CHAPTER 4: LEGAL AND REGULATORY FRAMEWORK

Learning Objectives:

After studying this chapter, you should know about:

• Role of regulators in India

• Role of SEBI in regulating mutual funds
• Due Diligence Process by AMCs for Distributors of Mutual Funds
• SEBI Advertisement Code for mutual funds
• Investor Grievance and Redress Standards
• AMFI Code of Ethics and AMFI Code of conduct for Intermediaries

4.1 Role of Regulators in India

At a broad level, the regulations in financial markets are driven by the need to safeguard
the interests of the consumers of various financial products and services, as well as to
ensure a regulated development of the financial markets, which is essential for the
growth of the economy. Currently, there are four regulators, viz.,

1. Reserve Bank of India (RBI) that regulates the banking system, as well as money
markets;
2. Securities and Exchange Board of India (SEBI) that regulates the securities markets;
3. Insurance Regulatory and Development Authority of India (IRDAI) that regulates the
insurance market; and
4. Pension Fund Regulatory and Development Authority of India (PFRDA) that regulates
the pension market.

These regulators come under the purview of the Ministry of Finance.

4.2 Role of Securities and Exchange Board of India

As mentioned earlier, securities markets in India are regulated by the Securities and
Exchange Board of India (SEBI). It regulates, among other entities, mutual funds,
depositories, custodians, registrars and transfer agents (RTAs) and credit rating agencies
in the country.

The Preamble of the Securities and Exchange Board of India describes the basic
functions of the Securities and Exchange Board of India as "...to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market and for matters connected therewith or incidental thereto".

The regulations cover three important aspects to achieve the above objectives:

• Disclosures by issuers of securities, e.g., companies that issue shares or

debentures, and mutual funds that issue mutual fund units
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 • Efficiency of transactions in the securities markets
• Low transaction costs

Apart from the above, various other areas also warrant regulations, such as:

• Deliberate speculation in stock markets

• Insider trading
• Excessive risks taken by mutual funds
• Inadequate collateral by issuers of debt securities

If such activities are unchecked, the trust of the investors would be lost in the
functioning of the markets, which eventually may lead to drying up of precious financial
resources. This would further dry up the investment activity, or channeling of household
savings in capital markets that the economy needs for growth.

4.2.1 Regulatory reforms by SEBI

SEBI issued the mutual fund regulations in 1996 in the form of SEBI (Mutual Funds)
Regulations, 1996. Since then, there have been many amendments through various
regulations and circulars. In all the cases, the objective has always remained to protect
the interests of the mutual fund investors, and to empower investors to take informed
investment decisions. The regulations have covered many aspects such as investor
services, accounting of NAV, valuation norms, disclosures and investment norms.

The various provisions of the regulations can be broken down into the following
categories, with a brief discussion of what they cover:

Different types of Areas covered

Regulation Categories
1. Scheme related The regulatory provisions cover various aspects related to
documents (Offer various scheme related documents, including the objectives
documents for and content of the respective documents.
schemes) These also cover the frequency of publication of the
respective documents that ensures the relevant information
is up-to-date.
SEBI has mandated that the scheme performance should be
compared with the total return index, as against the price
return index. A Price Return Index considers only the price
movement of its constituents and thus captures only the
capital gains of the constituents. On the other hand, a Total
Returns index considers all dividends/interest payments that
are generated from the basket of components that make up
the index in addition to the capital gains. The cash flows are
presumed to be notionally reinvested on their ex-date into
the basket of underlying components that make up the index.
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 A mutual fund scheme takes into consideration, capital gains
as well as the dividend earnings/interest income of the
instruments in which it has invested while calculating the
return generated by the scheme. TRI is more appropriate as
a benchmark to compare the performance of mutual fund
schemes. Therefore, SEBI stipulated that all Mutual Fund
schemes be benchmarked against Total Return Indices.
1A. Registration These cover various aspects of registration of key players,
viz., asset management company, sponsor, trustees. The
regulations also cover various scenarios including merger of
AMCs, change in management of the same, etc.
2. Conversion and The relevant regulations/guidelines/circulars define the
consolidation of manner in which the scheme mergers or consolidation
existing schemes should take place such that the interests of all unitholders are
protected.
SEBI circular on mutual fund scheme categorization and
rationalization aimed towards conversion and consolidation
of existing schemes and new products. The objective was to
reduce the number of schemes to one per category in the
open-ended arena, so that investors do not get confused.
However, that required consolidation through merger of
certain schemes with other schemes. The SEBI regulations
and circulars detail the procedure of such scheme mergers,
as well as the disclosures of performance of such schemes.
The circular on scheme categorization and rationalization,
mandated that there can be only one scheme per category
within the fund house. Various other provisions such as the
definition of various categories based on market
capitalization were included to bring-in uniformity.22
3. New products These regulations govern the new product categories that
may be approved from time to time. For example, in the
recent past, there have been product launches under new
categories such as Infrastructure Debt Funds and ESGs.

22
For disclosure of the maximum risk the fund manager can take in a scheme, SEBI has classified all debt schemes in
terms of a Potential Risk Class (PRC) matrix consisting of parameters based on maximum interest rate risk (measured
by Macaulay Duration (MD) of the scheme) and maximum credit risk (measured by Credit Risk Value (CRV) of the
scheme). The AMCs will continue to retain the same category of their schemes and they have full flexibility to place
single/multiple schemes in any cell of the PRC. Candidates are advised to read the circular
[Link]
on-interest-rate-risk-and-credit-risk_50440.html which is effective from December 1 2021.
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 4. Risk management Mutual funds are repositories of a large volume of client data.
system Also, huge sums of money are involved in investment
through mutual funds. Therefore, robust operational risk
management systems are warranted and SEBI has issued
detailed guidelines for governance of these aspects.
SEBI regulations and circulars also mandate exposure limits
for investments by mutual fund schemes to ensure that
investors get a diversified portfolio and the schemes remain
true-to-label.
These regulations also cover creation of segregated
portfolios in the event of any credit event in debt mutual fund
schemes.
During the 2018 credit crisis, SEBI laid down the provision for
creating segregated portfolios for protecting the interests of
the unitholders and giving fair treatment to all investors in
case of a credit event and to deal with liquidity risk.23
In the year 2008, when there was a global liquidity crisis, SEBI
brought many reforms such as disallowing premature
redemption in case of Fixed Maturity Plans (FMPs), and
disallowing the phrase “liquid plus” while naming mutual
fund schemes.
5. Disclosures and Mutual funds are among the best investment vehicles and
reporting norms one of the reasons for this is the ‘transparency’ factor. SEBI
has issued many guidelines to ensure proper disclosures and
reporting norms.
These norms mandate the different kinds of disclosures along
with the manner and frequency of reporting. In many cases,
SEBI has provided the format in which the disclosures must
be made such that the investor gets appropriate, and
adequate information in a timely manner to enable the
investor to take an informed investment decision.
6. Governance norms These provisions are very exhaustive and cover many areas
of governance, from 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; benchmarking of scheme’s
performance; systems audit of mutual funds, to the role of
mutual funds in corporate governance.

23Creationof segregated portfolio is a mechanism to separate distressed, illiquid assets from other more liquid assets
in a mutual fund portfolio to deal with a situation arising due to a credit event.

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 7. Secondary market These provisions pertain to the secondary market activities
activities by the mutual funds in all the markets—equity, debt,
government securities, and derivatives.
8. Net Asset Value NAV disclosures, rounding-off of NAV, cut-off time for various
(NAV) commercial transactions, time stamping and uniformity in
calculation of sale and purchase price are the areas covered
through regulatory provisions under this head.
9. Valuation Valuation of various securities in which the mutual fund
scheme has invested.
10. Loads, fees and Regulatory provisions impose limits to various loads, fees,
expenses and expenses. These provisions also cover disclosure of
commission payable to distributors.
11. Dividend distribution The procedure for distribution of dividend, the norms
procedure defining the calculation of distributable surplus, out of which
the dividend can be paid out have been laid out in
regulations, guidelines and circulars.24
12. Investment by Guidelines and circulars for investment restrictions and
schemes investment limits by mutual fund schemes.

13. Advertisements As the name suggests, these regulatory provisions govern

what the advertisements can cover and what they cannot;
the frequency of statutory advertisements; inclusion of
disclaimers and risk factors in various advertisements, etc.
14. Investor rights and These provisions cover various matters pertaining to the
obligations investor rights including dispatch of account statements or
redemption pay-outs, penalty in case of delays, instant
access facility in case of liquid funds, etc.
15. Certification and The requisite certification and registration norms for the
registration of intermediaries are covered here, including the need and
intermediaries process for the certification examination and continuous
professional education (CPE).
16. Transaction in These provisions cover the transactions through stock
mutual fund units exchanges and other similar platforms, the kind of
documents that the AMC/RTA need to preserve, KYC norms,
etc.

24 [Link]
unitholders_65455.html
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 16A. Corporate Debt SEBI regulations for Corporate Debt Market Development
Market Development Fund cover: registration and disclosure requirements,
Fund (CDMDF) investment restrictions (corporate bonds, debentures), risk
management and prudential norms, valuation and
accounting standards, reporting and compliance obligations,
investor eligibility and protection, and fund management and
governance norms.
Ensures transparency, investor protection, and
market development.
16B. Execution Only These regulations cover applicability and scope of EOPs,
Platforms (EOP) categories, eligibility criteria, on-boarding and integration,
rights and obligations of EOPs, transaction and on-boarding
fees, operational risk management, grievance redressal,
handling of conflict of interest, technology related
requirements, and disclosures, among others.
17. Miscellaneous All the matters not covered in the above 16 categories would
get covered under miscellaneous

Advertisements, valuation of securities, calculation of NAV—each of these aspects related to

mutual funds are very tightly regulated. Such an approach ensures that the Indian mutual
fund industry remains one of the most regulated and transparent investment options for
investors.

4.2.2 Mutual Funds Regulations

The applicable guidelines for mutual funds are set out in SEBI (Mutual Funds) Regulations,
1996, as amended from time to time. Some aspects of these regulations are discussed in
various sections of this workbook. An updated and comprehensive list of circulars issued by
SEBI can be found in the Mutual Funds section of SEBI’s website: [Link]. Master
Circulars, which capture the essence of various circulars issued from time to time, may be
downloaded from [Link].25

Wherever applicable, mutual funds need to comply with regulations issued by other
regulators also. For instance, RBI regulates the money market and foreign exchange market
in the country. Therefore, mutual funds need to comply with RBI’s regulations regarding
investment in the money market, investments outside the country, investments from people
other than Indian residents in India, remittances (inward and outward) of foreign currency
etc.

Stock Exchanges are regulated by SEBI. Every stock exchange has its own listing, trading and
margining rules. Mutual Funds need to comply with the rules of the exchanges with which

25 Candidates are advised to read the SEBI master circular on mutual funds issued from time to time along with other
circulars issued by SEBI.
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they choose to have a business relationship i.e., for listing the units of the mutual fund
schemes launched by them.

4.2.3 Investment restrictions and portfolio diversification norms for mutual fund schemes

Mutual fund is a managed investment vehicle. It is a pass-through vehicle—in that the risks
and the returns are passed on to the unitholders. The investors have no control, over the
investment management of the mutual fund. It is in this context that SEBI has laid down
regulations pertaining to investment universe, restrictions and portfolio diversification for
investment by mutual fund schemes. Such regulations intend to control the risks taken by the
mutual fund managers.

The SEBI Regulations provide for various limits to the kind of investments that are possible in
mutual fund schemes. In few cases, there are also aggregate limits for all schemes of a mutual
fund. The regulator’s objective behind setting these limits is to ensure mitigation of risks in
the scheme and protecting the investor’s interests. The restrictions specified apply at the
time of making the investment. Some of the important restrictions specified are:

General Restrictions

• 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 thefund, 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 rights in the asset management company
or the trustee company of any other mutual fund.

Restrictions pertaining to investment in Debt Securities:

• 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
80
 the prior approval of the Board of Trustees and Board of Directors of the asset
management company provided that:
o such limit shall not be applicable for investments in Government Securities,
treasury bills and triparty repo on Government securities or treasury bills.
o 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.
o 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.

• A mutual fund scheme shall not invest in unlisted debt instruments including
commercial papers, except Government Securities and other money market
instruments provided:
o 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 subject to such conditions as may be specified by SEBI from time to
time.

• 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. The Trustees/Asset
Management Companies shall ensure that no funds of a scheme are parked in
short term deposits of a bank that has invested in that scheme. Trustees/AMCs
shall also ensure that the bank in which a scheme has short term deposits do not
invest in the said scheme until the scheme has short term deposits with such bank.

• 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. This has been done to ensure that there is enough liquidity
available with the open-ended debt funds to meet redemption needs. Liquid
assets have been defined as Cash, Government Securities, T-bills and Repo on
Government Securities.

• 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.

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.

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 • 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.

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
o 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 limits mentioned above
are not applicable for investments in case of index funds or sector or
industry-specific scheme pertaining to REIT and InvITs.

4.2.4 SEBI Advertisement Code for Mutual Funds

The important provisions pertaining to SEBI’s Advertising Code for mutual funds (MFs)
are listed below:

• Advertisements shall be accurate, true, fair, clear, complete, unambiguous and

concise.

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

• Advertisements shall not be so designed as likely to be misunderstood or likely

to disguise the significance of any statement. Advertisements shall not contain
statements that directly or by implication or by omission may mislead the
investor.

• Advertisements shall not carry any slogan that is exaggerated or unwarranted or

slogan that is inconsistent with or unrelated to nature and risk and return
profile of the product.

• No celebrities shall form part of the advertisement.

• Advertisements shall not be so framed as to exploit the lack of experience or

knowledge of the investors. Extensive use of technical or legal terminology or
complex language and the inclusion of excessive details which may detract the
investors shouldbe avoided.

• Advertisements shall contain information that is timely and consistent with the
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 disclosures made in the Scheme Information Document, Statement of Additional
Information and the Key Information Memorandum.

• 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.

• Advertisements in vernacular language(s) shall contain the standard warning as

specified in previous clause in the vernacular language.

• In audio-visual media-based advertisements, the standard warning in visual and

accompanying voice-over reiteration shall be audible in a clear and understandable
manner. For example, in standard warning, both the visual and the voice-over
reiteration containing 14 words running for at least 5 seconds may be considered as
clear and understandable. Advertisement issued by mutual funds shall be in terms of
Sixth Schedule of SEBI (Mutual Fund) Regulations, 1996. In addition to the provisions of
the Sixth Schedule, mutual funds shall comply with the following:26

• 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. Further, for pay out of dividends at maturity of closed-ended
scheme(s)/ at completion of the interval period of interval scheme(s), AMC shall
advertise that “the entire distributable surplus at the time of maturity or at the
completion of the interval period shall be distributed.”

• In case of Overnight funds, Liquid funds and Money Market funds, wherein
investors have very short investment horizon, the performance can be
advertised by simple annualisation of yields if a performance figure is available
for at least 7 days, 15 days and 30 days provided it does not reflect an unrealistic
or misleading picture of the performance or future performance of the scheme.

Advertisement Guidelines for Mutual Funds27

A. Disclosing performance-related information of mutual fund schemes:

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

26 [Link]
27Vide SEBI Circular: CIR/IMD/DF/23/2017 dated March 15, 2017 ([Link]
2017/review-of-advertisement-guidelines-for-mutual- funds_34367.html),[Link]
2021/circular-on-mutual funds_49393.html
83
 o 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.28

o 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.

o It should be clearly mentioned whether the disclosed performance is of

regular or direct plan of the Mutual Fund. A footnote should clearly mention
that different plans have different expense structures.

o If the same fund manager has not managed the scheme for the full period
for which the information is being published in the advertisement, the same
should be disclosed in the footnote.

• Where the scheme has been in existence for less than six months past
performance shall not be provided. Further, if the scheme has been in existence
for more than six months but less than one year, then simple annualized growth
rate of the scheme for the past 6 months from the last day of month-end
preceding the date of advertisement shall be provided.

• In the case of money market schemes or cash and liquid schemes, wherein
investors have very short investment horizon, the performance can be
advertised by simple annualization of yields if a performance figure is available
for at least 7 days, 15 days and 30 days. Further, it should not give an unrealistic
or misleading picture about the performance or future performance of the
scheme.

• For the sake of standardization, a similar return in INR and by way of CAGR must
be shown for the following apart from the scheme benchmarks:

Scheme Type Benchmark

Equity scheme Sensex/Nifty
All Debt Schemes having duration /maturity up 1 year T-Bill
to 1year and Arbitrage Funds
All Debt Schemes which are not coveredin 10 years dated GoI security
Point 2
Conservative Hybrid Fund 10 years dated GoI security
Balanced Hybrid Fund / Aggressive Hybrid Fund Sensex or Nifty
/ Dynamic Asset Allocation or Balanced
Advantage / Multi Asset Allocation
Equity Savings 10 years dated GoI security
Retirement Fund / Children's Fund Sensex or Nifty

28To disclose the performance of mutual fund schemes since inception, SEBI has clarified that such disclosure of
performance shall be made since the date of allotment of units in the scheme.
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 Index Funds / ETFs & FoFs (Overseas/ Domestic) Appropriate benchmark
basedon the underlying
asset
allocation as per above

These disclosures shall form part of the Statement of Additional Information

and alladvertisements of Mutual Funds.

• 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. Such performance
data of the other schemes managed by the fund manager shall be provided as
follows:

o Performance of other schemes managed by the fund manager, along with

their respective scheme’s benchmark, shall be provided in terms of CAGR
for a period of 1 year, 3 years and 5 years.

o In case the number of schemes managed by a fund manager is more than six,
then the AMC may disclose the total number of schemes managed by that
fund manager along with the performance data of top 3 and bottom 3
schemes (in addition to the performance data of the scheme for which the
advertisement is being made) managed by that fund manager in all
performance-related advertisements. However, in such cases, AMCs shall
ensure that a true and fair view of the performance of the fund manager is
communicated by providing additional disclosures if required.

o If a mutual fund scheme has not been managed by the same fund manager
for the full period of information being published in the advertisement, the
same should be disclosed in a footnote.

o Further, for the advertisement published in internet-enabled media, mutual

funds shall be permitted to provide an exact website link to such
summarized information of the performance of other schemes managed by
the concerned fund manager.

Celebrity endorsements of Mutual Funds at industry level

• SEBI has permitted celebrity endorsements at the industry level for the purpose
of increasing awareness of Mutual Funds as a financial product category.
However, such celebrity endorsements of Mutual Funds at industry level are
subject to the following conditions:

o 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.
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 o 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.

o 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.

SEBI Guidelines for Circulation of Unauthenticated News

SEBI has issued guidelines to all market intermediaries relating to the circulation of
unauthenticated news through various modes of communication. Following are the
guidelines stipulated by SEBI:

• Proper internal code of conduct and controls should be put in place by market
intermediaries registered with SEBI. Employees/temporary staff/voluntary
workers etc. employed/working in the offices of market intermediaries should
not encourage or circulate rumors or unverified information obtained from client,
industry, any tradeor any other sources without verification.

• Access to Blogs/Chat forums/Messenger sites etc. should either be restricted or

undersupervision or access should not be allowed.

• Logs for any usage of such Blogs/Chat forums/Messenger sites (called by any
nomenclature) have to be treated as records and the same should be maintained
as specified by the respective Regulations which govern the concerned
intermediary.

• Employees should be directed that any market related news received by them
either in their official mail/personal mail/blog or in any other manner, should be
forwarded only after the same has been seen and approved by the concerned
Intermediary’s Compliance Officer. If an employee fails to do so, he/she shall be
deemed to have violated the various provisions contained in SEBI
Act/Rules/Regulations etc. and shallbe liable for action. The Compliance Officer
shall also be held liable for breach of dutyin this regard.

4.2.5 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. These rights
are bifurcated into two parts—AMC related rights and Fund related rights. Some of
these rights have been discussed below.

Right to beneficial ownership

Unit-holders have a proportionate right to the beneficial ownership of the assets of the
86
scheme. 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. The mutual fund/AMC is bound to co-ordinate
with the RTA and Depository to facilitate this.29 Units of all mutual fund schemes held
in the dematerialised form are freely transferable.30

Right to change the distributor

Investors can choose to change their distributor or opt for direct investing. This needs
to be done through a written request by the investor. In such cases, AMCs will need to
comply, without insisting on any kind of ‘No Objection Certificate’ from the existing
distributor.

Right to Inspect documents

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.

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. The investor can also specify the percentage
distribution between the nominees. If no distribution is indicated, then an equal
distribution between the nominees will be presumed.

Right to pledge mutual fund units

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

Right to grievance redressal

There is a formal grievance redressal policy for investors. SEBI has mandated that the
status of complaints redressed should be published by each AMC in their annual report.
The same should be available on the website of the mutual fund and on AMFI’s website.
It should provide the status of the number of complaints received by the AMC, the time
taken to resolve the complaints and the status of pending complaints.

The scheme related documents also have details of the number of complaints received
and their disposal. Pending investor complaints can be a ground for SEBI to refuse
permission to the AMC to launch new schemes.

29In the
case of unit-holding in demat form, the demat statement given by the Depository Participant would be treated
as compliance with the requirement of Statement of Account.
30However, in case of Equity Linked Savings Scheme (ELSS), free transferability of units (whether in demat or physical
form) is curtailed for the statutory minimum holding period.
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Rights of investors in the context of change in Fundamental Attributes

If there is a 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. The Trustees/AMC have to send a
written communication about the change in fundamental attributes of a scheme to all
the unitholders and have to advertise about the change in fundamental attribute in an
English daily newspaper having nationwide circulation and, in a newspaper, published
in the language of the region where the head office of the mutual fund is located.

Rights to terminate the appointment of an AMC

75 percent of unitholders can terminate the appointment of an AMC. Also, 75 percent

of the unitholders (unitholding) can pass a resolution to wind up a scheme. The Trustees
are bound to obtain the consent of the unit-holders:

o Whenever required to do so by SEBI, in the interest of the unit-holders.

o Whenever required to do so by 75 percent of the unit-holders (in practice, Unit-

holding) of the scheme.

o When the majority of the trustees decide to wind up a scheme or prematurely

redeem the units of a close ended scheme.31

If an investor feels that the trustees have not fulfilled their obligations, then he can file
a suit against the trustees for breach of trust. Under the law, a trust is a notional entity,
therefore investors cannot sue the trust but they can file suits against trustees.

Right to unclaimed amounts32

AMC is expected to make a continuous effort to remind the investors through letters to
claim their dues. The Annual Report has to mention the unclaimed amount and the
number of such investors for each scheme. Recovery of unclaimed amounts by the
investors is as follows:

• 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.

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

31Fordetails, refer to the page number 43 of the amended regulation; [Link]

2022/securities-and-exchange-board-of-india-mutual-funds-regulations-1996-last-amended-on-january-25-2022-
_55732.html
32The mutual fund has to deploy unclaimed dividend and redemption amounts in the money market and in a separate
plan of Liquid scheme floated by mutual funds especially for investing the unclaimed amounts. AMC can recover
investment management and advisory fees on management of these unclaimed amounts, at a maximum rate of 0.50
percent per annum and there shall be no exit loads charged on this plan.
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Investors also have rights to various services such as receiving account statements,
statements of portfolios, half-yearly disclosures etc. To enhance transparency, SEBI has
mandated mutual funds to disclose details of debt and money market securities
transacted in their schemes portfolio, including inter-scheme transfers, on a daily basis
with a time lag of 15 days in a prescribed format.33

Proceeds of Illiquid Securities

It is possible that security was treated as wholly or partly non-recoverable at the time
of maturity or winding up of a scheme. The security may subsequently yield a higher
amount to the scheme. Treatment of such excess is as follows:

• If the amounts are substantial and recovered within 2 years, then the amount is
to bepaid to the old investors

• In other cases, the amount is to be transferred to the Investor Education

Fund maintained by each mutual fund.

4.3 Due Diligence Process by AMCs for Distributors of Mutual Funds

Asset Management Companies and the Mutual Funds are regulated by SEBI through the
SEBI (Mutual Funds) Regulations, 1996. The AMCs are vested with the responsibility of
regulating the practices of the distributors. As part of that process, the AMCs are
required to conduct due diligence on their distributors. SEBI has issued a circular
regarding the process for carrying out such an exercise. This has been discussed in
section 6.2 in Chapter 6 in detail.

4.4 Investor Grievance Redress Mechanism

In the event of any issue with the AMC or mutual fund scheme, the investor can first
approach the investor service Centre. If the issue is not redressed, even after taking it
up at senior levels in the AMC, then the investor can write to SEBI with the complaint
details.34 The asset management company shall redress investor grievances promptly
but not later than twenty-one calendar days from the date of receipt of the grievance
and in such manner as may be specified by the Board.

SEBI Complaint Redress System

SEBI Complaint Redress System (SCORES) is a web-based centralized grievance redress

33 Candidates are also advised to see circular on ‘Deployment of unclaimed redemption and dividend amounts
[Link]
instant-access-facility-in-overnight-funds_51513.html (effective from December 01 2021)
34In this context, it should be noted that the principle of caveat emptor (let the buyer beware) applies to mutual fund
investments. So, the unit-holder cannot seek legal protection on the grounds of not being aware, especially when it
comes to the provisions of law, and matters fairly and transparently stated in the Scheme Documents. Unit-holders
have a right to proceed against the AMC or trustees in certain cases. However, a proposed investor i.e., someone who
has not invested in the scheme does not have the same rights.
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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
([Link] This system enables the market intermediaries and listed
companies to receive complaints from investors, redress such complaints and report
redressal. All the activities starting from a lodging of a complaint till its closure by SEBI
is online and works in an automated environment. An investor, who is not familiar with
SCORES or does not have access to SCORES, can lodge complaints in physical form at
any of the offices of SEBI. Such complaints are scanned and then uploaded in SCORES
for processing.35
Entities against which complaints are handled by SEBI include:

• Listed companies/registrar & transfer agents

• Brokers/stock exchanges
• Depository participants/depository
• Mutual funds
• Portfolio Managers
• Other entities (KRAs, Collective investment scheme, Merchant banker, Credit
rating, foreign portfolio investor etc.)

4.5 AMFI Code of Conduct for Intermediaries

4.5.1 AMFI Code of Ethics (ACE)

One of the objectives of the Association of Mutual Funds in India (AMFI) is to promote
the investors’ interest by defining and maintaining high ethical and professional
standards in the mutual fund industry. The AMFI Code of Ethics (ACE) 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. Appendix 1 has the details.

The AMFI Code has been drawn up to supplement that schedule, to encourage
standards higher than those prescribed by the Regulations for the benefit of investors
in the mutual fund industry. Appendix 2 has the details.

35Candidates are advised to read [Link]

mechanism-handling-of-scores-complaints-by-stock-exchanges-and-standard-operating-procedure-for-non-redressal-
of- grievances-by-listed-companies_47325.html
[Link]
13-august-2020-on-investor-grievances-redressal-mechanism-handling-of-scores-complaints-by-stock-exchanges-and-
standard-operati-_47953.html
[Link]
amendments_51305.html
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While the SEBI Code of Conduct lays down broad principles, the AMFI Code of Ethics
(ACE) sets more explicit standards for AMCs and Trustees.

4.5.2 AMFI’s Code of Conduct for Intermediaries of Mutual Funds

AMFI has also framed a set of guidelines and code of conduct for intermediaries (known
as AMFI Guidelines & Norms for Intermediaries (AGNI)), consisting of individual agents,
brokers, distribution houses and banks engaged in selling of mutual fund products. The
Code of Conduct is detailed in Appendix 3.

In the event of breach of the Code of Conduct by an intermediary, the following

sequence of steps is initiated by AMFI:

• Write to the intermediary (enclosing copies of the complaint and other

documentary evidence) and ask for an explanation within 3 weeks.
• In case an 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.
• If there is a proven second violation by the intermediary, the registration will be
cancelled, and intimation sent to all AMCs.

The intermediary has a right of appeal to AMFI.

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Chapter 4-Sample Questions

1. Which of the following regulates mutual funds in India?

a. Securities and Exchange Board of India

b. Association of Mutual Funds in India
c. Asset Management Companies
d. Board of Trustees of mutual funds

2. Mutual funds can buy and sell securities only on delivery basis. State whether this
statement is True or False.

a. True
b. False

3. What minimum percentage of the mutual fund scheme corpus must be invested in
equity and related instruments in the case of Equity Linked Savings Schemes (ELSS)?

a. 65 percent
b. 70 percent
c. 80 percent
d. 100 percent

4. Which of the following statements is ‘True’ with respect to celebrity endorsement

for mutual funds?

a. SEBI has permitted celebrity endorsement at the industry level for the
purpose of increasing the awareness of mutual funds
b. SEBI has permitted celebrity endorsements for the promotion of individual
mutual fund schemes
c. Celebrities can endorse only NFOs
d. Celebrities can endorse only ongoing mutual fund schemes

5. Investors have the right to specify up to ___nominees for their mutual fund
investment folios.

a. Zero
b. One
c. Two
d. Three

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