This article throws light upon the fourteen main SEBI guidelines as regard to constitution and management of mutual funds. The regulations are: 1. Trust Deed to be Registered under the Registration Act 2. Contents of Trust Deed 3. Disqualification from being Appointed as Trustees 4. Approval of the Board for Appointment of Trustee 5. Rights and Obligations of the Trustees and Others.
SEBI Regulations as Regards to Constitution and Management of Mutual Funds:
- Trust Deed to be Registered under the Registration Act
- Contents of Trust Deed
- Disqualification from being Appointed as Trustees
- Approval of the Board for Appointment of Trustee
- Rights and Obligations of the Trustees
- Application by an Asset Management Company
- Appointment of an Asset Management Company
- Eligibility Criteria for Appointment of Asset Management Company
- Terms and Conditions to be Complied with
- Procedure where Approval is not Granted
- Restrictions on Business Activities of the Asset Management Company
- Asset Management Company and its Obligations
- Appointment of Custodian
- Agreement with Custodian
Constitution and Management of Mutual Funds: Regulation # 1.
Trust Deed to be Registered under the Registration Act:
A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908) executed by the sponsor in favour of the trustees named in such an instrument.
Constitution and Management of Mutual Funds: Regulation # 2.
Contents of Trust Deed:
(a) The trust deed shall contain such clauses as are mentioned in the Third Schedule and such other clauses which are necessary for safeguarding the interests of the unit holders.
(b) No trust deed shall contain a clause which has the effect of-
(i) Limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unit holders; or
(ii) Indemnifying trustees or the asset management company for loss for damage caused to the unit holders by their acts of negligence or acts of commissions or omissions.
Constitution and Management of Mutual Funds: Regulation # 3.
Disqualification from being Appointed as Trustees:
(a) A mutual fund shall appoint trustees in accordance with these regulations.
(b) No person shall be eligible to be appointed as a trustee unless-
(i) He is person of ability, integrity and standing; and
(ii) Has not been found guilty of moral turpitude; and
(iii) Has not been convicted of any economic offence or violation of any securities laws; and
(iv) Has furnished particulars as specified in Form C.
(c) An asset management company or any of its officers or employees shall not be eligible to act as a trustee of any mutual funds.
(d) No person who is appointed as a trustee of a mutual fund can be appointed as a trustee of any other mutual fund unless-
(i) 5UCh a person is an independent trustee referred to in subregulation (5); and
(ii) Prior approval of the mutual fund of which he is trustee has been obtained for such an appointment.
(e) Atleast 50% of the trustees shall be independent persons and no such trustees shall be an associate or a subsidiary or associated in any manner with the sponsor.
(f) In case a company is appointed as a trustee then its directors can act as trustees of any trust provided that object of the trust is not in conflict with the object of the mutual fund.
Constitution and Management of Mutual Funds: Regulation # 4.
Approval of the Board for Appointment of Trustee:
(a) No trustee shall initially or any time thereafter is appointed without prior approval of the Board.
Provided further if any trustee resigns or retires, a new trustee shall be appointed within a period of three months with the prior approval of the Board.
(b) The existing trustees of any mutual fund may form a trustee company to act as a trustee with the prior approval of the Board.
Constitution and Management of Mutual Funds: Regulation # 5.
Rights and Obligations of the Trustees:
(a) The trustees and the asset management company shall with the prior approval of the Board enter into an investment management agreement.
(b) The investment management agreement shall contain such clauses as are mentioned in the Fourth Schedule and such other clauses as are necessary for the purpose of making investments.
(c) The trustees shall have a right to obtain from the asset management company such information as is considered necessary by the trustees.
(d) The trustee shall ensure before the launch of any scheme that the asset management company has –
(i) Systems in place for its back office, dealing room and accounting;
(ii) Appointed all key personnel including fund manager(s) for the scheme(s) and submitted their biodata which shall contain the educational qualifications, past experience in the securities market with the trustees, within 15 days of their appointment;
(iii) Appointed auditors to audit its accounts;
(iv) Appointed a compliance officer to comply with regulatory requirement and to redress investor grievances;
(v) Appointed registrars and laid down parameters for their supervision;
(vi) Prepared a compliance manual and designed internal control mechanisms including internal audit systems;
(vii) Specified norms for empanelment of brokers and marketing agents.
(e) The trustee shall ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker.
(f) The trustees shall ensure that the asset management company has not given any undue or run fair advantage to any associates or dealt with any of the associates of the asset management company in any manner detrimental to interest of the unit-holders.
(g) The trustees shall ensure that the transactions entered into by the asset management company are in accordance with these regulations and the scheme.
(h) The trustees shall ensure that the asset management company has been managing the mutual fund schemes independently of other activities and have taken adequate steps to ensure that the interest of investors of one scheme are not being compromised with those of any other scheme or of other activities of the asset management company.
(i) The trustees shall ensure that all the activities of the asset management company are in accordance with the provisions of these regulations.
(j) Where the trustees have reasons to believe that the conduct of business of the mutual fund is not in accordance with the regulations and the scheme that shall forth with take such remedial steps as are necessary by them and shall immediately inform the board of the violation and the action taken by them.
(k) Each trustee shall file the details of his holdings in securities on a half-yearly basis with the trust.
(l) The trustees shall be accountable for, and be the custodian of the funds and property of the respective schemes and shall hold the same in trust or the benefit of the unit holders in accordance with these regulations and the provisions of trust deed.
(m) The trustees shall take steps to ensure that the transactions of the mutual fund are in accordance with the provisions of the trust deed.
(n) The trustees shall be responsible for the calculation of any income due to be paid to the mutual fund and also of any income received in the mutual fund for the holders of the units of any scheme in accordance with these regulations and the trust deed.
(o) The trustees shall obtain the consent of the unit holders-
(i) Whenever required to do so by Board in the interest of the unit-holders; or
(ii) Whenever required to do so on the requisition made by three-fourths of the unit holders of any scheme; or
(iii) When the majority of the trustees decide to wind up or prematurely redeem the units; or
(iv) When any change in the fundamental attributes of any scheme or the trust of fees and expenses payable or any other change which would modify the scheme or affect the interest of the unit holders is proposed to be carried out unless the consent of not less than three-fourths of the unit holders is obtained:
Provided that on such change shall be carried out unless three-fourths of the units holders have given their consent and the unit holders who do not give their consent are allowed to redeem their holdings in the scheme.
Explanation:
For the purposes of this clause “fundamental attributes” means the investment object and terms of a scheme.
(p) The trustees shall call for the details of transactions in securities by the key personnel of the asset management company in his own name or on behalf of the asset management company and shall report to the board, as and when required.
(q) The trustees shall quarterly review all transactions carried out between the mutual funds, asset Management Company and its associates.
(r) The trustees shall continuously review the net-worth of the asset management company and in case of any shortfall; ensure that the asset management company makes up the shortfall as per clause (f) or sub-regulation (1) of regulation 21.
(s) The trustees shall periodically review all service contracts such as custody arrangements, transfer agency of the securities and satisfy itself that such contracts are executed in the interest of the unit-holders.
(t) The trustees shall ensure that there is no conflict of interest between the manner of deployment of its net-worth by the asset management company and the interest of the unit holders.
(u) The trustees shall periodically review the investor complaints received and the redressal of the same by the asset management company.
(v) The trustees shall abide by the Code of Conduct as specified in the Fifth Schedule.
(w) The trustees shall furnish to the Board on a half-yearly basis-
(i) A report on the activities of the mutual fund;
(ii) A certificate stating that the trustees have satisfied themselves that there have been no instances of self-dealing or front running by any of the trustees, directors and key-personnel of the asset management company;
(iii) A certificate to the effect that the asset management company has been managing the schemes independently of any other activities and in case any activities of the nature referred to in sub-regulation (2) of regulation 24 have been undertaken by the asset management company and has taken adequate steps to ensure that the interest of the unit holders are protected.
Constitution and Management of Mutual Funds: Regulation # 6.
Application by an Asset Management Company:
(a) The application for the approval of the asset management company shall be made in Form D.
(b) The provision of regulations 5, 6 and 8 shall, so far as may be, apply to the application made under sub-regulation (1) as they apply to the application for registration of a mutual fund.
Constitution and Management of Mutual Funds: Regulation # 7.
Appointment of an Asset Management Company:
(a) The sponsor or, if so authorised by the trust deed, the trustee shall, appoint an asset management company, which has been approved by the board under sub-regulation (2) or regulation 21.
(b) The appointment of an asset management company can be terminated by majority of the trustees or by seventy five per cent of the unit-holders of the scheme.
(c) Any change in the appointment of the asset management company shall be subject to prior approval of the Board and the unit holders.
Constitution and Management of Mutual Funds: Regulation # 8.
Eligibility Criteria for Appointment of Asset Management Company:
(a) For grant of approval of the asset Management Company the applicant has to fulfill the following:
(i) In case the asset management company is an existing asset management company it has a sound track record, general reputation and fairness in transactions;
(ii) The directors of the asset management company are persons having adequate professional experience in finance and financial services related field and not found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws;
(iii) The key-personnel of the asset management company has not been working for any asset management company or mutual fund or any intermediary whose registration has been suspended or cancelled at any time by the Board;
(iv) The board of directors of such asset management company has atleast fifty per cent directors, who are not associate of, o associated in any manner with, the sponsor or any of its subsidiaries or the trustees;
(v) The Chairman of the asset management company is not a trustee of any mutual fund;
(vi) The asset management company has a net-worth of not less than rupees ten crores;
Provided that an asset management company already granted approval under the provision of Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 shall within a period of twelve months from the date of notification of these regulations increase its net-worth to rupees ten crores.
Explanation:
For the purpose of this clause, “net-worth” means the paid up capital and free reserves of the company.
(b) The board may, after considering an application with reference to the matters specified in sub-regulation (1), grant approval to the asset management company.
Constitution and Management of Mutual Funds: Regulation # 9.
Terms and Conditions to be Complied with:
The approval granted under sub-regulation (2) of regulation 21 shall be subset to the following conditions, namely:
(a) Any director of the asset management company shall not hold the office of the director in another asset management company unless such person is an independent director referred to in clause (d) of sub-regulation (1) of regulation 21 and approval of the Board of asset management company of such person is a director, has been obtained;
(b) The asset management company shall forthwith inform the Board of any material change in the information o particulars previously furnished, which have a bearing on the approval granted by it;
(c) No appointment of a director of an asset management company shall be made without prior approval of the trustees;
(d) The asset management company undertakes to comply with these regulations:
(e) Any change in controlling interest of the asset management company shall be only with prior approval of trustees, the Board and the unit holders;
(g) The asset management company shall furnish such information and documents to the trustees as and when required by the trustees.
Constitution and Management of Mutual Funds: Regulation # 10.
Procedure where Approval is not Granted:
Where an application made under regulation 19 for grant of approval does not satisfy the eligibility criteria laid down in regulation 21, the board may reject the application.
Constitution and Management of Mutual Funds: Regulation # 11.
Restrictions on Business Activities of the Asset Management Company:
The asset management company shall -91) not act as a trustee of any mutual fund; (2) not undertake any other business activities except activities in the nature of management and advisory services of offshore funds, pension funds, venture capital funds, management of insurance funds, financial consultancy and exchanges of research on commercial basis if any of such activities are not in conflict with the activities of the mutual fund.
Provided that the asset management company may itself or through its subsidiaries undertake such activities if it satisfies the Board that the key-personnel of the asset management company, the system, back office, bank and securities account are segregated activity wise and there exist systems to prohibit access to inside information of various activities.
Provided further that asset Management Company shall meet capital adequacy requirement, if any, separately for each such activity and obtain separate approval, if necessary under the relevant regulations;
(a) The asset management company shall meet capital adequacy requirement, if any, separately for each such activity and obtain separate approval, if necessary under the relevant regulations;
(b) The asset management company shall not invest in any of its schemes unless full disclosure of its intention to invest has been made in the offer documents:
Provided that an asset management company shall not be entitled to charge any fees on its investment in that scheme.
Constitution and Management of Mutual Funds: Regulation # 12.
Asset Management Company and its Obligations:
(a) The asset management company shall take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provision of the regulations and the trust deed.
(b) The asset management company shall exercise due diligence and care in all its investment decisions as would be exercised by other persons engaged in the same business.
(c) The asset management company shall be responsible for the acts of commissions or omissions by its employees or the persons whose services have been procured by the asset management company.
(d) The asset management company shall submit to the trustee’s quarterly reports of each year on its activities and the compliance with these regulations.
(e) The trustees at the request of the asset management company may terminate the assignment of the asset management company at any time:
Provided that such termination shall become effective only after the trustees have accepted the termination of assignment and communicated their decision in writing to the asset management company.
(f) Notwithstanding anything contained in any contract or agreement or termination, the asset/ management
(g) No asset management company shall deal in securities through any broker associated with the sponsor or a firm which is an associate of a sponsor beyond 5% of the daily gross business of the mutual fund.
(h) An asset management company shall not utilise the 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 securities:
Provided that an asset management company may utilise such services if disclosure to that effect is made to the unit holders and the brokerage or commission paid is also disclosed in the half-yearly annual accounts of the mutual fund.
(i) The asset management company shall file with trustees the details of transactions in securities by the key-personnel of the asset management company in their own name or on behalf of the asset management company and shall also report to the Board, as and when required by the Board.
(j) In case the asset management company enters into any securities transactions with any of its associates a report to that effect shall immediately be sent to the trustees.
(k) In case any company has invested more than 5 per cent of the net asset value of a scheme, the investment made by the scheme or by any other scheme of the same mutual fund in that company or its subsidiaries shall be brought to the notice of the trustees by the asset management company and be disclosed in the half-yearly and annual accounts of the respective schemes with justification for such investment.
(l) The asset management company shall file with the trustees and the board-
(i) Detailed bio-data of all its directors along with their interest in other companies within fifteen days of their appointment; and
(ii) Any change in the interest of directors every six months.
(l) A statement of holdings in securities of the directors of the asset management company shall be filed with the trustees with the dates of acquisition of such securities at the end of each financial year.
(m) The asset management company shall not appoint any person as key-personnel who has been found guilty of any economic offence or involved in violation of securities laws.
(n) The asset management company shall appoint registrars and share transfer agents who are registered with the Board.
Provided if the work relating to the transfer of units is processed in house, the charges at competitive market rates may be debited to the scheme and for rates higher than the competitive market rates, prior approval of the trustees shall be obtained and reasons for charging higher rates shall be disclosed in the annual accounts.
(o) The asset management company shall abide by the Code of Conduct as specified in the Fifth Schedule.
Constitution and Management of Mutual Funds: Regulation # 13.
Appointment of Custodian:
(a) The mutual fund shall appoint a custodian to carry out the custodial services for the schemes of the fund and sent intimation of the same to the Board within fifteen days of the appointment of the custodian.
(b) No custodian in which the sponsor or its associates hold 50% or more the voting rights of the share capital of the custodian or where 50 per cent or more of the directors of the custodian represent the interest of the sponsor or its associates shall act as custodian for a mutual fund constituted by the same sponsor or any of its associate or subsidiary company.
Constitution and Management of Mutual Funds: Regulation # 14.
Agreement with Custodian:
The mutual fund shall enter into a custodian agreement with the custodian, which contain the clauses which are necessary for the efficient and orderly conduct of the affairs of the custodian.
Provided that the agreement, the service contract, terms and appointment of the custodian shall be entered into with prior approval of the trustees.