CHAPTER 3: LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA

- SEBI has stipulated the legal structure under which mutual funds in India need to be constituted.

- Mutual funds are constituted in India asTrusts.

- Mutual Funds are governed by the IndianT rusts Act, 1882

- The mutual fund trust is created by one or more Sponsors, who are the main persons behind the mutual fund business.

- Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the investors who invest in various schemes of the mutual fund.

- The Trust acts through its trustees.

- Day to day management of the schemes is handled by an Asset Management Company (AMC) who are appointed by the sponsor orthe Trustees.

- The trustees execute an “investment management agreement” with the AMC, setting out its responsibilities.

- Although the AMC manages the schemes, custody of the assets of the scheme (securities, gold, gold-related instruments & real estate assets) is with a Custodian, who is appointed by the Trustees.

- Investors invest in various schemes of the mutual fund. The record of investors and their unit-holding may be maintained by the AMC itself, or it can appoint a Registrar &TransferAgent (RTA).

- The application to SEBI for registration of a mutual fund is made by the sponsor/s.

- The sponsor should have a sound track record and reputation of fairness and integrity in all business transactions. The requirements are:

 Sponsor should be carrying on business in financial services for not less than 5 years

 Sponsor should have positive net worth (share capital plus reserves minus accumulated losses) in all the immediately preceding 5 years

 Net worth in the immediately preceding year should bemore than the amount that the sponsor contributes to the capital of theAMC

 The sponsor should have earned profits, after providingfor depreciation and interest and tax, in three of the previous five years, including the latest year

- The sponsor needs tocontribute a minimum 40 percent of the net worth oftheAMC.

- Sponsors have to contribute a minimum of Rs. 50,00,000 or 1% of the corpus raised in the NFO, whichever is lower as an initial contribution fund

- Aperson who is guilty of moral turpitude cannot be appointed as a 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 ofa 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.

- Prior approval of SEBI needs to be taken, before a person is appointed as aTrustee.

- 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.

- At least two-thirds of the trustees / directors on the Board of the trustee company would need to be independent trustees

- The trustees shall ensure that the interests of the unit holders are not compromised in any of the AMC’s dealings with brokers, other associates and even unit holders of other schemes.

- Day to day operations of asset management is handled bytheAMC.

- Prior approval of the trustees is required, before a person is appointed as a director on the board of theAMC.

- At least 50 percent of the directors should be independent directors i.e. not associates of or associated with the sponsor orany of its subsidiaries or the trustees.

- TheAMC needs to have a minimum net worth ofRs. 50 crore.

- AMC has five main functions:

1.) Compliance

2.) Fund management (Under Fund Management, there are analysts, fund managers, and dealers)

3.) Operations and customer services team. (Under Operations and customer services team there are R&T agents, custody, fund accountant, cash management)

4.) Sales and marketing (Under which there is distribution)

5.) Other functions (It includes, Finance and administration, HRD, technology)

- AMCs are required to invest seed capital of 1 percent of the amount raised subject to a maximum of Rs. 50 lakh in all growth options of the mutual fund schemes throughout the lifetime of the scheme.

- The custodian has custody of the assets of the fund.

- The Custodian is appointed by the trustees

- Acustodial agreement is signed between the trustees and the custodian.

- An independent custodian ensures that the securities are indeed held in the scheme for the benefit of investors.

- The custodian also tracks corporate actions such as dividends, bonus and rights in companies where the fund has invested.

- The RTAs maintains investor records. Eg are CAMS and KARVY.

- The functions of the RTAs includes processing of purchase and redemption transactions of the investor

- The appointment of RTA is done by the AMC.

- It is not compulsory to appoint an RTA.

- Auditors are responsible for the audit of accounts.

- The auditor appointed to audit the scheme accounts needs to be different from the auditor of the AMC.

- The scheme auditor is appointed by the Trustees, the AMC auditor is appointed by the AMC.

- The fund accountant performs the role of calculating the NAV, by collecting information about the assets and liabilities of each scheme.

- Distributors have a key role in selling suitable types of units to their clients.

- The investors’ money go into the bank account of the scheme in which they have invested in.

- To do away with multiple KYC formalities with various intermediaries, SEBI has mandated a unified KYC for the securities market through KYC RegistrationAgencies registered with SEBI.

- The aim of Central KYC (cKYC) is to have a structure in place which allows investors to complete their KYC only once before interacting with various entities across the financial sector.

- Payment Aggregators such as Tech Process, Bill Desk etc. are service providers that facilitate payment processing in the online market place.

- 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.

- AMCs in India are members of AMFI. It is not an SRO. Examples of SRO: Institute of Chartered Accountants of India (ICAI), NSE, BSE

- AMFI is formed to define and maintain high professional and ethical standards. It recommends and promotes best business practices and code of conduct.

- AMFI has framed a set of guidelines and code of conduct for intermediaries, consisting of individual agents, brokers, distribution houses and banks.