Who and How are mutual funds regulated?


Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI) primarily.

SEBI takes care of the sponsor, financial soundness of the fund and probity of the business

In the year 1963, the industry of mutual funds was established with the development of the Unit Trust of India (UTI), an initiative of the Indian government and the Reserve Bank of India. Later in the year 1987, the first NON-UTI mutual fund launched in India was the SBI Mutual Fund. The year 1993 was marked as a new era in this industry of mutual funds with the entry of private companies. It was 1996 when the SEBI Mutual Fund Regulations came into existence after the passing of the Securities and Exchange Board of India (SEBI) Act of 1992.

Who regulates the mutual funds in India?

Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI) primarily. They are governed by the Securities Exchange Board of India (Mutual Fund) Regulations 1996, except for Unit Trust of India (UTI). UTI was formed by the UTI Act passed by the Parliament of India. All mutual funds must be registered with SEBI. Besides SEBI, mutual funds are regulated by RBI, Indian Companies Act 1956, Stock exchange, Indian Trust Act, 1882 and Ministry of Finance.

RBI acts as a regulator of sponsors for mutual funds that are sponsored by banks, mainly in case of funds offering guaranteed returns scheme for which the mutual fund should have the approval of RBI. The Ministry of Finance acts as supervisor of both RBI and SEBI and also appellate authority under SEBI regulations. Mutual funds can appeal to the Ministry of finance on the rulings of SEBI.

As the industry developed, there was a necessity to promote healthy and ethical marketing practices and maintain standards in all areas in the mutual fund industry of India with a view to protect and promote the interests of mutual funds and their unitholders. The Association of Mutual Funds in India (AMFI), a non-profit organization, was formed with this objective in 1995.

The certificate of AMFI made mandatory by SEBI for all those who are engaged in marketing mutual fund products.

More about SEBI

In India, the Securities and Exchange Board (SEBI) is the designated regulatory body for finance and markets. SEBI is the apex regulator of capital markets and its intermediaries. Thus, the issue and trading of capital market instruments come under the purview of SEBI. The primary function of the board is to protect the interests of the investors in securities and promote and regulate the securities market.

However, the broad spectrum of mutual fund schemes may often confuse investors. Therefore SEBI has laid the ground rules and provide necessary information for investors to become aware of the functioning of the mutual funds. They serve to simplify the guidelines and the process of the merger and consolidation of mutual fund schemes issued by SEBI. The various mutual fund schemes that have been offered by the fund houses can be compared following these guidelines.

SEBI takes care of the sponsor, financial soundness of the fund and probity of the business while giving approval and ensuring that Mutual fund adheres to the principles of advertisement.

How mutual funds are regulated?

In India, the working of mutual funds is the same as that of the USA. SEBI formulated the Mutual Fund Regulation in the year 1996. It’s a 3-tier structure that operates the mutual fund in India. The sponsor is the 1st tier, 2nd tier is the Public Trust and Asset Management Company is the 3rd tier.

A sponsor is a person who establishes a mutual fund himself or in association with another corporate. The sponsor seeks approval of the Securities & Exchange Board of India (SEBI). Once SEBI gives approval, the sponsor forms the Public Trust under the Indian Trusts Act, 1882. The sponsor of the fund must have been in the financial industry for at least five years and have maintained positive net worth for the five years immediately before registry.

Trusts do not have any legal identity in India, and cannot enter into contracts. The sponsor and the trust are not same but two separate entities. Therefore trustees are appointed to act on behalf of the trust. The instrument of trust must be in the form of a deed agreement between the Sponsor and the trustees under the provisions of the Indian Registration Act 1908. The trust is then registered with SEBI to form mutual fund. After registration henceforth, the trust is known as mutual fund. The trustees’ role is of internal regulators of mutual fund to overlook that the fund is being managed as per the best interests of the shareholders and they hold the custody of all the assets.

After that, trustees appoint the Asset Management Company (AMC), to manage money that has been collected through sale of mutual fund’s units. The approval of SEBI is needed for AMCs.

The Board of Directors of AMC has at least 50% of independent directors. The AMC functions under the supervision of its Board of Directors, as per the instructions of the trustees and directives of SEBI. In the name of the trust, AMC floats new schemes and manage these schemes by buying and selling securities and communicate with shareholders. The AMC needs to follow the rules and regulations of SEBI and as per the agreement signed between the sponsors and the trustees.

Finally, the trustees must appoint a custodian and depository participant to keep track of asset trading activity and safeguarding the tangible as well as intangible assets of the fund.

That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.

With this one can say “Mutual Fund Sahi hai”,  so let me do Nivesh