Role of Regulators in India
- The regulations in financial markets aim to safeguard consumer interests and ensure regulated development of financial markets for economic growth.
- There are four regulators in India:
- Reserve Bank of India (RBI): Regulates banking system and money markets.
- Securities and Exchange Board of India (SEBI): Regulates securities markets.
- Insurance Regulatory and Development Authority of India (IRDAI): Regulates insurance market.
- Pension Fund Regulatory and Development Authority of India (PFRDA): Regulates pension market.
- These regulators fall under the Ministry of Finance.
Role of Securities and Exchange Board of India (SEBI)
- SEBI regulates securities markets, including mutual funds, depositories, custodians, and registrars and transfer agents (RTAs).
- The Preamble of SEBI describes its functions as protecting investor interests and promoting the development and regulation of the securities market.
- SEBI regulations focus on:
- Disclosures by issuers of securities (companies and mutual funds)
- Efficiency of transactions in securities markets
- Low transaction costs
- Other areas requiring regulations include:
- Deliberate speculation in stock markets
- Insider trading
- Excessive risks taken by mutual funds
- Inadequate collateral by issuers of debt securities
- Unchecked activities can erode investor trust, leading to a lack of financial resources and reduced investment activity in capital markets, hampering economic growth.
|Reserve Bank of India (RBI)||Regulates banking system and money markets|
|Securities and Exchange Board of India (SEBI)||Regulates securities markets|
|Insurance Regulatory and Development Authority of India (IRDAI)||Regulates insurance market|
|Pension Fund Regulatory and Development Authority of India (PFRDA)||Regulates pension market|
Regulatory reforms by SEBI
- SEBI (Securities and Exchange Board of India) has implemented various regulatory reforms in the mutual fund industry to protect investor interests and promote informed investment decisions.
- The reforms have been introduced through regulations, circulars, and guidelines, covering different aspects of mutual fund operations.
- The regulatory provisions can be categorized as follows:
|Regulation Categories||Areas Covered|
|Scheme related documents||Objectives, content, and publication frequency of scheme-related documents|
|Conversion and consolidation of existing schemes||Mergers and consolidation of schemes to protect unitholder interests|
|New products||Approval and regulation of new product categories|
|Risk management system||Guidelines for robust operational risk management and exposure limits|
|Disclosures and reporting norms||Mandates for proper disclosures, reporting formats, and frequency|
|Governance norms||Governance requirements for funds and schemes, including committees and trustees|
|Secondary market activities||Regulations for mutual fund activities in equity, debt, government securities, and derivatives markets|
|Net Asset Value (NAV)||Disclosure, calculation, rounding-off, and time stamping of NAV|
|Valuation||Valuation norms for securities held by mutual fund schemes|
|Loads, fees, and expenses||Imposition and disclosure of limits on loads, fees, and expenses|
|Dividend distribution procedure||Procedures and norms for distribution of dividends|
|Investment by schemes||Guidelines and restrictions on investments by mutual fund schemes|
|Advertisements||Regulations on content, clarity, accuracy, and fair representation of advertisements|
|Investor rights and obligations||Regulations regarding investor rights, account statements, penalties, and facilities|
|Certification and registration of intermediaries||Norms for certification, registration, and continuous professional education of intermediaries|
|Transaction in mutual fund units||Guidelines for transactions, preservation of documents, and KYC norms|
|Categorization of mutual fund schemes||Guidelines for scheme categorization and consolidation, benchmarking, and performance disclosure|
|Segregated Portfolio||Provision for creating segregated portfolios to protect unitholders in credit events and manage liquidity risk|
- SEBI’s Advertising Code for mutual funds ensures accurate, fair, and transparent advertisements, prohibiting false or misleading statements and exploitation of investor knowledge.
- Mutual funds also need to comply with regulations issued by other regulators such as RBI (Reserve Bank of India) and stock exchanges.
Advertisement Guidelines for Mutual Funds
The advertisement guidelines for mutual funds provide clear instructions on disclosing performance-related information, celebrity endorsements, circulation of unauthenticated news, and investors’ rights and obligations. Here are the key points summarized in a table:
|Disclosing performance-related information||– CAGR for different time periods|
|– Point-to-point returns for ease of understanding|
|– Differentiate between regular and direct plans|
|– Disclose if the fund manager has changed|
|– Performance data of other schemes managed by the same fund manager|
|– Disclosure for money market schemes and short-term investments|
|Celebrity endorsements at industry level||– Promote awareness of mutual funds as a financial product category|
|– Limit expenses and obtain prior approval from SEBI|
|Guidelines for circulation of unauthenticated news||– Implement internal code of conduct and controls|
|– Restrict access to blogs, chat forums, and messenger sites|
|– Maintain logs and seek approval from Compliance Officer|
|Investors’ rights and obligations||– Right to beneficial ownership, change distributor, inspect documents, etc.|
|– Right to appoint nominees, pledge units, and seek grievance redressal|
|– Rights in the context of change in fundamental attributes and termination of AMC|
|– Right to unclaimed amounts and disclosure of portfolio details|
|– Treatment of proceeds from illiquid securities|
Due Diligence Process by AMCs for Distributors of Mutual Funds
Asset Management Companies (AMCs) are responsible for regulating the practices of distributors of mutual funds. They conduct due diligence on distributors as per SEBI guidelines. Here are the key points summarized in a table:
|Due Diligence Process by AMCs for Distributors of Mutual Funds||Overview|
|Purpose||Regulate practices of mutual fund distributors|
|Process||Conduct due diligence on distributors|
|Key Steps||– Evaluate distributor’s background and experience|
|– Assess distributor’s infrastructure and systems|
|– Verify distributor’s compliance with regulations|
|– Review distributor’s track record and performance|
|Documentation||– Collect distributor’s registration and compliance documents|
|– Review distributor’s financial statements and audit reports|
|Ongoing Monitoring||– Regularly review distributor’s performance and conduct audits|
|– Take appropriate action for non-compliance or misconduct|
|SEBI Circular||SEBI has issued a circular providing detailed guidelines|
Note: The table summarizes the due diligence process conducted by AMCs for distributors of mutual funds, highlighting the purpose, process, key steps, documentation, ongoing monitoring, and reference to the SEBI circular.
Investor Grievance Redress Mechanism
In case of any issues with the AMC or mutual fund scheme, investors can follow the grievance redress mechanism. Here are the key points summarized in a table:
|Investor Grievance Redress Mechanism||Overview|
|Initial Approach||Contact investor service center for grievance redressal|
|Escalation Process||If the issue remains unresolved, escalate it to senior levels within the AMC|
|SEBI Complaint||If the issue is not resolved even after escalation, file a complaint with SEBI|
|SEBI Complaint Redress System||Lodge, follow up, and track complaints online using the SCORES system|
|Physical Complaint Submission||Investors unfamiliar with SCORES can submit complaints physically at SEBI offices|
|Entities Covered||Listed companies, registrar & transfer agents, brokers, mutual funds, and more|
AMFI Code of Conduct for Intermediaries
The AMFI Code of Conduct for Intermediaries aims to maintain high ethical and professional standards in the mutual fund industry. Here are the key points summarized in a table:
|AMFI Code of Conduct for Intermediaries||Overview|
|Objective||Promote investors’ interest by defining and maintaining ethical standards|
|Code of Ethics||ACE (AMFI Code of Ethics) sets out standards for AMCs in their operations|
|and dealings with investors, intermediaries, and the public|
|SEBI Regulation Compliance||Asset Management Companies and Trustees must abide by the Code of Conduct|
|specified in the Fifth Schedule of SEBI (Mutual Funds) Regulation, 1996|
|AMFI’s Supplemental Code||AMFI Code supplements SEBI’s Code to encourage higher standards for investors|
|AMFI Guidelines for Intermediaries||AGNI (AMFI Guidelines & Norms for Intermediaries) for agents, brokers, etc.|
|selling mutual fund products|
|Breach of Code||If an intermediary breaches the Code, AMFI initiates a sequence of steps|
|– Request explanation from the intermediary within 3 weeks|
|– Issue warning letter for subsequent violations|
|– Cancel registration upon proved second violation|
|Appeal Process||Intermediaries have the right to appeal to AMFI|