legal and regulatory framework

1. LEGAL AND REGULATORY
FRAMEWORK

2. 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.,

3. • Reserve Bank of India
• Securities and Exchange Board of India
• Insurance Regulatory and Development
Authority of India
• Pension Fund Regulatory and
Development Authority of India
These regulators come under the purview
of the Ministry of Finance

4. Role of Securities and Exchange Board
of India
• 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".

5. • 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
• Efficiency of transactions in the securities
markets
• Low transaction costs

6. • 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

7. • 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.

8. 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. The various
provisions of the regulations can be broken
down into the following categories :

9. Scheme related documents
The regulatory provisions cover various
aspects related to various scheme related
documents, including the objectives and
content of the respective documents.
These also cover the frequency of
publication of the respective documents
that ensures the relevant information is
up-to-date.

10. Conversion and consolidation of
existing schemes
The relevant
regulations/guidelines/circulars
define the manner in which the
scheme mergers or consolidation
should take place such that the
interests of all unit holders are
protected.

11. 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.

12. Risk management system
• Mutual funds are repositories of a large
volume of client data. Also, huge sums of
money are involved in investment through
mutual funds. 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.

13. 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.

14. Dividend distribution procedure
• The procedure for distribution of dividend, the
norms defining the calculation of distributable
surplus, out of which the dividend can be paid
out have been laid out in regulations,
guidelines and circulars.

15. 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.
• Investment by schemes
Guidelines and circulars for investment restrictions and
investment limits by mutual fund schemes.

16. Categorization of mutual fund
schemes
• 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.

17. Mutual Funds Regulations
• The applicable guidelines for mutual funds are set
out in SEBI (Mutual Funds) Regulations, 1996, as
amended from time to time. 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.

18. Investment restrictions and portfolio diversification norms for
mutual fund schemes
• The Mutual Fund will buy and sell securities on
delivery basis.
• 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.

19. • 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.
• The Mutual Fund under all its schemes shall
not own more than 10 percent of a company’s
paid-up capital bearing voting rights.

20. Restrictions pertaining to investment
in Debt Securities:
• A mutual fund scheme shall not invest more than 10
percent of its 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

21. • A mutual fund scheme shall not invest in unlisted
debt instruments including commercial papers,
except Government Securities and other money
market instruments
• 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.

22. 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.

23. 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 funds or sector or industry-specific
scheme pertaining to REIT and InvITs.

24. SEBI Guidelines for Circulation of
Unauthenticated News
• Proper internal code of conduct and controls
should be put in place by market
intermediaries registered with SEBI.
• Access to Blogs/Chat forums/Messenger sites
etc. should either be restricted or under
supervision or access should not be allowed

25. • 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.

26. 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 or any ranking
based on any criteria.

27. • Advertisements shall not be so designed as
likely to be misunderstood or likely to disguise
the significance of any statement.
• 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.

28. Investors’ Rights & Obligations
• Right to beneficial ownership
• Right to change the distributor
• Right to Inspect documents
• Right to appoint nominees
• Right to pledge mutual fund units
• Right to grievance redressal
• Rights to terminate the appointment of an
AMC

29. 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.

30. 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

31. SEBI Complaint Redress System
• SEBI Complaint Redress System (SCORES) is a web-based
centralized 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 (http://scores.gov.in). 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

32. AMFI Code of Conduct for
Intermediaries
• 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

33. 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 proved 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.

34. THANK YOU