SEBI has the authority to regulate mutual fund distributors under Section 11 of the Securities and Exchange Board of India Act, 1992, and the circular issued by SEBI was upheld as beneficial for investors and promoting transparency in the mutual fund market.

1. The petitioners herein are distributors, “who sell mutual funds to investors”. Earlier mutual funds were loading entry charges of upto 2 ½ % on any investment made in a new mutual fund. Part thereof was passed on to the distributor towards his commission.

2. Securities and Exchange Board of India (SEBI, for short), respondent No. 1 herein, has now issued a new circular/guidelines dated 30th June, 2009 under which the mutual funds are barred from charging entry load.

The relevant portion of the circular dated 30th June, 2009 reads as under:- “a) There shall be no entry load for all mutual fund schemes.

b) The scheme application forms shall carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor.

c) Of the exit load or CDSC charged to the investor, a maximum of 1% of the redemption proceeds shall be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance shall be credited to the scheme immediately.

d) The distributors should disclose all the commissions (in the form of trail commission or any other mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor.”

3. As per this circular, there cannot be an entry load for all mutual fund schemes. The net effect thereof is that the mutual funds will not pay any commission to the distributors from the entry load. The circular provides that the mutual fund scheme application forms shall carry a suitable disclosure that upfront commission to the distributors will be paid by the investor directly to the distributor and will be subject matter of a mutual contract between them. Thus the distributors have not been barred or prohibited from charging service fee and the service charges are to be mutually settled by the investor and the distributor. The distributors are required to disclose all commissions payable to them for different competing schemes of mutual funds including the scheme, which is being recommended by the distributor to the investor.

4. Learned counsel for the petitioner submits that the circular is ultra vires and illegal as SEBI does not have any power to issue the said circular under Section 11(2)(b) of the Securities and Exchange Board of India Act, 1992. Section 11 of the said Act reads as under:-

“POWERS AND FUNCTIONS OF THE BOARD

Functions of Board. 11. (1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for - (a) regulating the business in stock exchanges and any other securities markets;

(b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner;

1[13][(ba) registering and regulating the working of the depositories,2[14] [participants,] custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf;]

(c) registering and regulating the working of 3[15][venture capital funds and collective investment schemes],including mutual funds;

(d) promoting and regulating self-regulatory organisations;

(e) prohibiting fraudulent and unfair trade practices relating to securities markets;

(f) promoting