CHAPTER 4: LEGAL AND REGULATORY ENVIRONMENT

- Mutual Funds are regulated by SEBI, but they need to comply with regulations set by other regulators (like RBI) also.

- Anyone who is aggrieved by a ruling of SEBI, can file an appeal with the Securities Appellate Tribunal (SAT).

- During the 2018 credit crisis, SEBI laid down the provision for creating segregated portfolios for protecting the interests of the unit holders and giving fair treatment to all investors in case of a credit event and to deal with liquidity risk.

- RBI regulates the money market and foreign exchange market in the country.

Anyone who is aggrieved by a ruling of SEBI, can file an appeal with the Securities Appellate Tribunal (SAT).

- The Mutual Fund will buy and sell securities on delivery basis. Securities purchased will be transferred in the name of the Mutual Fund on account of the respective scheme.

- The Mutual Fund shall not advance any loans.

- The scheme will not invest in any unlisted or privately placed securities of any associate or group company of the sponsor.

- Investment in listed securities of the group companies of the sponsor will be limited to 25 percent of the net assets.

- The Scheme may invest in other schemes of the same Mutual Fund or other Mutual Funds. But, not more than 5 percent of the net asset value of the scheme. No fees will be charged on such investments. This does not apply to Fund of Funds.

- The Mutual Fund under all its schemes shall not own more than 10 percent of a company’s paid up capital bearing voting rights

- The Scheme shall not invest more than 10percent of its NAV in investment grade debt instruments issued by a single issuer. This can be extended to 12 percent with the approval of the trustees. The limit shall not apply to Government Securities,Treasury Bills and CBLO.

- Investment in unrated debt securities of a single issuer will be limited to 10 percent of its net assets and the total investments in such securities shall not exceed 25 percent. These limits shall not apply to investments in Government securities, treasury bills and CBLO.

- Parking of funds in Short-term deposits with all scheduled commercial banks shall be limited to 15 percent of the net assets of the scheme. This can be raised to 20 percent with the approval of the trustees.

- All investments by a mutual fund equity scheme in equity shares and equity related instruments shall only be made provided such securities are listed or to be listed.

- No mutual fund under all its schemes shall own more than 10 percent of units issued by a single issuer of REIT and InvIT.

- A mutual fund scheme shall not invest – (i) more than 10 percent of its NAV in the units of REIT and InvIT; and (ii) more than 5 percent of its NAV in the units of REITand InvIT issued by a single issuer.

- The ELSS notification requires that at least 80 percent of ELSS funds should be invested in equity and equity-linked securities.

- The Scheme shall not invest more than 10 percent of its net assets in the equity shares and equity related instruments of one company.

- Not more than 5 percent of the net assets of the scheme shall be invested in unlisted equity shares or equity related instruments in case of open ended scheme and 10% of its NAV in case of close ended scheme.

- Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise.

- Advertisements shall not contain statements which are false, misleading, biased or deceptive, based on assumption/projections and shall not contain any testimonials or any ranking based on any criteria.

- No celebrities shall form part of the advertisement to promote a particular mutual fund or a scheme.

- No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons.

- Advertisements shall 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.’ No addition or deletion of words shall be made to the standard warning.

- The dividends declared or paid shall also be mentioned 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.

- When the mutual fund scheme has been in existence for more than three years:

 Performance advertisement of mutual fund schemes shall be provided in terms of CAGR for the past 1 year, 3 years, 5 years and since inception.

 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.

- Where the scheme has been in existence for less than one year, past performance shall not be provided.

- The celebrity endorsements shall not promote a scheme of a particular Mutual Fund or be used as a branding exercise of a Mutual Fund house/AMC.

- Expenses towards such celebrity endorsements shall be limited to the amounts that are aggregated by Mutual Funds at industry level for the purpose of conducting investor education and awareness initiatives.

- Prior approval of SEBI shall be required for issuance of any endorsement of Mutual Funds as a financial product, which features a celebrity for the purpose of increasing awareness of Mutual Funds.

- Unit-holders have proportionate right to the beneficial ownership of the assets of the scheme.

- Investors can choose tochange their distributor or opt for direct investing.

- Unit-holders have the right to inspect key documents such as the Trust Deed, Investment Management Agreement, Custodial Services Agreement, RTA agreement and Memorandum & Articles of Association of the AMC.

- The investor/s can appoint up to 3 nominees, who will be entitled to the Units in the event of the demise of the investor/s.

- Investors can pledge their mutual fund units.This is normally done to offer security to a financier.

- SEBI has mandated that the status of complaints redressed should be published by each AMC in their annual report. Pending investor complaints can be a ground for SEBI to refuse permission to the AMC to launch new schemes.

- If there is a change in the fundamental attributes of a mutual fund scheme, then the unit-holders are provided the option to exit at the prevailing NAV without any exit load. This exit window has to be open for at least 30days.

- 75 percent of unit holders can terminate the appointment of an AMC.

- The Trustees are bound to obtain consent of the Unit-holders:

1.) Whenever required to do so by SEBI, in the interest of the Unit-holders

2.) Whenever required to do so by 75% of the Unit-holders (in practice, Unit-holding) of the scheme

3.) When the trustees decide to wind-up or prematurely redeem the scheme.

- AMC can recover investment management and advisory fee on management of these unclaimed amounts, at a maximum rate of 0.50% p.a.

- Recovery of such unclaimed amounts by the investors is as follows:

1.) If the investor claims the money within 3 years, then payment is based on prevailing NAV i.e. after adding the income earned on the unclaimed money.

2.) If the investor claims the money after 3 years, then payment is based on the NAV at the end of 3 years.

- Treatment of illiquid securities;

 If the amounts are substantial, and recovered within 2 years,then the amount is to be paid to the old investors.

 In other cases, the amount is to be transferred to the Investor Education Fund maintained by each mutual fund

- SEBI has mandatedAMCs to put in place a due diligence process to regulate distributors who qualify any one of the following criteria:

1.) Multiple point presence (More than 20 locations)

2.) AUM raised over Rs. 100 crore across the industry in the non-institutional category but including high net worth individuals (HNIs)

3.) Commission received of over Rs. 1 Crore p.a. across industry

4.) Commission received of over Rs. 50 Lakhs from a single mutual fund

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

- In the event of breach of the Code of Conduct by an intermediary, the following sequence of steps is provided for:

1.) Write to the intermediary (enclosing copies of the complaint and other documentary evidence) and ask for an explanation within 3 weeks.

2.) In case explanation is not received within 3 weeks, or if the explanation is not satisfactory, AMFI will issue a warning letter indicating that any subsequent violation will result in cancellation of AMFI registration.

3.) If there is a proved second violation by the intermediary, the registration will be cancelled, and intimation sent to allAMCs.

- The intermediary has a right of appeal to AMFI, to revoke the decision.