SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1996

S.O. 856 (E) of 1996

December 9, 1996

In exercise of the powers conferred by section 30, read with clause (c) of sub-section (2) of section 11 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Securities and Exchange Board of India hereby makes the following regulations.

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S.1 Short title, application and commencement

(1) These regulations may be called the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

(2) They shall come into force on the date of their publication in the Official Gazette.

2 Definitions

(1) In these regulations, unless the context otherwise requires:—

• “Act” means the Securities and Exchange Board of India Act, 1992 (15 of 1992);
• “advertisement” shall include all forms of communication issued by or on behalf of the asset management company/mutual fund that may influence investment decisions of any investor/prospective investors;
• “associate” includes a person, who directly or indirectly, by himself, or in combination with relatives, exercises control over the asset management company or the trustee or the sponsor, as the case may be, or in respect of whom the asset management company or the trustee or the sponsor, directly or indirectly, by itself, or in combination with other persons exercises a control, or whose director (except an independent director), officer or employee is a director, officer or employee of the asset management company.
• Provided that the above definition of associate shall not be applicable to such sponso
  

3 Application for registration

An application for registration of a mutual fund shall be made to the Board in Form A by the sponsor.

4 Application fee to accompany the application

Every application for registration under regulation 3 shall be accompanied by non-refundable application fee as specified in the Second Schedule.

5 Application to conform to the requirements

An application, which is not complete in all respects shall be liable to be rejected: Provided that, before rejecting any such application, the applicant shall be given an opportunity to complete such formalities within such time as may be specified by the Board.

6 Furnishing information

The Board may require the sponsor to furnish such further information or clarification as may be required by it.

7 Eligibility criteria

For the purpose of grant of a certificate of registration, the applicant has to fulfill the following, namely—

• (a) the sponsor should have a sound track record and general reputation of fairness and integrity in all business transactions. Explanation: For the purposes of this clause “sound track record” shall mean the sponsor should, —
• (i) be carrying on business in financial services for a period of not less than five years; and
• (ii) ensure that the networth is positive in all the immediately preceding five years; and
• (iii) ensure that the positive liquid networth is 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
  

7A Criteria for fit and proper person

For the purpose of determining whether an applicant or the mutual fund is a fit and proper person the Board may take into account the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

7B Norms for Shareholding and Governance in Mutual Funds

(1) No sponsor of a mutual fund, its associate or group company including the asset management company of the fund, through the schemes of the mutual fund or otherwise, individually or collectively, directly or indirectly, have –

• (a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other mutual fund; or
• (b) representation on the board of the asset management company or the trustee company of any other mutual fund.

(2) Any shareholder holding 10% or more of the share-holding or voting rights in the asset management company or the trustee company of a mutual fund, shall not have, directly or indirectly, –

• (a) 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other mutual fund; or
• (b) representation on the board of the asset management company or the trustee company of any other mutual fund.

7C

(1) The sponsor may be permitted to disassociate from the asset management company and the mutual fund subject to such conditions as may be specified by the Board.

(2) In the event of the sponsor disassociating itself from the asset management company and the mutual fund as specified in sub-clause (1) above, the asset management company of the existing mutual fund may act as sponsor of the same mutual fund subject to such conditions and in the form and manner as may be specified by the Board.

(3) In the event of the disassociation of the sponsor from the asset management company and the mutual fund, the shareholding for any shareholder in the asset management company shall be below 10%.

(4) In the event of the sponsor disassociating itself from the asset management company and the mutual fund, the board of directors of such asset management company shall have at least two third independent directors.

(5) If the asset management company fails to fulfill th

8 Consideration of application

The Board, may on receipt of all information decide the application.

9 Grant of Certificate of Registration

The Board may register the mutual fund and grant a certificate in Form B on the applicant paying the registration fee as specified in Second Schedule.

10 Terms and conditions of registration

The registration granted to a mutual fund under regulation 9, shall be subject to the following terms and conditions—

• (a) the trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations;
• (b) the mutual fund shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect;
• (c) the mutual fund shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by it;
• (d) payment of fees as specified in the regulations and the Second Schedule.

11 Rejection of application

Where the sponsor does not satisfy the eligibility criteria mentioned in regulation 7 or regulation 81, the Board may reject the application and inform the applicant of the same.

12 Payment of annual service fee

A mutual fund shall pay before the 15th April each year a service fee as specified in the Second Schedule for every financial year from the year following the year of registration: Provided that the Board may, on being satisfied with the reasons for the delay permit the mutual fund to pay the service fee at any time before the expiry of two months from the commencement of the financial year to which such fee relates.

13 Failure to pay annual service fee

The Board may not permit a mutual fund who has not paid service fee to launch any scheme.

14 Trust deed to be registered under the Registration Act

A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908), executed by the sponsor in favour of the trustees named in such an instrument. Provided that in case of disassociation of the sponsor, the signatory to the trust deed shall be as specified by the Board.

15 Contents of trust deed

(1) The trust deed shall contain such clauses as are mentioned in the Third Schedule and such other clauses which are necessary for safeguarding the interests of the unitholders.

(2) No trust deed shall contain a clause which has the effect of—

• (i) limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unitholders; or
• (ii) indemnifying the trustees or the asset management company for loss or damage caused to the unitholders by their acts of negligence or acts of commission or omission.

16 Disqualification from being appointed as trustees

(1) A mutual fund shall appoint trustees in accordance with these regulations.

(2) No person shall be eligible to be appointed as a trustee unless—

• (a) he is a person of ability, integrity and standing; and
• (b) has not been found guilty of moral turpitude; and
• (c) has not been convicted of any economic offence or violation of any securities laws; and
• (d) has furnished particulars as specified in Form C.

(3) No asset management company and no director (including independent director), officer or employee of an asset management company shall be eligible to be appointed as a trustee of any mutual fund.

(4) No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as a trustee of any other mutual fund.

(5) Two-thirds of the trustees shall be independent persons and shall not be associated with the sponsors or be associated with them in any manner whatsoever.

(6) In case a c

17 Approval of the Board for appointment of trustee

(1) No trustee shall initially or any time thereafter be appointed without prior approval of the Board.

(2) The existing trustees of any mutual fund may form a trustee company to act as a trustee with the prior approval of the Board.

18 Rights and obligations of the trustees

(1) The trustees and the asset management company shall with the prior approval of the Board enter into an investment management agreement.

(2) The investment management agreement shall contain such clauses as are mentioned in the Fourth Schedule and such other clauses as are necessary for the purpose of making investments.

(3) The trustees shall have a right to obtain from the asset management company such information as is considered necessary by the trustees.

(5) The trustees shall approve the policy for empanelment of brokers by the asset management company and shall ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker.

(6) The trustees shall ensure that the asset management company has not given any undue or unfair advantage to any associates or dealt with any of the associates of the asset management compan