Foundation — The regulators, SEBI's reforms and the investment restrictions

Think of it like this

Key terms in this chapter

AGNI

AMFI Guidelines & Norms for Intermediaries — the code of conduct for individual agents, brokers, distribution houses and banks selling mutual fund products. On breach, AMFI seeks an explanation within three weeks, then issues a warning letter, and cancels registration on a proven second violation, with intimation to all AMCs and a right of appeal to AMFI.

AMFI Code of Ethics (ACE)

The standards of good practice to be followed by AMCs in their operations and dealings with investors, intermediaries and the public. It supplements the SEBI Code of Conduct in the Fourth Schedule, setting more explicit standards than the broad principles the Regulations lay down.

Caveat emptor

Let the buyer beware — an investor is presumed to have read the scheme related documents and cannot seek legal protection on the ground of being unaware of the law or of matters fairly and transparently stated. A proposed investor who has not invested does not have a unitholder's rights.

Celebrity endorsement

Prohibited in scheme advertisements. Permitted only at industry level to increase awareness of mutual funds as a product category, provided it does not promote a particular scheme or AMC brand, expenses come from industry-aggregated investor education funds, and SEBI approves in advance.

Change in fundamental attributes

A change that modifies the scheme and affects unitholders’ interests, which may not be made unless written communication is sent to each unitholder, details are displayed on the AMC’s website, and an exit at prevailing NAV without exit load is offered for at least 30 days.

Corporate Debt Market Development Fund (CDMDF)

A backstop facility for the purchase of investment grade corporate debt securities, created as a permanent institutional framework for activation in times of market stress, to instil confidence and enhance secondary market liquidity.

Cyber Security and Cyber Resilience Framework (CSCRF)

SEBI’s framework for registered entities, covering five cyber resiliency goals adopted from CERT-In’s Cyber Crisis Management Plan: Anticipate, Withstand, Contain, Recover and Evolve.

Delivery basis

The rule that every mutual fund shall buy and sell securities on the basis of deliveries, taking delivery on every purchase and delivering on every sale — subject to specified provisos for short selling, exchange-traded derivatives and the sale of a government security already contracted for purchase.

Fifth Schedule advertisement code

The eleven clauses governing mutual fund advertisements — requiring them to be accurate, true, fair, clear, complete, unambiguous and concise, and prohibiting false or projected statements, testimonials, rankings, exaggerated slogans, celebrities, unfair comparisons and any alteration of the standard warning.

Fund of funds restrictions

No scheme of a mutual fund may invest in a fund of funds scheme; a fund of funds scheme may not invest in another fund of funds scheme; and it may not invest other than in schemes of mutual funds, except for disclosed liquidity requirements.

Listed or to be listed

The Sixth Schedule requirement that investment in equity shares, equity related instruments and debt instruments be made only in listed or to-be-listed securities, except for unlisted government securities, money market instruments other than commercial papers, and specified unlisted non-convertible debentures.

Performance disclosure norms

For schemes over three years old, CAGR for 1, 3 and 5 years and since inception, plus point-to-point returns on ₹10,000. No past performance for schemes under six months; simple annualised growth for six to twelve months; and for overnight, liquid and money market funds, simple annualisation where figures exist for at least 7, 15 and 30 days.

Potential Risk Class (PRC) matrix

A matrix classifying all debt schemes by maximum interest rate risk, measured by Macaulay Duration, and maximum credit risk, measured by Credit Risk Value — disclosing the maximum risk the fund manager may take. Effective 1 December 2021.

Price Return Index (PRI)

An index that considers only the price movement of its constituents, and therefore captures only their capital gains.

Proceeds of illiquid securities

Where a security written off as wholly or partly non-recoverable later yields more, substantial amounts recovered within two years are paid to the old investors; in all other cases the amount goes to the Investor Education Fund maintained by each mutual fund.

Regulation 39

The closed list of instruments in which an AMC may invest scheme funds: securities, money market instruments, privately placed debentures, securitised debt instruments (asset backed or mortgage backed), gold or gold-related instruments, silver or silver-related instruments, and anything else SEBI specifies.

Restrictions apply at the time of investment

The timing rule for all investment limits — a limit is tested when the investment is made, which is why a breach caused purely by market movement is treated as a passive breach with a rebalancing period.

Right to beneficial ownership

The unitholder’s proportionate right to the beneficial ownership of the scheme’s assets, including the right to a unit certificate and to hold units in demat form. Units held in dematerialised form are freely transferable, except ELSS during the statutory minimum holding period.

SCORES

SEBI Complaint Redress System — a web-based centralised grievance redress system at http://scores.sebi.gov.in, where every activity from lodging a complaint to its closure is online. Complaints may also be lodged in physical form at any SEBI office and are then scanned and uploaded.

SEBI Preamble

Describes SEBI's basic functions as protecting the interests of investors in securities and promoting the development of, and regulating, the securities market and matters connected therewith or incidental thereto.

Securities

Financial instruments that are transferable and tradeable in the secondary market, as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956.

Segregated portfolio

A mechanism to separate distressed, illiquid assets from the more liquid assets of a mutual fund portfolio on a credit event, introduced after the 2018 credit crisis to protect unitholders and give fair treatment to all investors.

SIF branding requirements

The requirement that a Specialized Investment Fund have a distinct brand name and logo separate from the mutual fund, with the sponsor's or mutual fund's brand usable for five years from SEBI approval in a font equal to or smaller than the SIF's own, and a separate website or dedicated web page.

Standard warning

"Mutual Fund investments are subject to market risks, read all scheme related documents carefully." No addition or deletion of words is permitted; it must appear in the vernacular where the advertisement is, and in audio-visual media in both visual form and voice-over.

The four regulators

RBI for the banking system and money markets, SEBI for the securities markets, IRDAI for the insurance market and PFRDA for the pension market — all under the purview of the Ministry of Finance.

Total Return Index (TRI)

An index that considers all dividends and interest payments generated by its constituents in addition to capital gains, with cash flows presumed to be notionally reinvested on their ex-date. SEBI requires all mutual fund schemes to be benchmarked against Total Return Indices.

Unauthenticated news guidelines

SEBI's requirement that intermediaries maintain an internal code of conduct, restrict or supervise access to blogs, chat forums and messenger sites, treat usage logs as records, and forward market-related news only after the compliance officer has seen and approved it — with the compliance officer also liable for breach of duty.

Unclaimed amounts

Redemption or dividend proceeds not claimed by an investor. Claimed within three years, payment is at prevailing NAV including income earned; claimed after three years, at the NAV as at the end of three years. Such amounts are deployed in a separate plan of a liquid scheme, with fees capped at 0.50 per cent per annum and no exit load.