Legal

&
Regulatory Framework

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 Banks and Securities Insurance
Money Market Market Pension Market Market
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• Pension Fund Regulatory and Development Authority of
India (PFRDAI) regulates the Pension Fund.
• Money Market is regulated by RBI.
• All these regulators comes under the purview of Finance.

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 SEBI as the Regulator

• The Securities and Exchange Board of India (SEBI) is the regulator for the
securities market in India. It was established in 1988 and given statutory powers
on 30 January 1992 through the SEBI Act, 1992.
• Indian mutual funds are supervised and regulated by the SEBI (Mutual Fund)
Regulation 1996.
• SEBI provides various amendments and circulars from time to time like
investment restrictions and portfolio diversification for MF schemes.
• Anyone who is aggrieved by a ruling of SEBI, can file an appeal with the
Securities Appellate Tribunal (SAT).

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SEBI as the Regulator
SEBI regulates stock market, mutual fund, depositories, custodians and registrars and transfer
agents in the country.

Functions performed by SEBI:

1. To protect the interest of investors in securities market

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 RBI & SEBI

• RBI regulate banks in India.

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Regulatory Reforms in MF
• Scheme Related Documents ( Relevant information should updated)
• Conversion and consolidation of existing schemes
• New products ( Approval required before launch)
• Risk Management system ( exposure limit, diversified portfolio )
• Disclosure and reporting norms ( Full Disclosure )
• Governance norms ( Auditors, Trustees, Independent Director,
benchmarking etc. )
• Secondary Market activities ( Specific Provision)
• NAV ( Market price of MF units, cut off timing , time stamping)
• Valuation of securities ( Mark to Market process)
• Loads, Fees and Expenses ( Exit load, Expense ratio)
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Regulatory Reforms in MF
• Dividend Distribution procedure
• Investment by schemes
• Advertisement ( Fair way)
• Investors Rights and Obligations ( Penalty in case of delay in redemption)
• Certification and Registration ( NISM Certification , ARN no.)
• Transaction ( Records maintained by RTA )
• Categorization of MF scheme
• Segregated Portfolio
• Scheme Performance
• Stress Testing Report

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 SEBI Advertisement Code For MF
• Advertisements shall be accurate, true, fair, clear, complete, unambiguous and
concise.
• No misleading, biased or deceptive statement is acceptable in advertisement.
• Extensive use of legal terminology or complex language should be avoided.
• Celebrity Endorsement shall not promote any particular scheme.
• 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.

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 Disclosure in Website Advertisement

• Scheme Type
• Past Performance
• Benchmark
• Fund Manager
• Expense Ratio
• Level of Risk
• AUM
• Launch Date

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Investor’s Rights & Obligations
• Right to beneficial ownership
• Right to change the Distributor
• Right to inspect the Document
• Right to appoint Nominees ( up to 3 )
• Right to pledge MF units
• Right to grievance redressal
• Right to terminate appointment of AMC
• Right to Unclaimed amounts (Within 3 years at prevailing NAV and after 3 years at
3 year end NAV)
• Rights of Investors in context of change in Fundamental Attributes (Exit window
open for 30 days, advertise in English newspaper nation wide and regional paper
where head office is located)
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 Investor Grievance Redress Mechanism
• Investor can make complaint to AMC.
• If issue is not redressed, than investor can approach SEBI, there is a
platform name SCORES.
• SCORES ( SEBI Complaint Redress System) facilitates you to
lodge your complaint online with SEBI and subsequently view its
status.

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Association of Mutual Fund in India(AMFI)

• AMFI is industry association of MF industry.

Objectives of AMFI:
• To recommends best business practices and code of conduct for members.
• AMFI represents the industry to regulators and policy makers in SEBI, RBI
and the government.
• To conducts various investor awareness programme.
• AMFI disseminates information.
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 AMFI Code of Ethics (ACE)

• The AMFI Code of Ethics sets out the standards of good practices to
be followed by the Asset Management Companies in their operations
and in their dealings with investors, intermediaries and the public.
• SEBI (Mutual Funds) Regulation, 1996 requires all Asset
Management Companies and Trustees to abide by the Code of
Conduct as specified in the Fifth Schedule to the Regulation.

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AMFI Guidelines and Norms for Intermediaries (AGNI)

• AMFI has also framed a set of guidelines and code of conduct for
intermediaries (known as AGNI), consisting of individual agents,
brokers, distribution houses and banks engaged in selling of mutual fund
products.
• SEBI has made it mandatory for distributors to follow the code.
• AMFI is authorized by SEBI to seek explanation, issue warnings, or
cancel the registration.

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 AMFI Registration Number (ARN)

• AMFI introduced the process to register the intermediaries who have passed the
certification test as AMFI Registered Mutual Fund Advisors (ARMFA), thus
laying the foundation for an organized industry and allotting a unique code-AMFI
Registration Number (ARN)along with an identity card.
• The AMFI has entrusted Computer Age Management Services Pvt. Ltd. (CAMS)
with the responsibility to process the registration and issue ARN on its behalf..

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Investment restrictions and portfolio diversification
norms for mutual fund schemes
• The Mutual Fund will buy and sell securities on delivery basis. Securities purchased will
be transferred in the name of the Mutual Fund because of the respective scheme.
• The Mutual Fund shall not advance any loans.
• The scheme will not invest in the unlisted or privately placed securities of any associate
or group company of the sponsor.
• Investment in the listed securities of the group companies of the sponsor will be
limited to 25 percent of the net assets, subject to conditions as specified by SEBI.
• The scheme may invest in other schemes of the same Mutual Fund or other Mutual
Funds. This will be limited to 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 the 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. Provided no sponsor of a mutual fund,
its associate or group company including the Asset Management Company of the fund,
through the schemes of the mutual fund or otherwise, individually or collectively,
directly or indirectly, have 10 percent or more of the shareholding or voting 18
• A mutual fund scheme shall not invest more than 10 percent of its total NAV
in debt instruments comprising money market instruments and non-money
market instruments issued by a single issuer which are rated not below
investment grade by a credit rating agency authorized to carry out such
activity under the Act. Such investment limit may be extended to 12 percent
of the NAV of the scheme with the prior approval of the Board of Trustees and
Board of Directors of the asset management company provided that:
• such limit shall not be applicable for investments in Government Securities, treasury
bills and triparty repo on Government securities or treasury bills.
• investments within such limit can be made in mortgaged backed securitized which are
rated not below investment grade by a credit rating agency registered with SEBI.
• such limit shall not be applicable for investments in case of debt exchange traded funds
or such other funds as may be specified by the Board from time to time.
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• A mutual fund scheme shall not invest in unlisted debt instruments
including commercial papers, except Government Securities and
other money market instruments provided:
• the Mutual Fund Schemes may invest in unlisted non-convertible debentures
up to a maximum of 10 percent of the debt portfolio of the scheme
• 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. No management fee will be charged for such investments by
the scheme. The Scheme cannot invest in the short-term deposits of a
bank that has invested in the scheme.

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• Open-ended debt funds have to maintain a minimum of 10 per cent
of their corpus in liquid assets. This is not applicable to liquid and
overnight funds where this limit is already being met.
• NCPS also known as Non-Convertible Preference Shares are to be
treated as debt instruments and hence all the restrictions applicable
to debt investment shall apply to these instruments too.

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Restrictions pertaining to investment in
Equity:
• All investments by a mutual fund scheme in equity shares and equity
related instruments shall only be made provided such securities are
listed or to be listed.
• The ELSS notification requires that at least 80 percent of the ELSS
funds should be invested in equity and equity-linked securities.
• The Scheme shall not invest more than 10 percent of its NAV in the
equity shares and equity related instruments of a company. The limit
is not applicable for investments in index/sector/industry specific
schemes.

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Restrictions pertaining to investment in REITs
and InvITs
• No mutual fund under all its schemes shall own more than 10 percent
of units issued by a single issuer of REIT and InvIT; and
• 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 REIT and InvIT issued by a single issuer. The
limits mentioned above are not applicable for investments in case of
index

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 Test Yourself
Q.1 Which of the following are not Self Regulatory
Organizations:
a. Bombay Stock Exchange c. AMFI
b. SEBI d. RBI
Q.2 A Self Regulatory Organization can regulate:
a. All entities in the market c. Government of India
b. Only its own members d. AMFI
Q.3 The role of AMFI in the mutual funds industry is not to:
a. Promote the interests of the unit holders
b. Set a Code of Ethics
c. Regulate mutual funds
d. Increase public awareness of mutual funds in the country

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Q.4 In case of breach of code of conduct license is cancelled by:
a. SEBI c. AMC
b. AMFI d. Sponsor
Q.5 SEBI regulates __________.
a. Mutual Funds c. Registrar & Transfer Agents
b. Depositories d. All of the above
Q.6 Unit holders can hold their units in demat form.
a. True b. False

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 Answer Chapter 4
1. C
2. B
3. C
4. A
5. D
6. A

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