Legal Structure of Mutual Fund in

India

1
Legal Structure of Mutual Fund in India

Structure of Mutual Fund is three tier structure based on SEBI (Mutual funds)
Regulations, 1996.

• Sponsor
• Trust / Board of Trustees
• Asset Management Company
• Custodian

2
Sponsor

• Sponsor are promoter of Mutual Fund.

• Sponsor apply to SEBI for registration of Mutual Fund.
• Sponsor identify and make a trust appoint the trustees.
• It is the duty of sponsors to submit to SEBI the Trust deed (agreement between sponsor and
trustee).
• Sponsor can be Indian, Foreign Sponsor and Joint Venture.
• E.g State Bank of India, Franklin Templeton, Goldman Sachs Mutual fund, ICICI Prudential
and Birla sun life mutual fund.

3
Following are the prerequisites of Sponsors:

• At least 5 years in Financial Services business.

• ensure that the net worth (share capital plus reserves minus accumulated losses) is
positive in all the immediately preceding 5 years; and
• The positive liquid networth should be more than the proposed capital
contribution of the sponsor in the asset management company and ensure that
in case of change in control of the existing asset management company due to
acquisition of shares, the positive liquid net worth of the sponsor or funds tied
up by the sponsor is to the extent of aggregate par value or market value of the
shares proposed to be acquired, whichever is higher; and
• Should have net profit after providing for depreciation, interest and tax in each
of the immediately preceding five years; and have average net annual profits
after depreciation, interest and tax during the immediately preceding five years
of at least rupees 10 crore.
4
 Trust
• A mutual fund is to be constituted as a Trust under Indian Trust Act 1882 and trustees
are to look after the trust.
• Trustees ensuring that the mutual fund complies with all the regulations, protects the
interests of the unit-holders.
• Trustees are appointed by the Sponsors with SEBI approval.
• Agreement between sponsor and trustee is Trust deed.
• To ensure fair dealings minimum 4 trustees & 2/3 of trustees are independent trustees
(not associated with sponsor).
• SEBI approval required before a person is appointed as trustee.
• Investors are the beneficiaries of MF trust.

5
 Trustee

• Person convicted of any economic/financial offence or violation of any securities

laws cannot appoint as trustee.
• A person is appointed as a trustee of certain mutual fund shall not be eligible to be
appointed as a trustee of other Mutual fund.
• No director, officer, employee of an AMC appointed as trustee of a Mutual fund.

6
Asset Management Company

• AMC is appointed by Trustees, with SEBI approval.

• AMC manage the day to day operations of the mutual fund.
• Agreement between AMC and Trustees is known as Investment deed.
• Trustee approval is required before a person is appointed as director. At least 50% are
independent director.
• AMC need to have a minimum Net worth of Rs 50 crore
• AMC cant invest in its own schemes.
• The appointment of AMC can be terminated by a majority of the trustees, or by 75% of the unit
holders.
• Any change in the AMC is subject to prior approval of SEBI and the unit holders.

7
Custodian

• The custodian is responsible for the safe keeping of all the securities. The
custodian is liable for keeping the investment account of the mutual fund.
• All custodians need to SEBI registered and appointed by Trustee.
• A Custodial agreement is made with Trustee and Custodian.
• The custodian also tracks corporate action such as dividends, bonus and
rights in companies where the fund has invested.
• Custodian can be a bank or any company.
• Custodian is appointed by Trust.
8
 Other Heads in AMC
Some of the other business heads are:
Chief Investment Officer: CIO is responsible for overall investments of the fund. Fund
manager generally report to the CIO.
Security analysts: They support the fund managers through their research inputs. They
take care of stock picking activities and do fundamental & technical analysis. They watch
Indian and global economic scenario.
Securities Dealers/Brokers: They help in putting the transactions (purchase and sale of
securities) through in the market.
Chief Marketing Officer: CMO is responsible for marketing schemes of mutual funds.
Direct sales team focus on large investors and channel manager manage the distributors.
Chief Operations Officer handles all Operational issues.
Compliance Officers needs to ensure all the legal compliances, sign a due Diligence
certificate in offer document of new issues. Compliance officers reports to the head of the
AMC and work closely with trustees on compliance and regulatory basis. 9
Organisation Structure of Asset Management Company

10
Other Service Provider

• RTA
• Auditors
• Fund Accountants
• Distributors
• Collecting Bankers/Payment Aggregator
• KYC Registration Agencies
• Valuation agencies
• Depositories and the Depository Participants
• Stock exchanges and the transaction platforms 11
 Registrar and Transfer Agents
• A Registrar & Transfer (R&T) agent acts as a third-party on behalf of a fund house.
• The R&T agent has a wide network of branches across the country to help investors execute their
transactions. Through their branch network, investors can also get forms, submit them and even get
their transaction statements. The agent acts as a single-window system for investors.
• An R&T agent also helps investors with information and details on new fund offers.
• Their offices are across country serve as Investor Service Centres (ISCs)
• Appointed by AMC.
• It is not compulsory to appoint RTA.
• All RTA need to registered with SEBI.
• Maintain investors records.
• For e.g Karvy and Computer Age Management Service (CAMS)

12
 Auditor

• Auditor is responsible for the Audit of accounts.

• Accounts of the schemes need to be maintained independent of the

accounts of the AMC.

There are two types of auditor :

Scheme Auditor: It is appointed by Trustee.
AMC Auditor: It is appointed by AMC.

13
 Fund Accountant

• The role of fund accountant is calculating and disclosure of NAV by

collecting information about the assets and liabilities of each scheme.
• AMC can either handle this activity in house or engage a service
provider.
• There is no need for a registration with SEBI to perform this function.

14
 Distributor

• Distributor have a key role in selling of mutual fund units to

their clients.
• Distributor can be individuals or institutions such as
distribution companies, broking companies and banks.
• Distributor need to pass the prescribed certification test and
register with AMFI.

15
Collecting Bankers
• The money of the investors goes into the bank account of the scheme
they have invested in and these bank accounts are mainly maintained
with the collection bankers who are basically chosen by the AMC.

• Enable collection and payment of funds for the schemes.

16
KYC Registration Agencies (KRA)

• Any new investor, Joint holders, Power of Attorney holders, Donors and
Guardian (in case of minors) have to comply with the KYC formalities.
• Thus KYC registration is being centralized through KYC Registration
Agencies (KRAs) registered with SEBI.
• With this each investor has to undergo KYC process only once in the
securities market and the details would be shared with other intermediaries
by the KRAs.
• According to guidelines of SEBI In- Person Verification is compulsory for
investors.

17
Only the following entities have the authorization to carry out IPV.
a. KYC registration agency (KRA)
b. AMC
c. Mutual fund agent/distributor
d. Transfer agent like CAMS or Karvy

18
 Valuation agencies

SEBI has issued guidelines for the purpose of arriving at fair valuation
of debt securities. AMFI has appointed CRISIL Ltd. and ICRA Ltd. for
the purpose.

Depositories and the Depository Participants

A depository is an institution, which holds the securities in
dematerialised or electronic form on behalf of the investors. Initially
depositories held only equity shares on behalf of the investors, later
other securities including mutual funds were also dematerialised.
There are two depositories in India, viz., National Securities Depository
Limited (NSDL), and Central Depository Services Limited (CDSL).
19
Stock exchanges and the transaction
platforms
• Investors can now transact in mutual fund units through the stock exchanges. The
units of close-ended funds and ETFs are compulsorily listed on at least one stock
exchange.

• At the BSE Limited, this segment is known as BSE-Star MF; while at the
National Stock Exchange of India (NSE), it is called NMF-II.

• MF Utilities India is another transaction platform for units of mutual funds.

Investors can perform various transactions such as purchase, sale, switch, etc.

20
Role and Function of AMFI

• Association of Mutual Funds in India (AMFI) is the association of all the registered
Asset Management Companies. The objectives of AMFI are: To define and
maintain high professional and ethical standards in all areas of operation of the
mutual fund industry.
• To recommend and promote best business practices and code of conduct to be
followed by members and others engaged in the activities of mutual fund and
asset management including agencies connected or involved in the field of capital
markets and financial services.
• To interact with SEBI and to represent to SEBI on all matters concerning the
mutual fund industry.
• To represent to the Government, Reserve Bank of India and other bodies on all
matters relating to the mutual fund Industry.
21
Role and Function of AMFI

To undertake a nationwide investor awareness programme to promote proper

understanding of the concept and working of mutual funds.
• To disseminate information on the mutual fund industry and to undertake
studies and research directly and/or in association with other bodies.
• To regulate the conduct of distributors including disciplinary actions
(cancellation of ARN) for violations of Code of Conduct.
• To protect the interest of investors/unitholders.

22
 ICICI Prudential Mutual Fund
Sponsor: The Fund is sponsored by Prudential and ICICI Bank Ltd.
Trustee: ICICI Prudential Trust Limited
Asset Management Company (AMC) : ICICI Prudential Asset Management Company Limited
Service providers-
Custodian: HDFC Bank acts as a custodian for all schemes, except certain schemes for which
HSBC has been appointed as the Custodian, as given below:
Sr. No Name of the Schemes
1 ICICI Prudential Income Opportunities Fund
2 ICICI Prudential Index Fund
3 ICICI Prudential Indo Asia Equity Fund
4 ICICI Prudential Interval Funds
Deutsche Bank A.G has been appointed as the custodian of Portfolio Deposit (i.e. Physical Gold)
for ICICI Prudential Gold Exchange Traded Fund.
Citibank acts as the global custodian to ICICI Prudential US Bluechip Equity Fund.
23
Registrar & Transfer Agent: Computer Age Management Services
Private Limited appointed as RTA.
Fund Accountant: Fund accounting is currently handled in-house by
the AMC. Fund Accounting for ICICI Prudential US Blue chip Equity
Fund is being handled by Citibank.
Collecting Bankers: ICICI Bank Ltd., HDFC Bank Limited &
Citibank.

24
 SBI Mutual Fund
Mutual Fund Trust SBI Mutual Fund

Sponsor State Bank of India

Trustee SBI Mutual Fund Trustee Company Private
Limited
AMC SBI Funds Management Private Limited

Custodian HDFC Bank Limited

RTA Computer Age Management Services Pvt.

Ltd

25
 Assignment
Search sponsor, trust, AMC, custodian, RTA, collecting banker
of selected AMC and write the name in your notebook.

26
 Test Yourself
Q.1 Approval of SEBI is needed to appoint a person as distributor.
a. True b. False
Q.2 Approval of SEBI is needed to appoint a person as Trustee.
a. True b. False

27
Q.3 Collection and payment of Fund is responsibility of
………….?
a. Custodian c. Banker
b. RTA d. Sponsor
Q.4 Independent trustees appointed by………..?
a. SEBI c. AMFI
b. Sponsors d. Any of the above
Q.5 Minimum contribution of a sponsor in an AMC should
be…….?
a. 50% c. 10%
b. 40% d. 25%

28
Q.6 Minimum Net worth requirement of the AMC is …….?
a. 10 crore c. 25 crore
b. 50 crore d. 40 crore
Q.7 Mutual fund sponsor can be compared to…….?
a. Depositor of the company c. Promoter of the company
b. Company Director d. CEO of the company
Q.8 NAV calculation is a responsibility of …….?
a. Custodian c. Banker
b. RTA d. Fund Accountant

29
Q.9 Who keep the custody of the assets of the fund?
a. AMC c. RTA
b. Custodian d. Fund accountants
Q.10 RTA functions must be outsourced?
a. True b. False
Q.11 The fund sponsors should have a positive net worth for….?
a. 3 years c. 4 Years
b. 5 years d. 12 Months

30
Q.12 Which function of the AMC can’t perform in house?
a. Custodian c. Fund Management
b. Distribution d. None of the above
Q.13 Which of the following is appointed by trustee?
a. Custodian c. RTA
b. Distributors d. All of the above
Q.14 Most investor service centres are offices of ……….
a. Trustees c. Custodian
b. RTA d. Fund Accountant

31
 Answer of Chapter 3
1b 11. b
2a 12.a
3.C 13. a
4. B 14. b
5.B
6.B
7.C
8.D
9.B
10.B

32