In India, collective investment schemes are regulated by the Securities and Exchange Board of India (SEBI). SEBI regulates these schemes through specific regulations, guidelines, and circulars issued by it in this respect.
Collective investment schemes in India can be classified, according to the type of investments to be made:
Under the SEBI (mutual funds) Regulations, 1996 (“SEBI (MF) Regulations” or “the Regulations”), mutual fund means a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets.
A scheme of mutual fund can be set up either as an open-ended scheme, that is, a scheme, which does not specify any duration for redemption, or as a close-ended scheme, that is, a scheme in which the period of maturity of the scheme is specified or as an interval scheme, that is, a scheme in which subscription to the scheme can be made during a specific period (known as specified transaction period) and the repurchase of units is permitted on all business days subject to applicable loads (except for redemption during specified transaction period when no load is charged). No scheme shall provide guaranteed or assured returns except guaranteed by sponsor or asset management company (AMC).
Gold exchange traded fund schemes
Gold exchange traded fund scheme is a mutual fund scheme that invests primarily in gold or gold related instruments. Gold related instrument means an instrument having gold as underlying, as may be specified by SEBI from time to time.
Real estate mutual fund scheme
Real estate mutual fund scheme means a mutual fund scheme that invests directly or indirectly in real estate assets or other permissible assets in accordance with the SEBI (MF) regulations.
Capital protection oriented scheme
Capital protection oriented scheme means a mutual fund scheme which is designated as such and which endeavors to protect the capital invested therein through suitable orientation of its portfolio structure.
The scheme may be launched subject to the following conditions:
The AMC shall not repurchase units of this scheme before the end of the maturity period.
A mutual fund can repurchase units in a close-ended scheme provided the initial issue expenses in respect of the scheme launched after the commencement of the SEBI (mutual funds)(second amendment) Regulations, 2006 have been charged or are proposed to be charged to the mutual fund. The mutual fund shall deduct an amount representing proportionate initial issue expenses or part thereof remaining unamortized, from the repurchase proceeds. The amount recovered will be credited to the unamortized initial issue expenses of the scheme.
The units of a close-ended scheme may be converted into open-ended scheme:
All closed-ended schemes (except equity linked savings schemes) launched after 12 December 2008 should get their units listed as mandatory on stock exchanges.
Index fund scheme
Index fund scheme means a mutual fund scheme that invests in securities in the same proportion as an index of securities.
Fund of fund scheme
Fund of fund scheme means a mutual fund scheme that invests primarily in other schemes of same mutual fund or other mutual funds.
Infrastructure debt schemes
SEBI has amended the Regulations to provide regulatory framework for setting up of Infrastructure Debt Funds (IDFs) by inserting Chapter VI-B to the Regulations.
Salient features of Regulatory Framework for IDF Scheme.
A mutual fund has to be approved by, and be registered with, SEBI. The scheme/fund, the trustee company and the management company are organized and supervised in India principally under the following laws/regulations:
As stated above, the SEBI (MF) Regulations govern the operation of mutual funds. The regulations lay down detailed requirements as to the managers, trustees and custodians of the funds/schemes and as to their functioning.
A mutual fund has to be managed by an AMC. An AMC has to be an Indian company incorporated under the Companies Act, 1956 and approved by SEBI to function as an AMC.
Some of the important regulations governing AMCs are as follows.
The total expenses of the scheme excluding issue or redemption expenses, whether initially borne by the mutual fund or by the asset management company, but including the investment management and advisory fee shall be subject to the following limits.
In the case of a fund of funds scheme, the total expenses of the scheme including the management fees shall be either:
Provided that the sum total of (A), (B) and the weighted average of the total expense ratio of the underlying schemes shall not exceed 2.5 percent of the daily or weekly average net assets (depending upon whether the NAV of the scheme is calculated on daily or weekly basis) of the scheme.
In the case of an index fund scheme or exchange traded fund, the total expenses of the scheme including the investment and advisory fees shall not exceed one and one half percent (1.5 percent) of the weekly average net assets.
In the case of any other scheme:
Provided that in respect of a scheme investing in bonds such recurring expenses shall be lesser by at least 0.25 percent of the daily or weekly average net assets outstanding in each financial year.
Investment advisory fees
An AMC can charge investment and advisory fees to a mutual fund. The fees have to be disclosed in the offer document and are subject to the following limits:
In the case of an index fund scheme the total limit of the investment advisor fees is 0.75 percent of the weekly average net assets.
No entry load shall be charged for direct applications received by the AMC that is, applications received through internet, submitted to AMC or collection center/investor service center that are not routed through any distributor/agent/broker.
The SEBI has mandated no entry load to be charged for the mutual fund schemes launched after 1 August 2009.
On 9 March 2011, The SEBI has has allowed the load balances to be used for marketing and selling expenses including distributor’s/agent’s commissions. The load balance needs to be segregated into two accounts in the books of accounts of the scheme - one to reflect the balance as on 31 July 2009 and the other to reflect accretions since 1 August 2009. Not more than one- third of load balance as on 31 July 2009 shall be used in any financial year including the financial year ending 31 March 2011. The unutilized balances can be carried forward, yet in no financial year the total spending can be more than one third of the load balances on 31 July 2009. The accretions to load balances after 31 July 2009 can be used by mutual funds for marketing and selling expenses including distributor’s/agent’s commissions without any restrictions.
Any person who is a person of ability, integrity and standing can be appointed as the trustee of a mutual fund with the prior approval of SEBI. Even a body corporate can be appointed as a trustee of a mutual fund. Also, there is no restriction on the appointment of non-residents as trustees of a mutual fund. There are no limits on foreign equity holding in a trustee company. The following restrictions apply.
Trustees are primarily required to ensure that the AMC has been managing the mutual fund schemes independently of other activities and has taken steps to ensure that the interests of the investors are not compromised. The Trustee will be required to give an undertaking for the new scheme offer document that the (name of the scheme/fund) approved by them is a new product offered by (name of the MF) and is not a minor modification of the existing scheme/fund/product. This undertaking shall not be applicable to fixed maturity plans and close-end schemes but shall be applicable to close-end schemes with a feature of conversion into open-ended on maturity.
A mutual fund is required to appoint a custodian, registered with SEBI, to carry out the custodial services for the schemes of the fund and intimate SEBI within fifteen days of appointment. In the case of a gold exchange traded fund scheme, the assets of the scheme being gold or gold related instruments may be kept in custody of a bank which is registered as a custodian with SEBI. A custodian cannot act as the custodian of a mutual fund if:
There are no specific regulations for the appointment of custodian, to collective investment schemes.
The moneys collected under any scheme of a mutual fund shall be invested only in securities, money market instruments, privately placed debentures, securitized debt instruments (asset backed securities or mortgaged backed Securities) or gold or gold related instruments.
A mutual fund can also engage in short selling and securities lending and borrowing as per framework specified by the SEBI.
The mutual fund may enter into derivatives transactions on a recognized stock exchange, subject to guidelines specified by SEBI.
The mutual funds can also make investments overseas in:
Money collected under money market scheme of a mutual fund shall be invested only in money market instruments.
Money collected under gold exchange traded fund scheme shall be invested only in gold and gold related instruments.
Following are some of the significant investment restrictions laid down by the SEBI (MF) Regulations.
No funds can be parked by a scheme in a bank which has invested in that scheme.
Further, the tenure of parking of funds in short-term deposits of a scheduled bank should not exceed 91 days. This limit has been raised to 182 days in the case the deposits are placed as margin for trading in derivatives.
No scheme of a mutual fund shall make any investment in any fund of funds scheme. A fund of funds scheme shall be subject to the following investment restrictions.
These restrictions shall not apply to gold exchange traded fund scheme. The funds of a gold exchange traded fund scheme shall be invested only in gold or gold related instruments except to the extent necessary to meet the liquidity requirements for honoring repurchases or redemptions. The mutual fund may invest such funds in short–term deposits of scheduled commercial banks.
A mutual fund cannot borrow except to meet temporary liquidity needs of the mutual fund for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit-holders. The borrowing cannot exceed 20 percent of the net assets of the scheme and the duration of such borrowing cannot exceed six months.
It is mandatory for a mutual fund to publish an offer document before launching a scheme. The scheme should be approved by the trustees and a copy of the offer document is required to be filed with the SEBI. In the case no modifications are suggested by SEBI within 21 days of filing, the AMC may issue the offer document.
The principal supervising authority for mutual funds and collective investment schemes is the Securities and Exchange Board of India, Plot No.C4-A,'G' Block, Bandra Kurla Complex, Bandra (East), Mumbai 400051 India.
Each scheme and individual plan(s) under the schemes of a mutual fund should have a minimum of 20 investors and no single investor should account for more than 25 percent of the corpus of such scheme/plan(s). Generally, all Indian residents are permitted to invest in mutual funds. The following classes of non-residents are also permitted to invest in units of mutual funds:
Umbrella funds are permitted in India. Hence, it is possible that a unitholder’s interest may be restricted to assets of a particular scheme under the mutual fund.
A scheme floated by a mutual fund is permitted to invest in another scheme under the same AMC or that of any other mutual fund, provided that the aggregate inter-scheme investments made by all the schemes of the mutual fund does not exceed 5 percent of the NAV of the mutual fund.
Mutual funds are not allowed to issue units in bearer form and any transfer of units is registered only upon the production of an instrument of transfer together with the relevant unit certificates. Units held in electronic form through a depository are transferable in accordance with SEBI regulations governing depositories.
All closed-ended schemes and interval schemes (except equity linked savings schemes) launched after 12 December 2008 should get their units listed as mandatory on stock exchanges.
Foreign funds are not entitled to register on local stock exchanges.
Every mutual fund is required to pay application fees of INR100,000 and registration fees of INR2.5 million to SEBI.
Annual fees payable by mutual funds are:
|Net assets as at 31 March||Annual fees payable|
|Up to INR0.5 billion||INR0.25 million|
|INR5 billion and above to 10 billion||INR0.35 million|
|INR10 billion and above to 30 billion||INR0.45 million|
|INR30 billion and above to 50 billion||INR0.55 million|
|INR50 billion and above to 100 billion||INR0.65 million|
|Above to INR100 billion||INR0.75 million|
|Filing fees for offer documents||0.002 percent of the amount raised in the new fund offer subject to minimum of INR0.01 million and maximum of INR0.5 million|
The mutual fund shall pay the minimum filing fees while filing the offer document and balance fees at such time as specified by SEBI.
Further, the cost of forming and registering the trust, including professional fees, would vary from case-to-case depending upon the complexity of the trust provisions.
A fund can usually be established in India within a period of 15 to 18 months.
The internet revolution has also affected the mutual funds sector and mutual funds/AMCs have their websites on which information on the mutual fund can be found. Contract notes with digital signature are valid subject to obtaining a certificate from the certifying authority under the Information Technology Act, 2000. Minimum requirements are prescribed for internet based purchase and sale of units by the SEBI.
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