LEGAL AND REGULATORY FRAMEWORK
NISM V-A
LEGAL AND
REGULATORY
FRAMEWORK
Weightage – 10 Marks
The regulations in financial markets are driven by the need to safeguard the interests of the consumers of various
LEGAL AND REGULATORY FRAMEWORK
financial products and services, as well as to ensure a regulated development of the financial markets.
Currently, there are 4 regulators:
Reserve Bank of India (RBI) which regulates the banking system, as well as money markets
Securities and Exchange Board of India (SEBI) that regulates the securities markets
Insurance Regulatory and Development Authority of India (IRDAI) that regulates the insurance market
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.
LEGAL AND REGULATORY FRAMEWORK
ROLE OF SECURITIES AND
EXCHANGE BOARD OF INDIA
LEGAL AND REGULATORY FRAMEWORK
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".
SEBI issued the mutual fund regulations in 1996 in the form of SEBI (Mutual Funds) Regulations, 1996.
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INVESTMENT RESTRICTIONS &
PORTFOLIO DIVERSICATION NORMS FOR
MUTUAL FUND SCHEMES
LEGAL AND REGULATORY FRAMEWORK
The SEBI Regulations provide for various limits to the kind of investments that are possible in mutual fund
schemes.
General Restrictions
The Mutual Fund will buy and sell securities on a delivery basis.
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% of the
net assets.
The Mutual Fund under all its schemes shall not own more than 10% of a company’s paid-up capital
bearing voting rights.
LEGAL AND REGULATORY FRAMEWORK
SEBI ADVERTISEMENT CODE FOR
MUTUAL FUNDS
LEGAL AND REGULATORY FRAMEWORK
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 assumptions/projections and shall not contain any testimonials or any
ranking based on any criteria.
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 advertisement shall directly or indirectly discredit other advertisements or make unfair
comparisons.
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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.
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.
LEGAL AND REGULATORY FRAMEWORK
ADVERTISEMENT GUIDELINES FOR
MUTUAL FUNDS
A. DISCLOSING PERFORMANCE-
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RELATED INFORMATION OF MUTUAL
FUND SCHEMES
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.
Where the scheme has been in existence for less than six months past performance shall not be provided.
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.
B. CELEBRITY ENDORSEMENTS
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OF MUTUAL FUNDS AT
INDUSTRY LEVEL
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.
C. SEBI GUIDELINES FOR CIRCULATION
OF UNAUTHENTICATED NEWS
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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 rumours or unverified information obtained from client, industry, any trade or any other
sources without verification.
Access to Blogs/Chat forums/Messenger sites etc. should either be restricted or under supervision 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.
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INVESTOR’S RIGHTS
AND OBLIGATIONS
RIGHT TO BENEFICIAL OWNERSHIP
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• Unit-holders have a proportionate right to the beneficial ownership of the assets of the scheme.
• The investor can ask for a Unit Certificate for his Unit-holding.
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.
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 and 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
• Mutual Funds can be pledged as collateral for loans, allowing access to funds without liquidating investments.
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• The loan amount typically ranges from 50-80% of the market value.
• The pledged units cannot be sold or redeemed.
RIGHT TO GRIEVANCE REDRESSAL
• 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.
• Pending investor complaints can be a ground for SEBI to refuse permission to the AMC to launch new schemes.
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 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 30 days.
RIGHTS TO TERMINATE THE APPOINTMENT OF AN AMC
• 75 percent of unit holders can terminate the appointment of an AMC.
• Also, 75 percent of the unit holders (unit holding) can pass a resolution to wind up a scheme.
LEGAL AND REGULATORY FRAMEWORK
RIGHT TO UNCLAIMED AMOUNTS
• 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.
SEBI COMPLAINT REDRESS SYSTEM
LEGAL AND REGULATORY FRAMEWORK
SEBI Complaint Redress System (SCORES) is a web-based centralised grievance redress 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]
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.
A written reply to the investor needs to be given by the concerned entity.
The entity is required to submit an action taken report within a reasonable period, not later than 30 days
AMFI CODE OF CONDUCT FOR
INTERMEDIARIES
LEGAL AND REGULATORY FRAMEWORK
The AMFI Code of Ethics (ACE) sets out the standards of good practices to be followed by the AMC in their operations and
dealings with investors, intermediaries and the public.
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 mutual fund
products.
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.
CONCEPT AND
LEGAL AND ROLE OF A MUTUAL
REGULATORY FUND
FRAMEWORK
LET’S PRACTICE
LEGAL AND REGULATORY FRAMEWORK
Question 1: Which of the following regulates mutual funds in India
A. Securities and Exchange B. Association of Mutual Funds
Board of India in India
D. Board of Trustees of
C. Asset Management Company
mutual funds
LEGAL AND REGULATORY FRAMEWORK
Question 2: Mutual funds can buy and sell securities only on delivery
basis.
State whether this statement is True or False.
A. True B. False
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Question 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
LEGAL AND REGULATORY FRAMEWORK
Question 4: Which of the following statements is ‘True’ with respect to celebrity
endorsement for mutual funds?
A. SEBI has permitted celebrity endorsement at B. SEBI has permitted celebrity endorsements
the industry level for the purpose of increasing for the promotion of individual mutual fund
the awareness of mutual funds schemes
C. Celebrities can endorse only NFOs D. Celebrities can endorse only ongoing mutual
fund schemes
LEGAL AND REGULATORY FRAMEWORK
Question 5: Investors have the right to specify up to ___ nominees for their
mutual fund investment folios.
A. Zero B. One
C. Two D. Three
LEGAL AND REGULATORY FRAMEWORK
Question 6: AGNI (AMFI Guidelines & Norms for Intermediaries) is _________
A. Code of Conduct for
B. Rules and Regulations
intermediaries
C. Terms and Conditions D. None of the above
LEGAL AND REGULATORY FRAMEWORK
Question 7: The Mutual Fund Investor can pledge the units.
A. True B. False
LEGAL AND REGULATORY FRAMEWORK
Question 8: AMFI instructs ___________ on all issues related to Mutual Fund
Industry
A. Reserve Bank of India B. Securities & Exchange Board of India
C. Government D. All of the above
LEGAL AND REGULATORY FRAMEWORK
Question 9: Annual report of Asset Management Company (AMC) should
necessarily mention the unclaimed amount & the number of
such investors for each scheme.
A. True B. False
LEGAL AND REGULATORY FRAMEWORK
Question 10: Code of ethics for employees of Asset Management Company
(AMC) is described by _____
A. Association of Mutual Funds in B. AMFI and Securities Board of
India (AMFI) India (SEBI)
C. Internal Audit Team D. Trustee
LEGAL AND REGULATORY FRAMEWORK
Question 11: Which of the following statements is ‘False’ with respect to SEBI’s
Advertising Code for mutual funds?
B. Advertisements can carry any slogan that is exaggerated or
A. No celebrities shall form part of the advertisement unwarranted or slogan that is inconsistent with or unrelated to the
nature and risk and return profile of the product.
C. No advertisement shall directly or indirectly discredit D. Both (a) and (b)
other advertisements or make unfair comparisons.
LEGAL AND REGULATORY FRAMEWORK
THANK YOU