PPT for Regulatory framework of M.F.

1. REGULATORY FRAMEWORK OF MUTUAL
FUNDS

2. Group Members -
• Syed Mohammed Asif
• Devendra Soni
• Faizan Ahmed
• Kuldeep Paliwal
• Alamzeb Khan

3. What are Mutual Funds?
• Pools of Investment
• Each Pool of money is called a Mutual Fund
Scheme
• Mutual funds assist in Earning Income or
Building Wealth
• Utilise the knowledge and experience of a
professional fund management team
• Benefit from the economies of scale

5. Regulatory Framework of Mutual Funds

6. Why we need Regulatory Framework?
Mutual funds need to be regulated –
• To overcome the investor-manager conflict of interests that might
arise
• Such post-contractual opportunistic behaviour can compromise the
interest of the investors
• expose them to risks such as poor portfolio selectivity, leading to
higher costs, higher portfolio risks than what was indicated in the
offer document and
• other organizational risks such as delayed settlement of transactions.
• the regulator steps in to overcome such market failures with the
objective of ensuring ideal type market conditions
• Indian Mutual Funds are regulated by SEBI, whose regulations are
quite comprehensive and qualitatively superior to those of many
other countries.

7. Reserve Bank Of India - RBI
• Though RBI role is to regulating banking industry in
India but as many mutual fund companies are backed
by banks so indirectly RBI has significant contribution
and role for safeguarding the interest of investors and
other stakeholders in India.
• In 1995, the RBI permitted private sector institution to
set up of ―Money Market Mutual Funds (MMMFs).
• They can invest in treasury bills, call and notice
money, commercial bills accepted/co-accepted by
banks, certificates of deposits, etc.

8. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI):
• Introduced several regulatory measures and
amendments in order to protect the interests of
small investors
• The SEBI (Mutual Funds) Regulations, 1996, is the
principal regulation for the Mutual fund industry in
India. This was amended several times with the latest
amendment being issued in 2012.
• SEBI (Mutual Fund) Regulations, 1996 as amended
till date define “mutual fund” as a fund established in
the form of a trust to raise moneys through the sale
of units to the public.

9. This imposes three limitations on a mutual fund and
determines its basic legal character –
• Allows the mutual fund to raise resources through
sale of units to the public.
• It permits the mutual fund to invest only in securities
prescribes in the SEBI (MF)Regulations.
• It requires the mutual fund to be set up in the form
of a trust under the Indian Trust Act.

10. Association of Mutual Funds In India (AMFI) :
• With the increase in mutual fund players in India, a need
for mutual fund association in India was generated to
function as a non-profit organization.
• Incorporated on 22nd August, 1995.
• Apex body of all Asset Management Companies (AMC)
which has been registered with SEBI.
• India has brought down the Indian Mutual Fund Industry to
• a professional and healthy market with ethical lines
enhancing and maintaining standards.
• It follows the principle of both protecting and promoting
the interests of mutual funds as well as their unit holders

11. Objectives of AMFI :
• To define and maintain high professional and ethical standards
in all areas of operation of mutual fund industry.
• To recommend and promote best business practices and code
of conduct to be followed by members and others engaged in
the activities of mutual fund
• To interact with the SEBI and to represent to SEBI on all matters
concerning the mutual fund industry.
• To represent to the Government, Reserve Bank of India and
other bodies on all matters relating to the Mutual Fund
Industry.
• To develop a cadre of well trained Agent distributors and to
implement a programme of training and certification for all
intermediaries and other engaged in the industry.

12. Key constituents of Mutual Funds and how they
are Regulated :
• Sponsors
• Trustees
• AMC’s
• Custodian
o RTA
o KYC’s

13. Sponsors :
• The application to SEBI for registration of a mutual fund is made by the
sponsor/s. Thereafter, the sponsor invests in the capital of the AMC.
• Since sponsors are the main people behind the mutual fund operation,
eligibility criteria has been specified as follows:
• The sponsor should have a sound track record and reputation of
fairness and integrity in all business transactions. The requirements are:
o Sponsor should be carrying on business in financial services for not less
than 5 years
o Sponsor should have positive net worth (share capital plus reserves
minus accumulated losses) in all the immediately preceding 5 years
o Net worth in the immediately preceding year should be more than the
amount that the sponsor contributes to the capital of the AMC

14. o The sponsor should have earned profits, after providing
for depreciation and interest and tax, in three of the
previous five years, including the latest year.
• The sponsor should be a fit and proper person for this
kind of operation.
• The sponsor needs to contribute a minimum 40% of the
net worth of the AMC. Further, anyone who holds 40% or
more of the net worth of share-holding in the AMC is
considered to be a sponsor, and should therefore fulfil
the eligibility criteria mentioned above.

15. Trustee
• The trustees have a critical role in ensuring that the mutual fund
complies with all the regulations, and protects the interests of the
unit-holders.
• The SEBI Regulations stipulate that:
• Every trustee has to be a person of ability, integrity and standing
 A person who is guilty of moral turpitude cannot be appointed
trustee
 A person convicted of any economic offence or violation of any
securities laws cannot be appointed as trustee
 No AMC and no director (including independent director), officer,
employee of an AMC shall be eligible to be appointed as a trustee of
a mutual fund
 No person who is appointed as a trustee of a mutual fund shall be
eligible to be appointed as trustee of any other mutual fund.

16. • Prior approval of SEBI needs to be taken, before a person is
appointed as Trustee.
• The sponsor will have to appoint at least 4 trustees. If a
trustee company has been appointed, then that company
would need to have at least 4 directors on the Board. Further,
at least two-thirds of the trustees / directors on the Board of
the trustee company would need to be independent trustees
i.e. not associated with the sponsor in any way.
• SEBI expects Trustees to perform a key role in ensuring legal
compliances and protecting the interest of investors.

17. Asset Management Company (AMC)
• Trustees appoint the Asset Management Company (AMC), to
manage investor’s money. The AMC in return charges a fee for
the services provided and this fee is borne by the investors as
it is deducted from the money collected from them.
• The AMC’s Board of Directors must have at least 50% of
Directors who are independent directors. The AMC has to be
approved by SEBI. The AMC functions under the supervision
of it’s Board of Directors, and also under the direction of the
Trustees and SEBI.
• It is the AMC, which in the name of the Trust, floats new
schemes and manage these schemes by buying and selling
securities. In order to do this the AMC needs to follow all rules
and regulations prescribed by SEBI and as per the Investment
Management Agreement it signs with the Trustees.

18. Contd.
• The role of the AMC is to manage investor’s money on a day
to day basis. Thus it is imperative that people with the highest
integrity are involved with this activity.
• The AMC cannot deal with a single broker beyond a certain
limit of transactions.
• The AMC cannot act as a Trustee for some other Mutual Fund.
• The responsibility of preparing the OD lies with the AMC.
• Appointments of intermediaries like independent financial
advisors (IFAs), national and regional distributors, banks, etc.
is also done by the AMC.
• Finally, it is the AMC which is responsible for the acts of its
employees and service providers.

19. Custodian :
• A custodian’s role is keeping custody of the securities that are
bought by the fund manager and also keeping a tab on the
corporate actions like rights, bonus and dividends declared by
the companies in which the fund has invested.
• The Custodian is appointed by the Board of Trustees. The
custodian also participates in a clearing and settlement
system through approved depository companies on behalf of
mutual funds, in case of dematerialized securities.
• Only the physical securities are held by the Custodian. The
deliveries and receipt of units of a mutual fund are done by
the custodian or a depository participant at the instruction of
the AMC and under the overall direction and responsibility of
the Trustees. Regulations provide that the Sponsor and the
Custodian must be separate entities.

20. RTA :
• The RTA maintains investor records. Their offices in various
centres serve as Investor Service Centres (ISCs), which
perform a useful role in handling the documentation of
investors.
• The functions of the RTA includes processing of purchase and
redemption transactions of the investor and dealing with the
financial transactions of receiving funds for purchases and
making payments for redemptions, updating the unit capital
of the scheme to reflect these transactions, updating the
information in the individual records of the investor, called
folios, keeping the investor updated about the status of their
investment account and information related to the
investment.

21. • The appointment of RTA is done by the AMC. It is not
compulsory to appoint a RTA. The AMC can choose
to handle this activity in-house. All RTAs need to
register with SEBI.

22. KYC Registration Agencies :
• To do away with multiple KYC formalities with various
intermediaries, SEBI has mandated a unified KYC for the
securities market through KYC Registration Agencies
registered with SEBI.
• Any new investor, Joint holders, Power of Attorney
holders, Donors and Guardian (in case of minors) have to
comply with the KYC formalities. In-Person Verification
(IPV) by a SEBI-registered intermediary is compulsory for
all investors.
• However, the investor needs to get IPV done by only one
SEBI-registered intermediary (broker, depository, mutual
fund distributor etc.).

23. • This IPV will be valid for transactions with other SEBI-
registered intermediaries too.
• Distributors who have a valid NISM-Series-V-A:
Mutual Fund Distributors certificate and a valid ARN
can carry out the In-person verification if they have
completed the KYD process.

24. THANK YOU