Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI). Under SEBI MF regulations,1996 a comprehensive set of guidelines for the functioning of a mutual fund is prescribed by SEBI. As per these regulations, must have a three-tiered structure consisting of:
The Sponsor is the main body that either itself or in association with other body corporates establishes the Mutual fund sponsor can be compared to the promoter of a company. The main responsibilities of the sponsor include:
- Setting up a Public Trust under Indian Trust Act, 1882 (the mutual fund) and getting it registered under SEBI
- Creating an Asset Management Company under Companies Act, 1956 (the Investment Manager); and
- Appointing the trustees with the approval of SEBI
SEBI has also laid down certain guidelines regarding the eligibility of a sponsor. Important among them are as under:
4. The sponsor should have a sound track record of carrying out business in the financial services space with fairness and integrity for not less than five years.
5.The Sponsor also needs to have made profits in at least three of the five years including the latest year.
6.The net worth of the sponsor in the immediate last year has to be greater than the capital contribution of the AMC.
7.The sponsor must have at least 40% share in the net worth of the asset management company.
For example, ICICI Bank and Prudential Plc are sponsors for ICICI Mutual Fund and for Birla Sun Life Mutual Fund, Aditya Birla Financial Services and Sun Life (India) AMC Investments Inc. are sponsors.
The fund sponsor with prior approval of SEBI, creates a trust in the favor of the trustees, through a document called trust deed. The trust is managed by the trustees and they are answerable to investors. Either, the sponsor should appoint four trustees or establish a trustee company with at least four independent directors. Additionally, at least two-thirds of the trustees or the directors should be independent not associated with the sponsor in any way.
A trustee of one mutual fund cannot be the trustee of another mutual fund unless he is an independent trustee in both cases and has the approval of both the boards.
The main role of a trustee is to ensure that the interest of the unit holders is protected while making sure that the mutual fund complies with all the regulations of SEBI.
Other responsibilities include:
- Entering into an Investment Management Agreement with the AMC to define its functioning.
- Ensuring that the AMC has all the required process, procedures, and systems in place while making sure that all the key personnel such as the CEO, CIO, the fund managers and the analysts are appointed after through due diligence.
- All the schemes launched by the AMC will have to be approved by the trustees, prior to their launch.
- The trustees will be reviewing all the transactions of the AMC on a quarterly basis while filing reports to SEBI on a half-yearly basis.
Asset Management Company:
The Asset Management Company (AMC) is the Investment Manager of the Trust. The AMC is appointed either by the trustee or the Sponsor after obtaining the approval of SEBI via an agreement called as ‘Investment Management Agreement’. It consists of the Chief Investment Officer, the fund managers, and analysts, who are together responsible for managing the various schemes launched. The compliance officer ensures compliance with all the activities of the AMC in line with the rules and regulations as prescribed by SEBI. The trust pays a small fee to the AMC for managing the schemes.
- Role of AMC: It acts as an operational arm of the mutual fund (trust). It takes care of the day to day operation of the mutual fund and managing the investors’ money as well. In addition, it also solicits these services with other elements like brokers, auditors, bankers, registrars, lawyers, etc. and works in close coordination with them.
- Prohibited functions of AMC: SEBI has imposed certain restrictions on the business activities carried on by the AMC to ensure that an AMC focuses just on its core business and that the activities of AMC’s are not in a conflict of each other. As per SEBI guideline, an AMC shall not undertake any business activity except in the nature of portfolio management services, management, and advisory services to offshore funds etc, provided these activities are not in conflict with the activities of the mutual fund.
Also, it cannot invest in any of its own schemes unless full disclosure of its intention to invest has been made in the offer document and cannot act as a trustee of any mutual fund.
While the above-mentioned play the most important roles in creating and running a fund house, following constituents also play a vital supporting role in the smooth functioning of a mutual fund:
Though the securities are bought and held in the name of trustees, they are not kept with them. The responsibility of safekeeping the securities is the custodian. Securities, which are in material form, are kept in safe custody of a custodian and securities, which are in “De-Materialized” form, are kept with a Depository participant, who acts on the advice of custodian. A custodian ensures that the securities bought, are delivered and transferred in the name of the mutual fund. Also, it makes sure that funds are paid out when securities are bought. It keeps the investment account of the mutual fund and collects the dividends and interest receivables on mutual fund investments and account for the same. It acts on the directions of the AMC and keeps track of various corporate actions like bonus issue, rights issue, and stock split; buyback offers, open offer etc.
It normally charges portfolio fee, transaction fee, and out-of-pocket expenses in accordance with the terms of the Custody Agreement and as per any modification made thereof from time to time.
Registrar and Transfer Agents:
A mutual fund manages the money of many unit-holders across cities and towns of the country. The main function of RTA is investor servicing across all location and keeping the costs lower for the unit-holders. Its functions include- processing investors’ application, recording the details of investors, sending them account statements and other reports on periodical basis, processing dividend payouts, making changes in investor details and keeping investor records updated by adding details of new investors and by removing details of investors who withdraw their funds from the mutual funds.
Accountants & Auditors:
Accountants ensure that separate books of account are maintained for each scheme of the mutual fund and individual annual report is prepared. They are also responsible for calculating the NAV of the schemes based on the information regarding the assets and liabilities of each scheme.
Auditors audit and scrutinize record books of accounts and annual reports of various schemes, taking into account the provisions of the Companies Act. Each AMC hires an independent auditor to analyze the books so as to keep their transparency and integrity intact.
Brokers are registered members of the stock exchange whose services are utilized by AMCs to buy and sells securities on the stock exchanges. Many brokers also provide with research reports on the performance of various companies, sector and market outlook, investment recommendations etc.
Thus, it is evident that the mutual funds in India are a well-regulated entity with clearly defined structure comprising of several components whose roles and responsibilities are properly defined under the preview of SEBI.