Legal and Regulatory Framework for Mutual Funds in India

Securities and Exchange Board of India (SEBI) is the apex regulator of Indian capital markets. Issuance and trading of capital market instruments and regulation of capital market the intermediaries is under the purview of SEBI. SEBI is the primary regulator of mutual funds in India. SEBI has enacted the SEBI (Mutual Funds) Regulations, 1996, which provides the scope of the regulation of mutual funds in India. It is mandatory that mutual funds should be registered with SEBI. The structure and the formation of mutual funds, appointment of key functionaries and investors, investment restrictions, compliance and penalties are all defined under SEBI Regulations, Mutual funds have to send a seven-year compliance reports to SEBI. SEBI is also empowered to periodically inspect mutual fund organizations to ensure compliance with SEBI regulations. SEBI also regulates other fund constituents such as AMCs, Trustees, Custodians, etc.

Reserve Bank of India capital adequacy(RBI) is the monetary authority of the country and is also the regulator of the banking system. Earlier bank sponsored mutual funds were under the dual regulatory control of RBI and SEBI. Money market mutual funds which invested in short-term instruments were also regulated by the RBI. These provisions are no longer in vogue. SEBI is the regulator of all mutual funds. The present position is that RBI is involved with the Indian mutual fund industry, only to the limited extent of being the regulator of the sponsors of bank-sponsored mutual funds. Specifically if the sponsor has made any financial commitment to the investors of the mutual funds, in the form of guaranteeing assured returns, such guarantees can no longer be made without the prior approval of the RBI. RBI will review the financial condition and capital adequacy of the sponsored bank, before permitting it to make such guarantee.

RBI is the issuer of government securities and also the regulator of money market. Mutual funds invest in these securities and are affected by the RBI stipulations on the structure pricing and trading of these instruments. For example, earlier RBI has decided that non-banks would be phased out of the call money markets, over a period of time. This decision impacts mutual funds ability to invest in call markets. The finance ministry is the supervisor of both the RBI and SEBI. The Ministry of Finance is also the appellate authority under SEBI regulations. Aggrieved parties can also make appeals to the MoF on the SEBI rulings relating to mutual funds.

The Asset Management Company (AMC) and the trustee company may be structured as limited companies, which come under the regulatory purview of the Company Law Board (CLB). The provisions of the Companies Act 1956, are applicable to these company forms of organizations. The CLB is the apex regulatory authority for companies. CLB is also the appellate authority for all issues relating to the Companies Act. Any grievance against the AMC or the trustee company can be addressed to the CLB for redressal. The Registrar of Companies (ROC) oversees the compliance by the AMC and trustee company, with the provisions of the Companies Act. Periodic reports and annual accounts have to be filed by these companies with the ROC. The Department of Company Affairs (DCA) is responsible for the formulation and modification of the laws relating to companies, including the Indian Companies Act. The DCA also has the powers to prosecute directors for non-compliance with provisions of the Act.

If a mutual fund has listed its scheme on stock exchanges, such listings are subject to the listing relation of stock exchanges. Mutual funds have to sign the listing agreement and abide by its provisions, which primarily deal with periodic notifications and disclosure of information that may impact the trading of listed units. Since mutual funds are structured and registered as public trusts, under the Indian Trusts Act they also come under the regulatory preview of the office of the public trustee, which in turn reports to the charity commissioner. The board of trustees and the trustee companies have to comply with the provisions of the Indian Trusts Act.

Credit: Investment Management-KU

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