ORGANISATION

OF MUTUAL FUNDS

SEBI Guidelines, 1992 spell out in clear terms the

establishment
norms
for
mutual
funds.
It
contemplated a three tier system for managing the
affairs of mutual funds.
The three constituents are the sponsoring company,
the trustees and the assets management company
(AMC).
These three constituents were incorporated in SEBI
Regulations, 1996 for the management of mutual
funds. Apart from these three, Custodians and
transfer agents are two more important constituents
of mutual funds.

SPONSOR
Sponsor of a mutual fund is akin to the

promoter of a company as he gets the fund

registered with SEBI. Under SEBI regulations,
sponsor is defined as any person who acting
alone or in combination with another body
corporate establishes the mutual fund.
Sponsor can be Indian companies, banks or
financial institutions, foreign entities or a joint
venture between two entities

SEBI has laid down the eligibility criteria for sponsor as it

should have a sound track record and at least five years

experience in the financial services industry.
SEBI ensures that sponsor should have professional
competence, financial soundness and general reputation of
fairness and integrity in business transactions.
At least 40 percent of the capital of AMC has to be contributed
by the sponsor.
Also, they identify and appoint the trustees and Asset
Management Company. Sponsors are also free to get
incorporated an AMC as well as to appoint a board of trustees.
They, either directly or acting through trustees, will appoint a
custodian to hold the fund assets

TRUSTEES
Trustees may be appointed as an individual or as a trustee

company with the prior approval of SEBI. As defined under

the SEBI regulations, 1996, trustees mean board of trustees
or Trustee Company who hold the property of mutual fund
for the benefit of the unit holders. A Trustee acts as the
protectors of the unit holders interests and is the primary
guardians of the unit holders funds and assets. Sponsor
executes and registers a trust deed in favour of trustees.
There must be at least 4 members in the board of trustees
and least two third of them need to be independent.
Trustees must be the person with experience in financial
services and every trustee should be a person of integrity,
ability and standing.

SEBI has also defined the rights and obligations of trustees.

Under their rights, trustees appoint AMC with the prior approval
of SEBI.
They approve each of the schemes floated by AMC in
consultation with the sponsors. They have the right to obtain
from the AMC, such information as they consider necessary to
fulfil their obligations.
Trustees can even dismiss AMC with the approval of the SEBI
and in accordance with the regulations.
Under their obligations, trustees must ensure that the
transactions of mutual funds are in accordance with the trust
deed and its activities are in compliance with SEBI regulations.
They must ensure that AMC has all the procedures and systems
in place, and that all the fund constituents are appointed.

ASSET MANAGEMENT COMPANY

(AMC)
Asset Management Company is the body engaged to run the show of a

mutual fund.
The sponsor or trustees appoint AMC to manage the affairs of the
mutual fund to ensure efficient management. SEBI desires that AMC
must have a sound track record in terms of net worth, dividend paying
capacity, profitability, general reputation and fairness in transactions.
AMC is involved in basically three activities as portfolio management,
investment analysis and financial administration. Therefore, the
directors of AMC should be expert in these fields.
SEBIs regulation for AMC requires that it should have a net worth of at
least Rs. 10 crore at all times and that a company can act as an AMC
of one mutual fund only. Also, at least 50 percent of the members of
the board of an AMC have to be independent and these can be the
director of another AMC also. Its chairman should be an independent
person.

Obligations of an AMC
The AMC shall take all the reasonable steps and exercise due diligence to ensure

that any scheme is not contrary to the Trust deed and provisions of investment of
funds pertaining to any scheme is not contrary to the provisions of the regulations
and Trust deed.
The AMC shall exercise due diligence and care in all its investment decisions. The
AMC shall be responsible for the acts of commission or commissions by its
employees or the persons whose services have been procured.
An AMC shall submit to the trustees quarterly reports.
The trustees at the request of an AMC can terminate the assignments of the AMC.
An AMC shall not deal in securities through any broker associated with a sponsor
or a firm which is an associate of sponsor beyond 5% of the daily gross business of
the mutual fund.
No AMC shall utilize services of the sponsor or any of its associates, employees, or
their relatives for the purpose of any securities transaction and distribution and
sale of brokerage/commission paid is disclosed in half-yearly accounts of the
mutual fund.
No person, who has been found guilty of any economic offence or involved in
violation of securities law, should be appointed as key personnel. . The AMC shall
abide by the code of conduct specified in the fifth schedule. The registrars and
share transfer agents to be appointed by AMC are to be registered with SEBI.

The AMCs are required to report its compliance in their

periodical reports to the trustees and the trustees are

required to report to SEBI, in their half-yearly reports.
Trustees can also check its compliance through independent
auditors or internal statutory auditors or through other
systems developed by them.
The unclaimed redemption and dividend amounts can now
be deployed by the mutual funds in call money market or
money market instruments and the investors who claim
these amounts during a period of three years from the due
date shall be paid at the prevailing net asset value.
After a period of three years, the amount can be transferred
to a pool account and the investors can claim the amount at
NAV prevailing at the end of the third year. The income
earned on such funds can be used for the purpose of
investor education.

SEBI issued directives that the directors of AMCs should file with

the trustees the details of their purchase and sale transactions in

securities on a quarterly basis.
As in the case of trustees, they may report only those transactions
which exceed the value of Rs 1 lakh. Following representations from
AMFI, SEBI notified the Mutual Funds (Amendment) Regulations,
2002, whereby the requirement of publishing of scheme-wise
annual report in the newspapers by the mutual funds was waived.
To provide the investors an objective analysis of the performance of
the mutual funds schemes in comparison with the rise or fall in the
markets, SEBI decided to include disclosure of performance of
benchmark indices in case of equity-oriented schemes and
subsequently extended to debt-oriented and balanced fund
schemes in the format for half-yearly results.
In case of sector or industry specific schemes, mutual funds may
select any sectoral indices published by stock exchanges and other
reputed agencies.

SEBI (Mutual Funds) Regulations, 1996

All the schemes to be launched by the AMC need to be approved by

the trustees and copies of offer documents of such schemes are to

be filed with SEBI.
The offer documents shall contain adequate disclosures to enable
the investors to make informed decisions.
Advertisements in respect of schemes should be in conformity with
the SEBI prescribed advertisement code, and disclose the method
and periodicity of valuation of investment sales and repurchase in
addition to the investment objectives.
The listing of close-ended schemes is mandatory and every closeended scheme should be listed on a recognised stock exchange
within six months from the closure of subscription. However, listing
is not mandatory in case the scheme provides for monthly income
or caters to the special classes of persons like senior citizens,
women, children, and physically handicapped; if the scheme
discloses details of repurchase in the offer document; if the scheme
opens for repurchase within six months of closure of subscription.

Units of a close-ended scheme can be opened for sale or redemption at a

predetermined fixed interval if the minimum and maximum amount of sale,

redemption, and periodicity is disclosed in the offer document.
Units of a close-ended scheme can also be converted into an open-ended scheme
with the consent of a majority of the unit-holders and disclosure is made in the offer
document about the option and period of conversion.
Units of a close-ended scheme may be rolled over by passing a resolution by a
majority of the shareholders.
No scheme other than unit-linked scheme can be opened for subscription for more
than 45 days. . The AMC must specify in the offer document about the minimum
subscription and the extent of over- subscription, which is intended to be retained.
In the case of over-subscription, all applicants applying up to 5,000 units must be
given full allotment subject to over subscription.
The AMC must refund the application money if minimum subscription is not
received, and also the excess over subscription within six weeks of closure of
subscription.
Guaranteed returns can be provided in a scheme if such returns are fully
guaranteed by the AMC or sponsor. In such cases, there should be a statement
indicating the name of the person, and the manner in which the guarantee is to be
made must be stated in the offer document.
A close-ended scheme shall be wound up on redemption date, unless it is rolled
over, or if 75% of the unit-holders of a scheme pass a resolution for winding up of
the scheme; if the trustees on the happening of any event require the scheme to be
wound up; or if SEBI, so directs in the interest of investors.

CUSTODIAN
SEBI requires that each mutual fund shall have a custodian who is

independent and registered with it.

SEBI regulations provide for the appointment of a custodian by
trustees of the mutual fund who are responsible for carrying on the
activities of safe keeping of securities and participating in any
clearing system on behalf of mutual fund.
Custodian is not permitted to act as a custodian of more than one
mutual fund without the prior approval of SEBI. They should be
independent of the sponsors.
The appointment of any agency as custodian depends upon its
track record, quality of services, experience, transparency,
computerization and other infrastructure facilities.
Custodians primarily perform securities settlement functions.
However, some also offer fund accounting and valuation services.
The responsibilities of custodian include delivering and accepting
securities and cash, to complete transactions made in the
investment portfolio of mutual funds.

TRANSFER AGENT
Registrar and transfer (R&T) agents are responsible

for creating and maintaining investor records kept

in numbered account called folios and servicing
them.
They
accept
and
process
investor
transactions and also operate investor service
centre (ISCs) which acts as an official points for
accepting investor transactions with a fund.
R&T functions include issuing and redeeming the
units and updating the unit capital account.
R&T perform creating, maintaining and updating the
investors records and enabling their transactions
such as redemption, purchase and switches.

Mutual funds are also required to:

bring uniformity in disclosures of various categories of advertisements, with a

view to ensuring consistency and comparability across schemes of various and

mutual funds.
reduce initial offer period from a maximum of 45 days to 30 days.
dispatch statements of account once the minimum subscription amount
specified in the offer document is received even before the closure of the issue.
invest in mortgaged backed securities of investment grade given by credit
rating agency.
identify and make provisions for the non-performing assets (NPAs) according to
criteria for classification of NPAs and treatment of income accrued on NPAs and
to disclose NPAs in half- yearly portfolio reports.
disclose information in a revised format on unit capital, reserves, performance
in terms of dividend and rise/ fall in NAV during the half-year period, annualized
yields over the last 1, 3, 5 years in addition to percentage of management fees,
percentage of recurring expenses to net assets, investment made in associate
companies, payment made to associate companies for their services, and
details of large holdings, since their operation.
declare their NA V s and sale/repurchase prices of all schemes updated daily on
regular basis on the AMFI website by 8.00 p.m. and declare NA V s of their
closeended schemes on every Wednesday.