substantial impending transaction.
- 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.
- Norms for shareholding in mutual fundsA 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.
- Self-dealingUsing one's position to engage in transactions with the fund by which one benefits unfairly at the expense of the fund and the unitholders.
- TrusteeThe party that holds the trust and enters into the Investment Management Agreement with the manager, delegating powers of management and administration of the AIF.
- Specialized Investment FundsA SEBI vehicle sitting between mutual funds and PMS: run by an eligible AMC under the Mutual Funds Regulations, with a minimum of Rs 10 lakh per investor across all of that AMC's SIF strategies.
- Infrastructure debt fund schemesA mutual fund scheme that must put at least 90% of its assets into the debt of infrastructure companies, projects and SPVs, with a 30% cap on any single infrastructure borrower.
- Real estate mutual fund schemesA mutual fund scheme holding actual property: at least 35% of net assets directly in completed, unencumbered Indian real estate, and at least 75% in real estate assets and related securities.
- Deemed connected personsCategories of people the insider trading rules treat as connected automatically — relatives, group companies, trustees, bankers, auditors — unless the person proves the contrary.
- Fit and proper person criteriaThe continuing character and capability test for a SEBI intermediary, its key people and its 20%-plus owners — eleven disqualifications, any one of which is enough to fail it.