SEBI Circular on Modification in the Mutual Fund Regulations

SEBI Circular on Modification in the Mutual Fund Regulations
Shivani Jain
| Updated: Mar 13, 2021 | Category: News, SEBI Advisory

The SEBI (Securities and Exchange Board of India), by way of a Circular No SEBI/ HO/ IMD/ DF2/ CIR/ P/ 2021/ 024issued on 04.03.2021, has notified modification in the Mutual Fund Regulations, i.e., SEBI (Mutual Fund) Regulations 1996.

Further, such a modification in the Mutual Fund Regulations will be applicable to all the Mutual Funds, Asset Management Companies, Trust Companies, BOT (Board of Trustees) of Mutual Fund, and Association of Mutual Funds in India.

In this learning blog, we will deal with the concept of Mutual Funds, together with the provisions of the Circular on Modification in the Mutual Fund Regulations.

Concept of Mutual Funds

The term Mutual Funds denotes one of the most popular choices of investment these days. It is an investment vehicle formed when an AMC (Asset Management Company) or fund houses decide to pool investments from various institutional investors and individuals with common investment objectives.

Further, the term Fund Manager denotes, a finance professional who manages and administers the pooled investment. Also, he is responsible for purchasing and buying securities, such as bonds and stocks that are in consequence of the investment mandate.

Also, it shall be noted that Mutual Funds are the best investment option for those who want to get experience in an expert managed portfolio. Moreover, one can diversify his/ her portfolio by making an investment in Mutual Funds as the asset allocation will cover various instruments.

Lastly, investors will be allocated with fund units on the basis of the amount they invest. That means each investor will experience profit or loss that is directly proportional to the amount he/ she has invested.

Also, Read: Guidelines for Votes Cast by Mutual Funds Prescribed by SEBI

Key Provisions of Circular on Modification in the Mutual Fund Regulations

The key provisions of Circular on Modification in the Mutual Fund Regulations are as follows:

Gross Exposure Limit

Provisions of various SEBI circulars with respect to the cumulative gross exposure limit for the mutual fund (MF) schemes have been modified as under:

The term Gross Exposure Limit means a cumulative gross exposure by way of equity, debts, derivative positions (comprising of fixed income and commodity derivatives), repo transactions, and credit default swaps in the corporate debt securities, REITs (Real Estate Investment Trusts), InvITs (Infrastructure Investment Trusts), other permitted securities or assets. Also, such other securities or assets may be allowed by the Board from time to time must not exceed 100% of the total net assets of the scheme.

Investment Pattern

In partial modification to the SEBI Circular No IIMARP/ MF/ CIR/ 01/ 294/ 98 issued on 04.02.1998, the portion on the Investment pattern in paragraph 2 (a) (ii) shall be read as under:

The term Investment pattern means the tentative portfolio breakup of equity, debts, money market instruments, and other permitted securities. Also, such other securities as may be allowed by the SEBI from time to time with a minimum and a maximum asset allocation while holding the option to alter the asset allocation for a shorter term on defensive considerations.

Procedure for Change in the Control of Asset Management Company

The Guidance Letter, issued on 28.01.2003 on the Procedure for the Change in the Controlling Interest of the AMC (Asset Management Company) stands deleted, and the new procedure for the change in the control of AMCs has been provided by the SEBI, which includes provisions as follows:

  • Requirements for Mutual Funds Regulations;
  • New Sponsor;
  • Undertaking by New Trustees/ Sponsors;
  • Disclosure to Unitholders;
  • Revision of the Standard Offer Documents;
  • Other Situations;

Go Green Initiatives

The existing facility of filing of the MCR (Monthly Cumulative Report) in a physical mode in addition to furnishing the same by way of an e-mail in terms of the SEBI Circular No. MF/ CIR/ 07/ 404/ 2000 issued on 31.07.2000 and paragraph 2 of the SEBI Circular No. SEBI/IMD/CIR No 3/124444/08 issued on 30.04.2008 stands deleted, and the same will be continued to be furnished by the Asset Management Company to the Board through an email (Email Id: [email protected]).

Further, the format of the ASR (Annual Statistical Report) as specified by way of SEBI Circular No. MFD/ CIR/ 02/ 110/ 02 issued on 26.04.2002 has been revised and is positioned at Annexure I, and the same will be submitted to the SEBI by way of an email only (Email Id: [email protected]).

Furthermore, Paragraph 4 of the SEBI Circular No. MFD/ CIR/ 9/ 120/ 2000 issued on 24.11.2000, has been modified as under:

The annual report comprising of the accounts of the Asset Management Company will be displayed on the portals of the mutual funds soon after the approval in AGMs (Annual General Meetings) within a time period of four months, starting from the date of ending of the financial year. Also, it should be specified in the annual reports of mutual fund schemes that the unit holders, if they so want, may request for the “annual report” of the Asset Management Company. Also, AMCs need to display their annual report on their official websites in the machine readable format.

Filing of AIR (Annual Information Return) by Mutual Funds

Pursuant to the issuance of CBDT guidelines and several circulars, the provisions of the SEBI Circular No. IMD/ CIR No.8/ 73580/ 06 issued on 04.04.2006 on the Filing of Annual Information Return (AIR) by Mutual Funds stands deleted.

However, it shall be noted that mutual funds will continue to adhere to the following:

Mutual funds need to submit the AIR (Annual Information Return) under the provisions of section 285 BA of the Income Tax Act 1961 and several guidelines and directions notified by the CBDT (Central Board of Direct Taxes).  Further, as per this prerequisite, Trustees of Mutual Funds or any such other person managing the operations and affairs of the Mutual Funds need to report the mentioned financial transactions by way of electronic medium to the Income Tax Department. The same can be done by giving PAN (Permanent Account Number) of the transacting parties in an AIR.

Advertisement

The modification in the Mutual Fund Regulations concerning Advertisement can be summarised as:

Partial Modification to the SEBI Circular No. Cir/IMD/DF/6/2012, issued on 28.02.2012

  • The first point of para C (2) must be read as under:
  1. While advertising the payout of dividends, all the advertisements need to disclose the dividends proposed or paid in rupees per unit, together with the face-value of each unit of that mutual fund scheme and the prevalent NAV (Net Asset Value) at the time of announcement of the dividend. Further, it shall be noted that for the payout of dividends at the maturity of closed-ended scheme or at the completion of the interval period of the interval scheme, AMC (Asset Management Company) will need to advertise that the whole distributable surplus at the time of completion of the interval period or at the time of maturity will be distributed.”
  • The second Point of the paragraph C (2) stands deleted;
  • The fourth point of the paragraph C(2) shall be read as under:
  1. In the case of the Overnight Funds, Money Market Funds, and Liquid Funds, the investors have a very short investment horizon, and the performance can be advertised just by a simple annualisation of yields if the performance figure is accessible for at least 7 days, 15 days, and 30 days, provided that it does not showcase a misleading or an unrealistic picture of the performance or the future performance of the scheme.

Partial Modification to the SEBI Circular No. Cir/IMD/DF/ 23/ 2017, issued on 15.03.2017

  • The portion as follows of the paragraph A(4) (a) stands deleted:
  1. When a mutual fund scheme has been in presence for more than one year but less than the period of three years or five years, then, in that case, the same will be specified as a footnote in the advertisement of the scheme.
  • Paragraph A (4) (b) must be read as under:
  1. Where the mutual fund scheme has been in continuation for less than six months, then, in that case, past performance will not be provided. Further, it shall be noted that if a scheme remains in existence for more than a period of six months, but less than one year, then, in that case, a simple annualized growth rate of the said scheme for the past 6 months, starting from the last day of the month but preceding the date of advertisement will be provided.

Partial Modification to the SEBI Circular No. Cir/IMD/DF/ 13/ 2011, issued on 22.08.2011

S. No. Category of Mutual Fund Schemes Additional Benchmark
1. All Equity Schemes; Sensex or Nifty
2. All Debt Schemes having a duration or maturity upto 1 year and Arbitrage Funds; 1 year Treasury Bill
3. All the remaining Debt Schemes which are not covered under Point 2; 10 year dated Government of India Security
4. Conservative Hybrid Fund; 10 year dated Government of India Security
5. Balanced Hybrid Fund or Aggressive Hybrid Fund or Dynamic  Asset
Allocation or Balanced Advantage or Multi Asset Allocation;
Sensex or Nifty
6. Equity Savings; 10 year dated Government of India Security
7. Retirement Fund or Children’s Fund; Sensex or Nifty
8. Index Funds / Exchange Traded Funds and  Funds of Funds (Overseas or Domestic); Appropriate benchmark on the basis of the underlying asset allocation as per above.

Disclosure of Performance of the Mutual Fund Schemes

SEBI, by way of various circulars under Mutual Fund Regulations, has specified to disclose the performance of the mutual fund schemes since inception. Also, it shall be noted that in this regard, it is clarified that such a disclosure of performance will be made since the date of units’ allotment in the scheme.

Undertaking from Trustees for the New Scheme Offer Document

In partial modification to the SEBI Circular No SEBI/ IMD/ CIR No. 5/ 70559/ 06 issued on 30.06.2006, it has been decided that the certification from the trustees will also not be applicable to the Interval Schemes apart from the Fixed Maturity Plans and the Close Ended Schemes.

Key Personnel of the Asset Management Company

For the reason of applicability of the Mutual Fund Regulations and various general circulars issued thereunder, the word “Key Personnel” has been defined as under:

  • Chief Executive Officer (CEO);
  • Chief Investment Officer (CIO);
  • Chief Risk Officer (CRO);
  • Chief Information Security Officer (CISO);
  • Chief Operation Officer (COO);
  • Fund Manager(s);
  • Compliance Officer;
  • Sales Head;
  • Investor Relation Officer (IRO);
  • Heads of other departments;
  • Dealer of the Asset Management Company, and;
  • Such other persons as considered fit and identified by the Asset Management Company and the Trustees;

Further, the term “Key Managerial Personnel” specified in the SEBI Circular No SEBI/HO/IMD/DF2/CIR/P/2016/42 issued on 18.03.2016 will be replaced with the word “Key Personnel”.

Updation of SID (Scheme Information Document) and KIM (Key Information Memorandum)

In partial modification to the SEBI Circular No SEBI/ IMD/ CIR No. 5/ 126096/ 08 issued on 23.05.2008, paragraph 5 on the procedure for the updation of SID and KIM has been amended.

Disclosures concerning Votes Cast by Mutual Funds

In partial modification of SEBI Circular No. CIR/IMD/DF/05/2014, issued on 24.03.2014, paragraph B(1) (c) will be read as under:

  • Asset Management Companies will be required to make disclosures concerning votes cast on their official websites (in the form of machine readable spreadsheet format) on a quarterly basis. The same must be done within 10 working days, starting from the end of the quarter according to the format enclosed. Further, a detailed report in this respect, together with a summary thereof must also be disclosed on their official website. The Performa for the disclosure of vote cast by the Mutual Funds in regard to the resolutions passed in annual general meetings (AGMs) of the investee companies and the performa for presenting a summary of the votes cast by Mutual Funds is positioned as Annexure B. Also, it shall be noted that AMCs will need to provide the web link in the voting details in their annual reports.

Dividend Distribution Process for Mutual Funds

In partial modification of the SEBI Circular No SEBI/ IMD/ CIR No.1/ 64057/ 06 issued on 04.04.2006, a new process for Dividend Distribution Process has been decided.

Postal Ballot

As per the prevailing provisions of Mutual Fund Regulations and several circulars issued thereunder, wherever there is a need for the consent or approval from the unit holders, an option must be given to unitholders. However, in this respect, it is clarified that the same must also be done by way ofthe Postal Ballot mechanism.

Further, for the said purpose, voting by way of Postal Ballot means voting either by post or through any other electronic mode.

Exit Period for Unit holders

To bring uniformity and conformity, wherever an exit option is needed to be given to the unit holders under Mutual Fund Regulations and general circulars issued thereunder, unit holders willbe given a time period of at least 30 days for the purpose of using the exit option.

SEBI’s Comment for change in Fundamental Attribute

In addition to the stipulations and conditions prescribed under Regulation 18 (15A) for bringing variation in the fundamental attributes of any mutual fund scheme, it has been decided that trustees will take comments of the SEBI prior to bringing such change.

Rajiv Gandhi Equity Savings Scheme

Since the time RGESS (Rajiv Gandhi Equity Savings Scheme) has been made out from the assessment year 2018 – 2019, the references of RGESS have resulted in being redundant from all places in Mutual Fund Regulations and general circulars issued thereunder, and thus all the provisions concerning RGESS, issued through several circulars stands deleted.

However, it shall be noted that for existing RGESS, if in case any, the rules and regulations concerning RGESS before the deletion of the provisions as specified in paragraph 17.1 above will be applicable.

Modes of Payments and Dispatch

Asset Management Companies may use different instruments or payment mechanisms, such as RTGS, IMPS, NEFT, direct credit, etc., or any other mode permitted by the Reserve Bank of India (RBI) from time to time, for payments, including refunds to unitholders in addition to the demand draft, cheque, or dividend warrants.

Further, AMCs may use different modes of dispatch, such as courier, speed post, etc., for making payments, including refunds to unitholders, in addition to the registered post with an acknowledgement due.

Investment in Non Convertible Preference Shares

It has been decided that Non Convertible Preference Shares will be treated as debt instruments, and therefore, investment restrictions as pertinent on debt instruments as prescribed in the Mutual Fund Regulations and general circulars issued thereunder will also be applicable to Non Convertible Preference Shares.

Change in Nomenclatures

It has been decided by the SEBI that in all the pertinent circulars issued under the Mutual Fund Regulations:

  • The word “Service tax” shall be substituted with the word “Goods & Service Tax”;
  • The word “Affiliate” will be substituted with the word ”Associate”;
  • The word “Collateralized Borrowing &Lending Obligations (CBLO)” will be substituted with the word “triparty repo on the Government securities or on the treasury bills”;

Applicability of Exit Load

It is simplified that the provisions of Regulation 49 (3) of the Mutual Fund Regulations is pertinent on all the open-ended mutual fund schemes, wherever exit load is applicable.

Conclusion

In a nutshell, SEBI has passed the circular by exercising the powers conferred under the provisions section 11 (1) of the Securities & Exchange Board of India Act 1992, read with the provisions of Rule 77 of the SEBI (Mutual Funds) Regulations 1996. The same was done to protect the investors’ interests in securities and to promote and boost the development and regulation of the securities market.

Also, Read: Legal Entity Template Rolled Out by SEBI

Official SEBI Circular on Modification in the Mutual Fund Regulations

Official-SEBI-Circular-on-Modification-in-the-Mutual-Fund-Regulations-1

Spread the love
Shivani Jain

Shivani has completed her B com LLB (Hons) and has the experience of writing various research papers during her college time. Earlier she was working as an Associate in a Delhi based Law Firm, but her interest in writing made her pursue Legal Content Writing as a career. Her core area of interest is in writing about various legal enactments, tax, and finance.

docsbizkit
 

Related Articles

Benefits of Mergers and Acquisitions
| Date: Feb 24, 2021 | Category: Mergers and Acquisitions

What are the Benefits of Mergers and Acquisitions?

Mergers and Acquisitions (M&A) is the best way to reach exponential heights and continue to create attention, and it is the process of one company combining with another company. Nowadays,...

Read More
annual compliance for a listed company
| Date: Jan 28, 2021 | Category: SEBI Advisory

Annual Compliance for a Listed Company as per SEBI Regulations

Any company whose shares has been listed on the RSE (Recognized Stock Exchange), such as National Stock Exchange and Bombay Stock Exchange are termed as Listed Company. Further, it shall...

Read More
All You Need to know about Limitations of Trademark Law
| Date: Feb 09, 2021 | Category: News, Trademark

All You Need to know about Limitations of Trademark Law

The Trademarks Act, 1999 allows for the protection of well- known trademarks in 2 ways that is, an action against the registration of similar trademarks and action against the misuse...

Read More

ARTICLES

Hi! My name is Akanksha! Let's talk.