III. LEGAL STRUCTURE OF MUTUAL FUNDS IN INDIA

Table of Contents

Structure of Mutual Funds in India:

  • Mutual funds in India are established as trusts governed by the Indian Trusts Act, 1882.
  • The trust is created by one or more sponsors who are the main individuals behind the mutual fund business.
  • The investors who invest in the mutual fund schemes are the beneficiaries of the trust.
  • The operations of the trust are governed by a Trust Deed, which is executed between the sponsors and the trustees. SEBI has specific clauses that need to be included in the Trust Deed.
  • The trustees are responsible for protecting the interests of the investors. They are named in the Trust Deed, and procedures for changing trustees are also mentioned.
  • Trustees can be individuals or a trustee company. If individuals are appointed, they form the ‘Board of Trustees.’ A trustee company operates through its Board of Directors.
  • Day-to-day management of the schemes is handled by an Asset Management Company (AMC), appointed by the sponsor or the trustees.
  • The trustees enter into an investment management agreement with the AMC, specifying its responsibilities.
  • The custody of scheme assets, such as securities, gold, silver, real estate assets, etc., is entrusted to a Custodian appointed by the trustees.
  • Investor records and unit holdings can be maintained by the AMC itself or by a Registrar & Transfer Agent (RTA) appointed by the AMC.

Table summarizing the structure of mutual funds in India:

Structure ComponentDescription
Trust TypeMutual funds are established as trusts governed by the Indian Trusts Act, 1882
SponsorsMain individuals behind the mutual fund business
BeneficiariesInvestors who invest in the mutual fund schemes
Trust DeedGoverning document executed between sponsors and trustees
TrusteesResponsible for protecting the interests of investors
Board of TrusteesIf individuals are appointed as trustees, they form the Board of Trustees
Trustee CompanyOperates through a Board of Directors
Asset Management Company (AMC)Handles day-to-day management of the schemes
Investment Management AgreementAgreement between trustees and the AMC, outlining responsibilities
CustodianAppointed by trustees for custody of scheme assets
Registrar & Transfer Agent (RTA)Maintains investor records and unit holdings

Key Constituents of a Mutual Fund:

  1. Sponsors:
  • Sponsors make the application to SEBI for the registration of a mutual fund and invest in the capital of the Asset Management Company (AMC).
  • Eligibility criteria for sponsors include a track record of fairness, integrity, and at least 5 years of experience in financial services.
  • Sponsors should have a positive net worth for the preceding 5 years, which should be higher than their proposed capital contribution to the AMC.
  • They should have profits in 3 out of the last 5 years and a net worth of at least Rs. 100 crore if the profit criterion is not fulfilled.
  • Sponsors should be considered fit and proper for operating a mutual fund.
  1. Board of Trustees:
  • Trustees play a critical role in ensuring regulatory compliance and protecting the interests of unit-holders.
  • Trustees must be persons of ability, integrity, and standing, with no involvement in moral turpitude or economic offenses.
  • No AMC director, officer, or employee can be appointed as a trustee.
  • Prior approval from SEBI is required for trustee appointments.
  • At least 4 trustees should be appointed, and if a trustee company is appointed, it must have at least 4 directors, with two-thirds being independent trustees.
  • Trustees have various responsibilities, including entering into an Investment Management Agreement with the AMC, reviewing service contracts, ensuring compliance with regulations, protecting unitholders’ interests, and filing reports to SEBI.
  1. Mutual Fund Trust:
  • A mutual fund is constituted as a trust, and a trust deed is executed by the sponsor, duly registered under the Indian Registration Act, 1908.
  • The trust deed specifies the trustees named in the instrument.
  1. Asset Management Company (AMC):
  • The AMC handles the day-to-day operations of the mutual fund.
  • The directors and key personnel of the AMC should have professional experience in finance and financial services.
  • They should have a clean record with no involvement in moral turpitude or violations of securities laws.
  • Approval from trustees is required before appointing a person as a director on the AMC’s board.
  • At least 50% of the directors should be independent directors.
  • The AMC must maintain a minimum net worth of Rs. 50 crores on a continuous basis.
  • Changes in AMC control require prior approval from trustees and SEBI.
  1. Custodian:
  • The custodian is responsible for the custody of the fund’s assets and settles transactions on behalf of the mutual fund schemes.
  • All custodians must register with SEBI.
  • The custodian is appointed by the trustees, and a custodial agreement is entered into.
  • Independent custodians ensure the proper holding of securities for the benefit of investors.
  • Custodians track corporate actions such as dividends and bonuses in invested companies.

Organization Structure of Asset Management Company:

FunctionDescription
Compliance FunctionEnsures legal compliance, reports directly to the head of the AMC, works closely with the Trustees
Fund ManagementAnalyzes investment opportunities, manages the fund in line with the scheme’s objective
Operations and Customer Services TeamFront office and back office teams that attend to customer queries, maintain investor records, process transactions, and generate account statements
Sales and Marketing TeamResponsible for branding, advertising, distribution of mutual fund products, relationship management with distributors
Other FunctionsFinance/Accounts, Administration, Human Resources, Information Technology, support various operations and improve customer experiences

Note: The above table provides a summary of the various functions within an Asset Management Company (AMC). The structure may vary across different AMCs, and additional departments or variations may exist based on specific requirements and operations.

Role and Support Functions of Service Providers:

Service ProviderDescription
Fund AccountantCalculates the Net Asset Value (NAV) of the mutual fund schemes by collecting information about the assets and liabilities of each scheme. Can be handled in-house by the AMC or outsourced to a service provider. No SEBI registration required.
Registrars and Transfer Agents (RTAs)Maintain investor records, process purchase and redemption transactions, update investor information, and handle financial transactions. Can be appointed by the AMC or managed in-house. Registration with SEBI is required.
AuditorsResponsible for auditing the accounts of mutual fund schemes and the AMC. Separate auditors appointed for the schemes and the AMC.
DistributorsPlay a key role in selling mutual fund schemes to clients/investors. Can be individuals or institutions such as distribution companies, broking companies, and banks. Need to pass the NISM Certification Examination and register with AMFI.
Collecting Bankers/Payment AggregatorsReceive and process funds from investors for mutual fund purchases and redemptions. Facilitate the collection and payment of funds for the schemes.
KYC Registration AgenciesEnsure investor compliance with KYC (Know Your Customer) requirements under the Prevention of Money Laundering Act. Establish investor identity and address. Registered with SEBI.
Valuation AgenciesProvide fair valuation of non-traded or thinly traded debt securities. Guidelines issued by SEBI.
Credit Rating AgenciesRate debt securities issued by various issuers. Important input for investment decisions. Some mutual fund categories have restrictions based on credit ratings.
Depositories and Depository ParticipantsHold securities in dematerialized or electronic form on behalf of investors. Investors can hold mutual fund units in dematerialized form through a depository participant. Two depositories in India: NSDL and CDSL.
Stock Exchanges and Transaction PlatformsEnable investors to transact in mutual fund units through stock exchanges. Units of close-ended funds and ETFs are listed on stock exchanges. Transaction platforms like MF Utilities India allow investors to aggregate transactions across multiple mutual funds.

Role and Function of AMFI:

FunctionDescription
Define and maintain professional and ethical standardsAMFI aims to define and uphold high professional and ethical standards in all areas of operation within the mutual fund industry.
Recommend and promote best business practices and code of conductAMFI promotes best business practices and a code of conduct for its members and other entities involved in mutual fund and asset management activities.
Interact with SEBIAMFI interacts with the Securities and Exchange Board of India (SEBI) on matters related to the mutual fund industry.
Represent to Government and other bodiesAMFI represents the mutual fund industry’s interests to the Government, Reserve Bank of India, and other relevant bodies.
Nationwide investor awareness programAMFI undertakes initiatives to educate and create awareness among investors about the concept and functioning of mutual funds.
Disseminate information and conduct researchAMFI disseminates information about the mutual fund industry and conducts studies and research in collaboration with other organizations.
Regulate conduct of distributors and protect investor interestsAMFI regulates the conduct of distributors, including disciplinary actions such as the cancellation of ARN (AMFI Registration Number), for violations of the Code of Conduct. It also works to protect the interests of investors.