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NISM_VA_Ch_03_Legal Structure of Mutual Funds in India

Published by Teamlease Edtech Ltd (Amita Chitroda), 2022-08-03 07:04:10

Description: NISM_VA_Ch_03_Legal Structure of Mutual Funds in India


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NISM VA Legal Structure of Mutual Funds in India July 13, 2022

Objectives By the end of the session you will be able to: • Know legal structure of mutual funds • Understand key constituents of a Mutual Fund • Get clear idea on organization structure of Asset Management Company. • Describe the role and support functions of services providers of mutual funds.

Structure of Mutual Funds in India Mutual Fund is established as a trust The schemes invest in securities It raises money through sale of units The units are sold under one or more to public schemes 3

Legal Structure of Mutual Fund Mutual funds are constituted as Trusts, Record of investors governed by Indian and their units is maintained by AMC Trusts Act, 1882. or AMC may appoint MF trust is created a RTA. by one or more Sponsors. Custody of the assets of the schemes is Investor are the with a Custodian. beneficiaries of MF Trustees execute an trust. investment management MF Operations are governed by Trust agreement withAMC. Deed, between the sponsors and the AMC is appointed by Individuals appointed sponsors ortrustees. as trustees are jointly trustees. referred as Board of Day to day The trust acts management of Trustees, whereas a through itstrustees. schemes is handled trustee company acts by an AMC. through Board of Directors. 4

Key Constituents of Mutual Fund 5

Sponsor Promoter of the fund Have to make an initial 01 Appoints trustees, AMC minimum contribution of 08 02 and Custodians with prior Rs. 1,00,000 approval of SEBI Sponsor could be a bank, Must have a 5 year track a financial institution or a 07 Sponsor 03 record in the financial corporate services business Must contribute at least 06 04 Must have positive net 40% of the share holding worth for each of above 5 of theAMC years Must be profit making in 05 6 at least 3 out of 5 FY, including recentFY

Trustee Appointed by sponsors with Role to ensure that MF Role to protect the interests of prior approval ofSEBI. complies with all regulations. the investors of the fund. A person of ability and free AMC, director or officer of Trustee of one mutual fund from any guilty of moral AMC cannot be appointed as cannot be trustee of another turpitude. trustee. mutual fund. 7

Trustee’s Rights and Obligations Enter into investment management agreement with Periodically review service contracts of custodians, RTAs, AMC Auditors, Compliance Officers Right to seek any information All schemes floated by the AMC from AMC have to be approved by Trustees. Ensure due diligence before launch of any scheme Must file half-yearly reports to SEBI. 8

Trustee’s Rights and Obligations…Cont’d Can seek remedial actions from AMC and Review net worth of AMC has power to dismiss the on quarterly basis. AMC. Meeting of trustees to be Periodically review the held at least once in 2 investor complaints and months. their redressal by AMC. Shall not permit a change in fundamental attributes of a scheme, unless a written communication given to each unit holder and allow him to exit without any exit load. 9

Asset Management Company Carries out day to day operations. AMC cannot invest in its own schemes, unless Appointed after prior intention is disclosed in approval of SEBI. offer document. AMC gets fees for fund AMC must have a management. minimum net worth of Rs. 10 50 Crore, at all times. Key personnel and directors NOT have been found guilty of moral turpitude.

Asset Management Company…Cont’d Cannot charge At least 50% of AMC can be AMC is headed Invest seed any fees for its directors to be terminated by a by a Managing capital of 1% of own investment independent amount raised in a scheme. majority of Director, directors. trustees or 75% Executive subject to of Unit holders. Director or maximum of Rs. 50 lacs in growth CEO. options of mutual fund schemes. 11

Officers of Asset Management Company Custodians RTA Payment Aggregators cKYC KRA Auditors Collecting Distributors Fund Bankers Accountants 12

Registrar and Transfer Agency Maintain Offices serve Handling Processing of Update the investor as Investor documentatio purchase and unit capital of records the scheme Service n of the redemption Centres investors transactions (ICSs) Update Update Appointed by Not All RTAs to information in investor AMC compulsory be registered about the to appoint individual status of their RTA, can be with SEBI investor accounts records done in- (folios) house 13

Auditors Scheme auditor needs to be different than Scheme accounts to be AMC auditor maintained independently Scheme auditor appointed by of AMC accounts Trustee Responsible for AMC auditor appointed audit of accounts by AMC 14

Fund Accountants Can be in- house Role of calculating activity or outsourced NAV No need for registration with SEBI 15

Collecting Bankers Investor’s These bank Payment Enable money go into accounts are instruments collection and bank account maintained by need to be of the scheme. banked with payment of collecting funds for the 01 bankers. collecting bankers. scheme. 02 03 04 16

KYC Registration Agencies KYC Unified KYC New investors Registration for Securities have to comply Agencies. Market, with KYC mandated by formalities. SEBI. In-Person NISM certified Verification (IPV) distributors, with valid ARN and KYD by a SEBI completed can registered intermediary carry out IPV. compulsory for all investors. 17

Central KYC 06 Initiative of GOI so as to 14 digit KIN (KYC 01 complete KYC onlyonce. Identification Number) allotted after successful Managed by CERSAI (Central Registry of completion of KYC 02 Securitisation Asset Curbs money 05 laundering by knowing Reconstruction and the people entering the Security Interest of market. India). Reduces burden of 04 03 CERSAI functions as Central producing KYC documents KYC Registry(cKYCR). every time. 18

Payment Aggregators Service providers facilitating online payments. Mutual fund is paid by the aggregator. Enable users to make payments using their bank Allows mutual fund to accounts in a secured and accept credit cards and convenient bank transfers. Manner. 19

Valuation Agencies As per guidelines 2 valuation agencies should To arrive at the fair be used which provides valuation of debt securities valuation matrix. that are non-traded or thinly traded SEBI has issued CRISIL Ltd. & ICRA Ltd has guidelines. been appointed for the valuation purpose by the AMCs will make use of the AMFI. matrix to arrive at fair valuation of the investments. 20

Credit Rating Agencies Debt securities Certain mutual Capital Credit ratings issued by fund products protection agencies like corporate oriented assume an various issuers bond funds, schemes need are rated by credit risk funds to carry a credit important role in credit rating are defined on rating assigned case of debt agencies. the basis of by rating agency. mutual funds. credit rating. 21

Depositories and the Depository Participants There are two depositories A depository is an institution, in India, viz., National which holds the securities in Securities Depository dematerialised or electronic Limited (NSDL), and Central form on behalf of the Depository Services Limited investors. (CDSL). Investors have the option of holding their mutual fund Depository and Depository units in dematerialised form through a depository Participants participant. As an analogy, one can The depositories reach out consider the depositories as to the investors through the the head office of a bank depository participants. and the depository 22 participants akin to the branches of the bank.

Stock Exchanges and Transaction Platforms Internet and mobile based Investors can transact directly in applications have helped to reduce mutual fund units through stock paperwork and transaction related errors, made the process simple to exchanges. execute and increased the comfort level of investors to transact. Under the AMFI, and the initiative of The units of close-ended funds and mutual fund industry Mutual Fund ETFs are compulsorily listed on at Utilities India is another transaction platform for units of mutual funds. least one stock exchange. At the BSE, this segment is known as Units of open-ended funds are also BSE-Star MF and at the NSE, it is available through special segments called NSE Mutual Fund II Platform (NMF-II). on the stock exchanges. 23

Objectives of AMFI 02 03 04 01 To interact with To represent to the To define and To recommend and SEBI and to Government, maintain high promote best professional and represent to SEBI Reserve Bank of ethical standards in practices and code on all matters India and other of conduct to be concerning the all areas of followed by mutual fund bodies on all operation of the members, others industry. matters relating to engaged in the mutual fund activities of MF the mutual fund industry. Industry. 24

Objectives of AMFI…Cont’d 06 07 08 05 To regulate the To protect the To disseminate conduct of interest of information on the distributors including investors/unitholde mutual fund rs. industry and to disciplinary actions To undertake a undertake studies (cancellation of nationwide investor and research directly and/or in ARN) for violations awareness association with of Code of programme to other bodies. Conduct. promote proper understanding of the concept and working of mutual funds. 25

Role of AMFI A major role of AMFI AMFI also issues various AMFI is neither a regulatory involves the registration of circulars recommending best body nor a Self Regulatory mutual fund distributors, by practices for the asset Organisation (SRO). allotting them AMFI management companies, as Registration Number (ARN), well as the distributors. which is mandatory for becoming a mutual fund distributor. 26

Summary: • SEBI has stipulated the legal structure under which mutual funds in India need to be constituted. • Sponsors are the main people behind the mutual fund operation. • The trustees have a critical role in ensuring that the mutual fund complies with all the regulations and protects the interests of the unit-holders. • Day to day operations of a mutual fund is handled by the AMC. • The custodian has custody of the assets of the fund. • Stock exchanges and the transaction platforms play a very important role in enhancing the reach of mutual funds.

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