CHAPTER 4: LEGAL AND REGULATORY FRAMEWORK
Currently there are Four Regulators in the Financial Market which are RBI, SEBI, IRDAI and PFRDA.
Role of SEBI in Regulating Mutual Funds
SEBI issued the mutual fund regulations in 1996 in the form of SEBI (Mutual Funds) Regulations, 1996. The Objective has been to protect the interests of the mutual fund investors, and to empower investors to take informed investment decisions. Some provisions covered by the regulations are:
- Risk Management Systems
- Investment by Scheme
- Disclosure & Reporting Norms
- Secondary Market Activities
- Valuation
Scheme Related Document: The provisions cover the objectives and content of the respective documents, frequency of publication of the that ensures the relevant information is up-to-date.
New products: These regulations govern the new product categories that may be approved from time to time.
Governance norms: These provisions cover fund level governance norms that include formation of audit and valuation committees, role of independent directors and trustees to scheme level governance norms that include minimum number of investors in a scheme.
Net Asset Value (NAV): NAV disclosures, rounding-off of NAV, cut-off time for various commercial transactions and uniformity in calculation of sale and purchase price.
Scheme Performance: SEBI has mandated that the scheme performance should be compared with the total return index, as against the price return Index.
Investment Restriction and Portfolio Diversification for MF Schemes
| SR No. | Types of Restrications | Restriction |
|---|---|---|
| 1. | General Restriction | 1. MF will buy and sell securities on delivery basis.2. MF shall not advance any loans.3. Scheme may invest in other schemes of the same MF or other MF. This will be limited to not more than 5% of the net asset value of the scheme. |
| 2. | Investment in DEBT Securities | 1. A MF scheme shall not invest more than 10% of its NAV in debt instruments comprising money market instruments and non-money market instruments issued by a single issuer2. Open-ended debt funds have to maintain a minimum of 10% of their corpus in liquid assets.3. Parking of funds in Short-term deposits with all SCB shall be limited to 15% of the net assets of the scheme |
| 3. | Investment in Equity | 1. ELSS notification requires that at least 80% of the ELSS funds should be invested in equity and equity-linked securities.2. Scheme shall not invest more than 10% of its NAV in the equity shares and equity related instruments of a company. The limit is not applicable for investments index/sector/industry specific schemes. in |
| 4 | Investment in REITs and invITs | No mutual fund under all its schemes shall own more than 10% of units issued by a single issuer of REIT and InvIT. |
Investors’ Rights & Obligations
Mutual fund investors are entitled to some important rights which are meant to protect the investments and bring more transparency to the mutual fund investors. Some rights are discussed below:
SR No.
Rights
Content
1
Right to beneficial Ownership
The investor can ask for a Unit Certificate for his Unit-holding. Investors also have the option to receive an allotment of mutual fund units of open ended and closed end schemes in their demat account
2
Right to Inspect Documents
Such as the Trust Deed, Investment Management Agreement, Custodial Services Agreement, RTA agreement and Memorandum & Articles of Association of the AMC.
3
Right to Appoint Nominees
The investors can appoint up to 3 nominees, who will be entitled to the 'Units' in the event of the demise of the investors.
4
Right to terminate the Appointment of an AMC
75% of unitholders can terminate the appointment of an AMC They can also pass a resolution to wind up a scheme.
5
Rights of Investors in the Context of Change in Fundamental Attributes.
In case of change in the fundamental attributes of a mutual fund scheme, then the unitholders are provided the option to exit at the prevailing NAV without any exit load. This exit window has to be open for at least 30 days.
SEBI Advertisement Code for Mutual Funds
Advertisement Shall:
- Be accurate, true, fair, clear, complete, unambiguous and concise.
- Not contain statements that are false, misleading, biased or deceptive, based on assumption/projections.
- not be so designed as likely to be misunderstood.
- not carry any slogan that is exaggerated or unwarranted.
- No celebrities shall form part of the advertisement.
- contain information that is timely and consistent with the disclosures made in the SID, SAI and the KIM.
- Be accompanied by a standard warning in legible fonts which states ‘Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
- While advertising pay out of dividends, all advertisements shall disclose the dividends declared or paid in rupees per unit along with the face value of each unit of that scheme and the prevailing NAV at the time of declaration of the dividend.
Investors Rights & Obligations:
| SR No. | Rights |
|---|---|
| 1 | Right to Change the Distributors |
| 2 | Right to Grievance Redressal |
| 3 | Right to Unclaimed Amount |
Disclosing Performance-Related Information of Mutual Funds Schemes:
1. When the mutual fund scheme has been in existence for more than three years:
- Performance advertisement of MF Schemes shall be provided in terms of CAGR for the past 1 year, 3 years, 5 years and since inception.
- It should be clearly mentioned whether the disclosed performance is of regular or direct plan of the Mutual Fund.
2. Point-to-point returns on a standard investment of Rs. 10,000 shall also be shown in addition to CAGR for the scheme to provide ease of understanding to retail investors.
3. Where the scheme has been in existence for less than 6 months, past performance shall not be provided.
4. When the performance of a particular mutual fund scheme is advertised, the advertisement shall also include the performance data of all the other schemes managed by the fund managers of that particular scheme.
5. For the sake of standardization, a similar return in INR and by way of CAGR must be shown for certain scheme types apart for scheme benchmarks.
Celebrity Endorsement of Mutual Fund at Industry Level:
SEBI has Permitted Such Celebrity Endorsement of MF at Industry Level are Subject to the Following Conditions:
- Prior Approval of SEBI Shall be Required for Issuance of any Endorsement of MF Which Features a Celebrity for the Purpose of Increasing Awareness of MF.
- Expenses towards such Celebrity Endorsement Shall BE Limited to the amounts that are Aggregated by MF for Conducting Investor Education and Awareness Initiatives.
SEBI GUIDELINES FOR CIRCULATION OF UNAUTHENTICATED NEWS:
- Proper internal code of conduct and controls should be put in place by market intermediaries registered with SEBI.
- Access to Blogs/Chat forums/Messenger sites etc. should either be restricted or under supervision or access should not be allowed.
- Employees should be directed that any market related news received in their official mail/personal mail/blog should be forwarded only after the same has been approved by the concerned Intermediary’s Compliance Officer.
Investors Grievance Redress Mechanism
Investor can First Approach the Investor Service Centre. If the Issue is not Redressed, even after taking it up at Senior Level in the AMC, then the Investor can Write to SEBI with the Complaint Details.
SEBI Complaint Redress Systems (Scores)
It is a Web- based Centralized grievance redress system of SEBI. Scores Enables Investors to Lodge, follow up on their Complaints and Track the Status of Redressal of Such Complaints online on the Website (http: //scores.gov.in).
Entities Against which Complaints are handled by SEBI include:
- Listed Companies/Registrar & Transfer Agents.
- Brokers/Stock Exchanges.
- Depository Participants/Depository.
- Mutual Funds.
- Portfolio Managers.
- Others Entities (KRAs, collective Investment Scheme, Merchant Banker, Credit Rating, FPI etc.)
CHAPTER 1: Investment Landscape
CHAPTER 2 : Concept And Role Of A Mutual Fund
Chapter 3: Legal Structure Of Mutual Funds In India
Chapter 4: Legal And Regulatory Framework
Chapter 5: Scheme Related Information
Chapter 6: Fund Distribution & Channel Management Practices
Chapter 7: Net Asset Value, Total Expense Ratio & Pricing Of Units
Chapter 10 : Risk, Return And Performance Of Funds
