Regulatory framework of mutual funds

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

4. Regulatory Framework of Mutual Funds

5. 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.

6. 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.

7. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI): I ntroduced 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.

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

9. 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. I ncorporated on 22nd August, 1995. A pex 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

10. 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.

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

12. 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

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.).

22. 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.

23. THANK YOU