भारतीय प्रततभतू त और तितिमय बोर् ड
Securities and Exchange Board of India
MASTER CIRCULAR
SEBI/HO/IMD/DF2/CIR/P/2020/156 August 24, 2020
All Mutual Funds/
Asset Management Companies (AMCs)/
Trustee Companies/ Boards of Trustees of Mutual Funds/
Registrar and Transfer Agents (RTAs)/
Association of Mutual Funds in India (AMFI)
Dear Sir/ Madam,
Sub: Master Circular for Mutual Funds
For effective regulation of the Mutual Fund Industry, Securities and Exchange
Board of India (SEBI) has been issuing various circulars from time to time. In order
to enable the industry and other users to have an access to all the applicable
circulars at one place, Master Circular for Mutual Funds has been prepared.
This Master Circular is a compilation of all the circulars issued by SEBI on the
above subject, which are operational as on date of this circular.
This Master Circular shall supersede the previous Master Circular
No.SEBI/HO/IMD/DF5/CIR/P/2018/109 dated July 10, 2018.
Yours faithfully,
Hruda Ranjan Sahoo
Deputy General Manager
Tel no.: 022-26449586
hrsahoo@sebi.gov.in
MASTER CIRCULAR FOR MUTUAL FUNDS
BY
S E B I
ECURITIES AND XCHANGE OARD OF NDIA
1. This Master Circular includes circulars issued upto March 31, 2020.
Temporary relaxations with regards to certain compliance requirements for
mutual funds in the wake of the COVID- 19 pandemic were provided vide
SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2020/47 dated March 23,
2020, which may be referred to for the same.
2. In case of any inconsistency between the master circular and the applicable
circulars, the contents of the relevant circular shall prevail.
3. Master Circular is a compilation of all the existing/applicable circulars
issued by Investment Management Department of SEBI to Mutual Funds.
Efforts have been made to incorporate certain applicable provisions of
existing circulars (as on date) issued by other Departments/Divisions of
SEBI relevant to Mutual Funds.
2 Master Circular for Mutual Funds
INDEX
ABBREVIATIONS ............................................................................. 5
CHAPTER 1 .................................................................................... 7
OFFER DOCUMENT FOR SCHEMES ................................................. 7
CHAPTER 2 ................................................................................ 211
CONVERSION AND CONSOLIDATION OF SCHEMES AND LAUNCH
OF ADDITIONAL PLAN ................................................................ 211
CHAPTER 3 .................................................................................. 38
NEW PRODUCTS ........................................................................... 38
CHAPTER 4 ................................................................................. 45
RISK MANAGEMENT SYSTEM ....................................................... 45
CHAPTER 5 .................................................................................. 64
DISCLOSURES & REPORTING NORMS ........................................... 64
CHAPTER 6 .................................................................................. 83
GOVERNANCE NORMS .................................................................. 83
CHAPTER 7 ................................................................................ 112
SECONDARY MARKET ISSUES .................................................... 112
CHAPTER 8 ................................................................................ 116
NET ASSET VALUE ...................................................................... 116
CHAPTER 9 ................................................................................ 128
VALUATION ................................................................................ 128
CHAPTER 10 ............................................................................... 152
LOADS, FEES AND EXPENSES ..................................................... 152
CHAPTER 11 ............................................................................... 168
DIVIDEND DISTRIBUTION PROCEDURE ..................................... 168
CHAPTER 12 ............................................................................... 171
INVESTMENT BY SCHEMES ........................................................ 171
CHAPTER 13……………………………………………………………………….212
INVESTMENT BY FOREIGN INVESTORS IN MF SCHEMES ……….212
CHAPTER 14 ............................................................................... 225
ADVERTISEMENTS ..................................................................... 225
3 Master Circular for Mutual Funds
CHAPTER 15 ............................................................................... 231
INVESTOR RIGHTS & OBLIGATIONS ........................................... 231
CHAPTER 16 ………………………………………………………………………249
CERTIFICATION AND REGISTRATION OF INTERMEDIARIES …... 249
CHAPTER 17 ............................................................................... 258
TRANSACTION IN MUTUAL FUNDS UNITS ................................... 258
CHAPTER 18 ............................................................................... 267
MISCELLANEOUS ........................................................................ 267
FORMATS ------------------------------------------- Refer the attachment
ANNEXURES --------------------------------------- Refer the attachment
4 Master Circular for Mutual Funds
ABBREVIATIONS
American Depository Receipt ADR
Asset Management Company AMC
Asset under Management AUM
Association of Mutual Funds in India AMFI
Authorized Dealer AD
Bombay Stock Exchange BSE
Central Board of Direct Taxes CBDT
Compliance Test Reports CTR(s)
Common Account Statement CAS
Contingent Deferred Sales Charge CDSC
Compound Annual Growth Rate CAGR
Depository Participant DP
External Commercial Borrowings ECB
Financial Action Task Force FATF
Foreign Exchange Management Act FEMA
Foreign Institutional Investor FII
Foreign Portfolio Investor FPI
Fixed Maturity Plans FMP(s)
Global Depository Receipt GDR
Gold Exchange Traded Fund GETF
Gold Monetization Scheme GMS
Hindu Undivided Family HUF
International Organization of Securities Commission IOSCO
Investor Service Center ISC
Key Information Memorandum KIM
Know Your Client KYC
Monthly Cumulative Report MCR
5 Master Circular for Mutual Funds
Monthly Average Assets Under Management MAAUM
Multilateral Memorandum of Understanding MMOU
National Stock Exchange NSE
Net Asset Value NAV
New Fund Offer NFO
Permanent Account Number PAN
Prevention of Money Laundering Act PMLA
Qualified Foreign Investor QFI
Regulation Reg.
SEBI (Mutual Funds) Regulations 1996 Regulations
Securities and Exchange Board of India the Board
Scheme Information Document SID Offer
Statement of Additional Information SAI Document
Systematic Investment Plan SIP
Systematic Transfer Plan STP
Systematic Withdrawal Plan SWP
Trustee(s) Board of Trustee(s)/
Trustee Company
Unique Client Code UCC
Unit Confirmation Receipt UCR
6 Master Circular for Mutual Funds
CHAPTER 1
OFFER DOCUMENT FOR SCHEMES
1.1 Filing of Offer Document with the Board1
1.1.1 The Offer Document shall have two parts i.e. Scheme Information
Document (SID) and Statement of Additional Information (SAI). SID
shall incorporate all information pertaining to a particular scheme.
SAI shall incorporate all statutory information on Mutual Fund.
1.1.2 The Mutual Funds shall prepare SID and SAI in the prescribed
formats2. Contents of SID and SAI shall follow the same sequence as
prescribed in the format. The Board of the AMC and the Trustee(s)
shall exercise necessary due diligence, ensuring that the SID/SAI and
the fees paid3 are in conformity with the Mutual Funds Regulations4.
1.1.3 All offer documents (ODs) of Mutual Fund schemes shall be filed with
SEBI in terms of the Regulations5.
1.1.3.1 Filing of Draft SID:
a. Draft SID of schemes of Mutual Funds filed with the Board shall
also be available on SEBI’s website – www.sebi.gov.in for 21
working days from the date of filing.
b. AMC shall submit a soft copy of draft SID to the Board in HTML
or PDF format. For this purpose, AMC shall be fully responsible
1 SEBI Circular No. SEBI/IMD/CIR No.5/ 126096/08 dated May 23,2008 and SEBI Circular
No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
< 2 ,, For format of SID & SAI, please refer to the section on Formats
3 The filing fees was revised via gazette notification No. LAD-NRO/GN/2014-15/03/1089on
SEBI (Payment of Fees) (Amendment) Regulations, 2014 dated 23 May, 2014, applicable from
May 23, 2014.
4 SEBI Circular No. IIMARP/MF/CIR/01/428/97 dated February 28, 1997.
5 Regulation 28 (1) of SEBI (Mutual Funds) Regulation 1996
7 Master Circular for Mutual Funds
for the contents of soft copies of the SID. AMC shall also submit
an undertaking to the Board while filing the soft copy of draft
SID certifying that the information contained in the soft copy
matches exactly with the contents of the hard copy filed with the
Board.
c. In case of any inaccurate filing, the SID will be returned and
refiling will be required. 21 working days6 shall be calculated
from the date of refiling;7
d. If any changes to the SID are made after filing, the 21 working
day(s) period will recommence from the date of submission of
the last additional statement(s)8
1.1.3.2 Filing of SAI
a. A single SAI (common for all the schemes) can be filed with
Board along with first draft of SID or can be filed separately.
After incorporating the comments/observations, if any, from
the Board, AMC shall file a soft copy of SAI with the Board in
PDF format along with printed copy of the same9, upload the
SAI on its website and on AMFI website.
1.1.3.3 Filing of Final SID
a. Final SID (after incorporating comments of the Board) must
reach the Board before it is issued for circulation. Soft copy of
the final SID in PDF format along with a printed copy should
be filed with Board seven10 working days prior to the launch of
6 Regulation 29(3) of SEBI (Mutual Funds) Regulation 1996
, 7 ,,, SEBI Circular No. IIMARP/MF/CIR/01/428/97 dated February 28, 1997.
,8,,, SEBI Circular No. IIMARP/MF/CIR/01/428/97 dated February 28, 1997, SEBI Circular No.
IIMARP/MF/CIR/07/844/97 dated May 5, 1997.
9 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
10 SEBI Circular No – SEBI/HO/IMD/DF2/CIR/P/2016/68 dated August 10, 2016
8 Master Circular for Mutual Funds
the scheme. AMC shall also submit an undertaking to the
Board while filing the soft copy that information contained in
the soft copy of SID to be uploaded on SEBI website is current
and relevant and matches exactly with the contents of the hard
copy and that the AMC is fully responsible for the contents of
the soft copy of SID. The soft copy of SID should also be
uploaded on AMFI website two working days prior to launch of
the scheme 11. Failure to submit the printed SID to the Board
before it is issued for circulation shall invite penalties under
the Mutual Funds Regulations12.
b. In case of any difference, in nature of material alteration of the
suggestions made by the Board13 between the printed SID and
the SID filed with the Board, immediate withdrawal of the SID
from circulation will be ordered and such withdrawal shall be
publicized by the Board14.
1.2 Updation of SID & SAI
1.2.1 Updation of SID
1.2.1.1 For the schemes launched in the first half of a financial
year, the SID shall be updated within 3 months from the
end of the financial year. However, for the schemes
launched in the second half of a financial year, SID shall
be updated within 3 months of the end of the subsequent
financial year. (For example, for a scheme launched in May,
11 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
12 SEBI Circular No. IIMARP/MF/CIR/07/844/97 dated May 5, 1997.
,1 3Regulation 29(2) of the SEBI (Mutual Funds) Regulations, 1996
14The existing schemes shall adopt the SID and KIM format as soon as possible but not later
than 12 months from the date of issuance of the circular- SEBI/IMD/CIR No. 5/126096/08
dated May 23, 2008. A confirmation in this regard shall be given in the half yearly trustee
report.
9 Master Circular for Mutual Funds
2016 the SID shall be updated by June 30, 2017 and for a
scheme launched in December 2015, the SID shall be
updated by June 30, 2017) Thereafter, the SID shall be
updated once every year.
1.2.1.2 The procedure to be followed in case of changes to the
scheme shall be as under:
a. In case of change in fundamental attributes in terms of
Regulation15, SID shall be revised and updated
immediately after completion of duration of the exit option.
b. In case of other changes:
1. The AMC shall be required to issue an addendum and
display it on its website.
2. The addendum shall be circulated to the entire
distributors/brokers/Investor Service Centre (ISC) so
that the same can be attached to copies of SID already
in stock, till the SID is updated.
3. In case any information in SID is amended more than
once, the latest applicable addendum shall be a part of
SID. (For example, in case of changes in load structure the
addendum carrying the latest applicable load structure
shall be attached to all KIM and SID already in stock till
it is updated).
4. A public notice shall be given in respect of such changes
in one English daily newspaper having nationwide
circulation as well as in a newspaper published in the
language of region where the Head Office of the Mutual
Fund is situated.
1.2.1.3 A copy of all changes made to the scheme shall be filed with
Board within 7 days of the change. A soft copy of updated
15 Regulation 18 (15A) of SEBI (Mutual Funds) Regulation, 1996
10 Master Circular for Mutual Funds
SID shall be filed with Board in PDF Format along with
printed copy of the same. AMC shall also submit an
undertaking to the Board while filing the soft copy that
information contained in the soft copy of SID to be
uploaded on SEBI website is current and relevant and
matches exactly with the contents of the hard copy and
that the AMC is fully responsible for the contents of the
soft copy of the SID16.
1.2.2 Updation of SAI
1.2.2.1 A printed copy of SAI shall be made available to the
investor(s) on request. SAI shall be updated within 3
months from end of financial year and filed with SEBI.
1.2.2.2 Any material changes in the SAI shall be made on an
ongoing basis by way of updation on the Mutual Fund and
AMFI website. SEBI shall be intimated of the changes made
in the SAI within 7 days. The effective date for such
changes shall be mentioned in the updated SAI.
1.2.2.3 A soft copy of updated SAI shall be filed with SEBI in PDF
format along with printed copy of the same. AMC shall also
submit an undertaking to SEBI while filing the soft copy
that information contained in the soft copy of SAI to be
uploaded on SEBI website is current and relevant and
matches exactly with the contents of the hard copy and
that the AMC shall be fully responsible for the contents of
soft copy of SAI17.
16 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
17 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
11 Master Circular for Mutual Funds
1.3 Validity of SEBI Observations on SID
1.3.1 The AMCs shall file their replies to the modifications suggested by
SEBI on SID as required under Regulation 29 (2), if any, within six
months from the date of the letter. In case of lapse of six-month
period, the AMC shall be required to refile the SID alongwith filing
fees.
1.3.2 The scheme shall be launched within six months from the date of
the issuance of final observations from SEBI. If the AMC intends to
launch the scheme at a date later than six months, it shall refile
the SID with SEBI under Regulation 28 (1) along with filing fees.
1.4 Undertaking from Trustees for new Scheme18
1.4.1 In the certificate submitted by Trustees with regard to compliance
of AMC with Regulations,19 the Trustees are required to certify as
follows:
“The Trustees have ensured that the (name of the scheme/Fund)
approved by them is a new product offered by (name of the Mutual
Fund) and is not a minor modification of any existing
scheme/fund/product.”
1.4.2 This certification shall be disclosed in the SID along with the date
of approval of the scheme by the Trustees.
1.4.3 This certification is not applicable to close ended schemes except
for those close ended schemes which have the option of conversion
into open ended schemes on maturity.
18SEBI Cir No IMD/CIR No.5/70559/06 dated June 30,2006
19Regulation 18 (4) of SEBI ( Mutual Funds) Regulations, 1996.
12 Master Circular for Mutual Funds
1.5 Standard Observations
1.5.1 Standard Observations have been prescribed to ensure minimum
level of disclosures in the SID and SAI20.
1.5.2 SEBI may revise the Standard Observations from time to time and
in that case the date of revision shall also be mentioned.
While filing the SID and SAI, AMC shall highlight and clearly
mention the page number of the SAI and SID on which each
standard observation has been incorporated.
1.6 KIM
1.6.1 Application forms for schemes of mutual funds shall be
accompanied by the KIM in terms of Regulation 29 (4). KIM shall be
printed at least in 7 point font size with proper spacing for easy
readability.
1.6.2 Format of KIM
1.6.2.1 Mutual Funds shall prepare KIM in the prescribed format21.
The contents of KIM shall follow the same sequence as
prescribed in the format.
1.6.3 Frequency of updation
1.6.3.1 KIM shall be updated at least once a year and shall be filed
with SEBI.
1.6.3.2 In case of changes in the SID other than changes in
fundamental attribute in terms of Reg 18 (15A), the addendum
20For Standard Observations, please refer to the section on Formats
21 For format of KIM please refer to the section on Formats
13 Master Circular for Mutual Funds
circulated to all the distributors/brokers/investor Service
Centre (ISC) shall be attached to KIM till the KIM is updated.
1.6.3.3 In case any information in SID is amended more than once,
the latest applicable addendum shall be a part of KIM (For
example, in case of changes in load structure the addendum
carrying the latest applicable load structure shall be attached
to all KIM and SID already in stock till it is updated).
1.7 Easy Availability of Offer Document
1.7.1 Trustees and AMCs shall ensure that the SID of the schemes and
SAI are readily available with all the distributors/ISCs and confirm
the same to SEBI in the half yearly trustee report.
1.8 Selection of Benchmarks22
1.8.1 In case of equity oriented schemes, mutual funds may
appropriately select any of the indices available, (e.g. BSE
(Sensitive) Index, S&P CNX Nifty, BSE 100, BSE 200 or S&P CNX
500 etc.) as a benchmark index depending on the investment
objective and portfolio.
1.8.2 Benchmarks for debt oriented and balanced fund schemes23
developed by research and rating agencies recommended by the
AMFI on a regular basis shall be used by the Mutual Funds.
1.8.3 In case of sector or industry specific schemes, Mutual Funds may
select any sectoral indices as published by the Stock Exchanges
and other reputed agencies.
22SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000, SEBI Circular No.
MFD/CIR/16/400/02 dated March 26, 2002, SEBI Circular No. MFD/CIR/01/071/02 April
15, 2002.
23SEBI Circular No. MFD/CIR/01/071/02 dated April 15, 2002.
1, 4 Master Circular for Mutual Funds
1.8.4 These benchmark indices may be decided by the AMC(s) and
Trustees. Any change at a later date in the benchmark index shall
be recorded and reasonably justified24.
1.8.5 Examples of benchmarks are illustrated below25:
1.8.5.1 Growth funds maintaining minimum 65% of their investments
in equities shall always be compared against The Bombay
Stock Exchange Ltd. (BSE) Sensex or The National Stock
Exchange Ltd. (NSE) Nifty or BSE 100 or CRISIL 500 or similar
standard indices.
1.8.5.2 Income funds maintaining 65% or more of investments in debt
instruments shall be compared with a suitable index that is a
representative of the fund’s portfolio.
1.8.5.3 Balanced funds with equity investments of 40%-60% shall be
compared with a tailored index having 50% of its weight
selected from any equity index as above and the other 50%
from an appropriate bond return index.
1.8.5.4 Money Market funds or liquid plans can be compared against
a suitable Money Market Instrument or a combination of such
instruments.
24SEBI Circular No. MFD/CIR/16/400/02 dated March 26, 2002. Also please note that for
review of scheme performance with benchmark indices please refer to section on governance
norms.
25SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000
15 Master Circular for Mutual Funds
1.9 New Fund Offer (NFO) Period26
1.9.1 In case of open ended and close ended schemes (except ELSS
schemes), the NFO should be open for 15 days.
1.9.2 The NFO period in case of ELSS schemes shall continue to be
governed by guidelines issued by Government of India.
1.9.3 Mutual Funds/AMCs are allowed to deploy the NFO proceeds in
CBLO27 28 before the closure of NFO period. However, AMCs shall
not charge any investment management and advisory fees on funds
deployed in CBLOs during the NFO period. The appreciation
received from investment in CBLO shall be passed on to investors.
Further, in case the minimum subscription amount is not garnered
by the scheme during the NFO period, the interest earned upon
investment of NFO proceeds in CBLO shall be returned to investors,
in proportion of their investments, along-with the refund of the
subscription amount.
1.9.4 The mutual fund should allot units/refund of money and dispatch
statements of accounts within five business days from the closure
of the NFO and all the schemes (except ELSS) shall be available for
ongoing repurchase/sale/trading within five business days of
allotment.
26SEBI Circular no MFD/Cir.No 9/120/2000 dated November 24, 2000. SEBI Circular No.
SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010. The provisions mentioned shall
be applicable for all NFOs launched on or after July 01, 2010
27 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated March 18, 2016.
28 will be applicable for NFOs launched on or after April 1, 2016
16 Master Circular for Mutual Funds
1.10 Restriction on Redemption in Mutual Funds29
1.10.1 Presently in terms of circular SEBI/IMD/CIR No.5/126096/08
dated May 23, 2008, facility of restriction on redemption under any
scheme of the mutual fund can be made only after the approval
from the Board of Directors of the Asset Management Company
(AMC) and the Trustees. The provisions are general in nature and
do not specifically spell out the circumstances in which restriction
on redemption may be applied; leading to discretionary disclosures
and practices in the industry.
1.10.2 As a philosophy, restriction on redemption should apply during
excess redemption requests that could arise in overall market crisis
situations rather than exceptional circumstances of entity specific
situations. The circumstances calling for restriction on redemption
should be such that illiquidity is caused in almost all securities
affecting the market at large, rather than in any issuer specific
securities.
1.10.3 Therefore, in order to bring more clarity and to protect the interest
of the investors, the following requirement shall be observed before
imposing restriction on redemptions:
1.10.3.1 Restriction may be imposed when there are
circumstances leading to a systemic crisis or event that
severely constricts market liquidity or the efficient
functioning of markets such as:
1.10.3.1.1 Liquidity issues - when market at large becomes
illiquid affecting almost all securities rather than any
issuer specific security. AMCs should have in place
29 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/57 dated May 31, 2016
17 Master Circular for Mutual Funds
sound internal liquidity management tools for
schemes. Restriction on redemption cannot be used as
an ordinary tool in order to manage the liquidity of a
scheme. Further, restriction on redemption due to
illiquidity of a specific security in the portfolio of a
scheme due to a poor investment decision, shall not be
allowed.
1.10.3.1.2 Market Failures, exchange closures - when markets are
affected by unexpected events which impact the
functioning of exchanges or the regular course of
transactions. Such unexpected events could also be
related to political, economic, military, monetary or
other emergencies.
1.10.3.1.3 Operational Issues - when exceptional circumstances
are caused by force majeure, unpredictable operational
problems and technical failures (e.g. a black out). Such
cases can only be considered if they are reasonably
unpredictable and occur in spite of appropriate
diligence of third parties, adequate and effective
disaster recovery procedures and systems.
1.10.3.2 Restrictions on redemption may be imposed for a
specified period of time not exceeding 10 working days in
any 90 days period.
1.10.3.3 Any imposition of restriction would require specific
approval of Board of AMCs and Trustees and the same
should be informed to SEBI immediately.
18 Master Circular for Mutual Funds
1.10.3.4 When restriction on redemption is imposed, the following
procedure shall be applied:
1.10.3.4.1 No redemption requests up to INR 2 lakh shall be
subject to such restriction.
1.10.3.4.2 When redemption requests are above INR 2 lakh, AMCs
shall redeem the first INR 2 lakh without such
restriction and remaining part over and above INR 2
lakh shall be subject to such restriction.
1.10.4 Disclosure: The above information to investors shall be disclosed
prominently and extensively in the scheme related documents
regarding the possibility that their right to redeem may be restricted
in such exceptional circumstances and the time limit for which it
can be restricted.
1.10.5 The circular shall be applicable immediately for (i) all schemes to
be launched on or after the date of this circular and (ii) all the
existing schemes with effect from July 01, 2016.
1.11 Discontinuation of the nomenclature – ‘Liquid Plus
Scheme(s)’30
1.11.1 The nomenclature “Liquid Plus Scheme(s)” has been discontinued
from January 2009 since it gives a wrong impression of added
liquidity.
30 SEBI/IMD/CIR No.13/150975 / 09 dated January 19, 2009
19 Master Circular for Mutual Funds
1.12 Fundamental Attributes31
1.12.1 The words "fundamental attributes"32 are elaborated below:
1.12.1.1 Type of a scheme
a. Open ended/Close ended/Interval scheme
b. Equity Schemes, Debt Schemes, Hybrid Schemes, Solution
Oriented Schemes and Other Schemes33
1.12.1.2 Investment Objective(s)
a. Main Objective - Growth/Income/Both.
b. Investment pattern - The tentative Equity/Debt/Money Market
portfolio break-up with minimum and maximum asset
allocation, while retaining the option to alter the asset
allocation for a short term period on defensive considerations.
1.12.1.3 Terms of Issue
a. Liquidity provisions such as listing, repurchase, redemption.
b. Aggregate fees and expenses charged to the scheme.
c. Any safety net or guarantee provided.
31 SEBI Circular No- IIMARP/MF/CIR/01/294/98 dated February 4, 1998
32 Sub-regulation (15A) of Regulation 18 of SEBI (Mutual Funds) Regulations, 1996
33 SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06, 2017
20 Master Circular for Mutual Funds
CHAPTER 2
CONVERSION AND CONSOLIDATION OF SCHEMES AND LAUNCH
OF ADDITIONAL PLAN
PART I - CONVERSION OF SCHEMES
2.1 Conversion of Close Ended Scheme(s) to Open Ended
Scheme(s)34
2.1.1 Although the procedure for conversion of close ended scheme(s)
to open ended scheme(s) has been clearly enumerated in the
Mutual Funds Regulations35, following requirements are clarified
again:
2.1.1.1 Since the scheme(s) would reopen for fresh subscriptions,
disclosures contained in the SID shall be revised and updated. A
copy of the draft SID shall be filed with the Board as required
under Regulation 28(1) of the Mutual Funds Regulations along
with filing fees prescribed under Regulation 28(2) of the Mutual
Funds Regulations. Instructions issued by the Board36 for filing
of the SID shall also be followed.
2.1.1.2 A draft of the communication to be sent to unit holders shall be
submitted to the Board which shall include the following:
a. Latest portfolio of the scheme(s) in the prescribed format37
34 SEBI Circular No. MFD/CIR No.22/2311/03 dated January 30, 2003.
,3, 5 Regulation 33(3) of the SEBI (Mutual Funds), Regulations, 1996.
, 3 , 6 SEBI Circular No. SEBI/IMD/Cir No 5/126096/08 dated May 23, 2008
37 Refer to format of half yearly portfolio disclosure under section on formats.
2, 1 Master Circular for Mutual Funds
b. Details of the financial performance of the scheme(s) since
inception in the format prescribed in SID38 along with
comparisons with appropriate benchmark(s)39.
c. The addendum to the SID detailing the modifications (if any)
made to the scheme(s).
2.1.1.3 The letter to unit holders and revised SID (if any) shall be issued
only after the final observations as communicated by the Board
in terms of Regulation 29(3) of the Mutual Funds Regulations
have been incorporated therein and final copies of the same have
been filed with the Board.
2.1.1.4 Unit holders shall be given at least 30 days to exercise exit option.
During this period, the unit holders who opt to redeem their
holdings in part or in full shall be allowed to exit at the NAV
applicable for the day on which the request is received, without
charging exit load.
38 Please refer to format of SID under section on Formats.
39 For examples of Benchmarks, refer to chapter on SID
22 Master Circular for Mutual Funds
<,
PART II – CONSOLIDATION OF SCHEMES
2.2 Consolidation of Schemes40
2.2.1 Any consolidation or merger of Mutual Fund schemes will be
treated as a change in the fundamental attributes of the related
schemes and Mutual Funds shall be required to comply with the
Mutual Funds Regulations in this regard41.
2.2.2 Further, in order to ensure that all important disclosures are
made to the investors of the schemes sought to be consolidated or
merged and their interests are protected; Mutual Funds shall take
the following steps:
2.2.2.1 Approval by the Board of the AMC and Trustee(s):
a. The proposal and modalities of the consolidation or merger shall
be approved by the Board of the AMC and Trustee(s), after they
ensure that the interest of unit holders under all the concerned
schemes have been protected in the said proposal.
2.2.2.2 Disclosures:
a. Subsequent to approval from the Board of the AMC and
Trustee(s), Mutual Funds shall file the proposal with the Board,
along with the draft SID, requisite fees (if a new scheme emerges
after such consolidation or merger) and draft of the letter to be
issued to the unit holders of all the concerned schemes.
40 SEBI Circular No. SEBI/MFD/CIR No.5/12031/03 dated June 23, 2003.
, 4 1 Regulation 18(15A) of the Mutual Funds Regulations.
23 Master Circular for Mutual Funds
b. The letter addressed to the unit holders, giving them the option
to exit at prevailing NAV without charging exit load, shall
disclose all relevant information enabling them to take well
informed decisions. This information will include, inter alia:
1. Latest portfolio of the concerned schemes42.
2. Details of the financial performance of the concerned schemes
since inception in the format prescribed in SID43 along with
comparisons with appropriate benchmarks.
3. Information on the investment objective, asset allocation and the
main features of the new consolidated scheme.
4. Basis of allocation of new units by way of a numerical
illustration
5. Percentage of total exposure to securities classified as below
investment grade or default and percentage of total illiquid
assets to net assets of each individual scheme(s) as well the
consolidated scheme.44
6. Tax impact of the consolidation on the unit holders.
7. Any other disclosure as specified by the Trustees.
8. Any other disclosure as directed by the Board.
2.2.2.3 Updation of SID shall be as per the requirements for change in
fundamental attribute of the scheme45.
2.2.2.4 Maintenance of Records:
a. AMC(s) shall maintain records of dispatch of the letters to the
unit holders and the responses received from them. A report
giving information on total number of unit holders in the
42 Refer format of half yearly portfolio disclosure under section on Formats
< 4 3 Please refer to SID Format under section on Formats
44 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019.
45 Please refer to SID chapter for further details
24 Master Circular for Mutual Funds
schemes and their net assets, number of unit holders who opted
to exit and net assets held by them and number of unit holders
and net assets in the consolidated scheme shall be filed with the
Board within 21 days from the date of closure of the exit
option46.
2.2.2.5 Merger or consolidation shall not be seen as change in
fundamental attribute of the surviving scheme if the following
conditions are met47:
a. Fundamental attributes48 of the surviving scheme do not
change. The ‘surviving scheme’ means the scheme which
remains in existence after the merger.
b. Mutual Funds are able to demonstrate that the circumstances
merit merger or consolidation of schemes and the interest of the
unit holders of surviving scheme is not adversely affected.
c. After approval by the Boards of AMCs and Trustees, the mutual
funds shall file such proposal with SEBI. SEBI would
communicate its observations on the proposal within the time
period prescribed49.
d. The letter to unit holders shall be issued only after the final
observations communicated by SEBI have been incorporated
and final copies of the same have been filed with SEBI.
46 SEBI Circular No- SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
47 SEBI Circular No- Cir / IMD / DF / 15/ 2010 dated October 22, 2010
48 SEBI Circular No-IIMARP/MF/CIR/01/294/98 dated February 4, 1998
49 Regulation 29(3) of SEBI (Mutual Funds) Regulations, 1996
25 Master Circular for Mutual Funds
PART III – LAUNCH OF ADDITIONAL PLANS50
2.3 Launch of Additional Plans
2.3.1 Additional plans sought to be launched under existing open ended
schemes which differ substantially from that scheme in terms of
portfolio or other characteristics shall be launched as separate
schemes in accordance with the regulatory provisions.
2.3.2 However, plan(s) which are consistent with the characteristics of
the scheme may be launched as additional plans as part of
existing schemes by issuing an addendum. Such proposal should
be approved by the Board(s) of AMC and Trustees. In this regard
please note that:
2.3.2.1 The addendum shall contain information pertaining to salient
features like applicable entry/exit loads, expenses or such other
details which in the opinion of the AMC/ Trustees is material.
The addendum shall be filed with SEBI 21 days in advance of
opening of plan(s).
2.3.2.2 AMC(s) shall publish an advertisement or issue a press release
at the time of launch of such additional plan(s).
50 SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15, 2009
26 Master Circular for Mutual Funds
2.4 Single Plan51
2.4.1 Mutual funds/AMCs shall launch schemes under a single plan
and ensure that all new investors are subject to single expense
structure.
2.4.2 Existing schemes with multiple plans based on the amount of
investment (i.e. retail, institutional, super-institutional, etc.) shall
accept fresh subscriptions only under one plan.
2.4.3 Other plans will continue till the existing investors remain
invested in the plan.
2.5 Direct Plan52
2.5.1 Mutual funds/AMCs shall provide a separate plan for direct
investments, i.e., investments not routed through a distributor,
in existing as well as new schemes.
2.5.2 Such separate plan shall have a lower expense ratio excluding
distribution expenses, commission, etc., and no commission shall
be paid from such plans. The plan shall also have a separate NAV.
51 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012
52 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012
27 Master Circular for Mutual Funds
PART IV – CATEGORIZATION AND RATIONALIZATION OF
MUTUAL FUND SCHEMES53
It is desirable that different schemes launched by a Mutual Fund are clearly
distinct in terms of asset allocation, investment strategy etc. Further, there
is a need to bring in uniformity in the characteristics of similar type of
schemes launched by different Mutual Funds. This would ensure that an
investor of Mutual Funds is able to evaluate the different options available,
before taking an informed decision to invest in a scheme.
In order to bring the desired uniformity in the practice, across Mutual
Funds and to standardize the scheme categories and characteristics of each
category, it has been decided to categorize the MF schemes as given below:
2.6 Categories of Schemes, Scheme Characteristics and
Type of Scheme (Uniform Description of Schemes):
2.6.1 The Schemes would be broadly classified in the following groups:
i. Equity Schemes
ii. Debt Schemes
iii. Hybrid Schemes
iv. Solution Oriented Schemes
v. Other Schemes
53 SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06, 2017
28 Master Circular for Mutual Funds
The details of the scheme categories under each of the aforesaid
groups along with their characteristics and uniform description are
as under:
A. Equity Schemes:
Sr. Category of Scheme Characteristics Type of scheme (uniform
No. Schemes description of scheme)
1 Multi Cap Minimum investment in equity & Multi Cap Fund- An open
Fund equity related instruments- 65% of ended equity scheme
total assets investing across large cap,
mid cap, small cap stocks
2 Large Cap Minimum investment in equity & Large Cap Fund- An open
Fund equity related instruments of large ended equity scheme
cap companies- 80% of total predominantly investing in
assets large cap stocks
3 Large & Mid Minimum investment in equity & Large & Mid Cap Fund- An
Cap Fund equity related instruments of large open ended equity scheme
cap companies- 35% of total investing in both large cap
assets and mid cap stocks
Minimum investment in equity &
equity related instruments of mid
cap stocks- 35% of total assets
4 Mid Cap Fund Minimum investment in equity & Mid Cap Fund- An open
equity related instruments of mid ended equity scheme
cap companies- 65% of total predominantly investing in
assets mid cap stocks
5 Small cap Minimum investment in equity & Small Cap Fund- An open
Fund equity related instruments of small ended equity scheme
cap companies- 65% of total predominantly investing in
assets small cap stocks
6 Dividend Yield Scheme should predominantly An open ended equity
Fund invest in dividend yielding stocks. scheme predominantly
investing in dividend
Minimum investment in equity- yielding stocks
65% of total assets
7 Value Fund* Scheme should follow a value An open ended equity
investment strategy. scheme following a value
Minimum investment in equity & investment strategy
equity related instruments - 65%
of total assets
Contra Fund* Scheme should follow a contrarian An open ended equity
investment strategy. scheme following
29 Master Circular for Mutual Funds
Minimum investment in equity & contrarian investment
equity related instruments - 65% strategy
of total assets
8 Focused Fund A scheme focused on the number An open ended equity
of stocks (maximum 30) scheme investing in
Minimum investment in equity & maximum 30 stocks
equity related instruments - 65% (mention where the scheme
of total assets intends to focus, viz., multi
cap, large cap, mid cap,
small cap)
9 Sectoral/ Minimum investment in equity & An open ended equity
Thematic equity related instruments of a scheme investing in __
particular sector/ particular sector (mention the
theme- 80% of total assets sector)/
An open ended equity
scheme following __ theme
(mention the theme)
10 ELSS Minimum investment in equity & An open ended equity
equity related instruments - 80% linked saving scheme with
of total assets (in accordance with a statutory lock in of 3
Equity Linked Saving Scheme, years and tax benefit
2005 notified by Ministry of
Finance)
* Mutual Funds will be permitted to offer either Value fund or Contra fund.
B. Debt Schemes
Sr. Category of Scheme Characteristics Type of scheme (uniform
No. Schemes description of scheme)
1 Overnight Investment in overnight securities An open ended debt
Fund** having maturity of 1 day scheme investing in
overnight securities
2 Liquid Fund $ Investment in Debt and money An open ended liquid
** market securities with maturity of scheme
upto 91 days only
3 ++ Ultra Short Investment in Debt & Money ‘An open ended XYZ
Duration Market instruments such that the scheme investing in
Fund Macaulay duration of the portfolio instruments such that the
is between Macaulay duration of the
3 months - 6 months portfolio is between A to B
years (please refer to page
no.__) # .’
30 Master Circular for Mutual Funds
4++ Low Duration Investment in Debt & Money ‘An open ended XYZ
Fund Market instruments such that the scheme investing in
Macaulay duration of the portfolio instruments such that the
is between Macaulay duration of the
6 months- 12 months portfolio is between A to B
years (please refer to page
no.__) # .’
5 Money Market Investment in Money Market An open ended debt
Fund instruments having maturity up to scheme investing in money
1 year market instruments
6++ Short Investment in Debt & Money ‘An open ended XYZ
Duration Market instruments such that the scheme investing in
Fund Macaulay duration of the portfolio instruments such that the
is between Macaulay duration of the
1 year - 3 years portfolio is between A to B
years (please refer to page
no.__) # .’
7++ Medium Investment in Debt & Money ‘An open ended XYZ
Duration Market instruments such that the scheme investing in
Fund ^^ Macaulay duration of the portfolio instruments such that the
is between Macaulay duration of the
3 years - 4 years. portfolio is between A to B
years (please refer to page
Portfolio Macaulay duration under no.__) # .’
anticipated adverse situation is 1
year to 4 years
8++ Medium to Investment in Debt & Money ‘An open ended XYZ
Long Market instruments such that the scheme investing in
Duration Macaulay duration of the portfolio instruments such that the
Fund ^^ is between Macaulay duration of the
4 - 7 years. portfolio is between A to B
years (please refer to page
Portfolio Macaulay duration under no.__) # .’
anticipated adverse situation is 1
year to 7 years
9++ Long Duration Investment in Debt & Money ‘An open ended XYZ
Fund Market Instruments such that the scheme investing in
Macaulay duration of the portfolio instruments such that the
is greater Macaulay duration of the
than 7 years portfolio is between A to B
years (please refer to page
no.__) # .’
31 Master Circular for Mutual Funds
10 Dynamic Investment across duration An open ended dynamic
Bond debt scheme investing
across duration
11 Corporate Minimum investment in corporate An open ended debt
Bond bonds- 80% of total assets (only in scheme predominantly
Fund AA+ and above rated corporate investing in AA+ and above
bonds) rated corporate bonds
12 Credit Risk Minimum investment in corporate An open ended debt
Fund ^ bonds- 65% of total assets (only in scheme predominantly
AA* and below rated corporate investing in AA and below
bonds) rated
corporate bonds (excluding
AA+ rated corporate
bonds)
13 Banking and Minimum investment in Debt An open ended debt
PSU Fund instruments of banks, Public scheme predominantly
Sector Undertakings, Public investing in Debt
Financial Institutions and instruments of banks,
Municipal Bonds - 80% of total Public Sector
assets Undertakings, Public
Financial Institutions and
Municipal Bonds
14 Gilt Fund Minimum investment in Gsecs- An open ended debt
80% of total assets (across scheme investing in
maturity) government securities
across maturity
15 Gilt Fund Minimum investment in Gsecs- An open ended debt
with 10 year 80% of total assets such that the scheme investing in
constant Macaulay duration of the portfolio government securities
duration is equal to 10 years having a constant
maturity of 10 years
16 Floater Fund Minimum investment in floating An open ended debt
rate instruments (including fixed scheme predominantly
rate instruments converted to investing in floating rate
floating rate exposures using instruments (including
swaps/derivatives)- 65% of total fixed rate instruments
assets converted to floating rate
exposures using
swaps/derivatives)
**Provisions of SEBI Circular No SEBI/IMD/DF/19/2010 dated November 26, 2010
shall be followed for Uniform cut-off timings for applicability of Net Asset Value in
respect of Liquid Fund and Overnight Fund.
32 Master Circular for Mutual Funds
$ All provisions mentioned in SEBI circular SEBI/IMD/CIR No.13/150975/ 09 dated
January 19, 2009 in respect of liquid schemes shall be applicable.
# Please refer to the page number of the Offer Document on which the concept of
Macaulay's Duration has been explained
^ Words/ phrases that highlight/ emphasize only the return aspect of the scheme
shall not be used in the name of the scheme (for instance Credit Opportunities Fund,
High Yield Fund, Credit Advantage etc.)
* excludes AA+ rated corporate bonds
^^ With respect to the Medium Duration Fund and Medium to Long Duration Fund,
the characteristics of the scheme shall remain the same under normal circumstances
as stated in the circular dated October 6, 2017. However, the fund manager, in the
interest of investors, may reduce the portfolio duration of the aforementioned
schemes up to one year, in case he has a view on interest rate movements in light of
anticipated adverse situation. The AMC shall be required to mention its asset
allocation under such adverse situation in its offer documents.
Whenever the portfolio duration is reduced below the specified floors of 3 years and
4 years in respect of Medium Duration Fund and Medium to Long Duration Fund
respectively, the AMC shall be required to record the reasons for the same with
adequate justification and maintain the same for inspection. The written
justifications shall be placed before the Trustees in the subsequent Trustee
meeting. Further, the Trustees shall also review the portfolio and report the same
in their Half Yearly Trustee Report to SEBI.
++ It is clarified that Macaulay duration shall be at portfolio level.
C. Hybrid Schemes
Sr. Category of Scheme Characteristics Type of scheme (uniform
No. Schemes description of scheme)
1 Conservative Investment in equity & equity An open ended hybrid
Hybrid Fund related instruments- between scheme investing
10% and 25% of total assets; predominantly in debt
Investment in Debt instruments
instruments- between 75% and
90% of total assets
2 Balanced Equity & Equity related An open ended balanced
Hybrid instruments- between 40% and scheme investing in equity
Fund @ 60% of total assets; and debt instruments
33 Master Circular for Mutual Funds
Debt instruments- between 40%
and 60% of total assets
No Arbitrage would be
permitted in this scheme
Aggressive Equity & Equity related An open ended hybrid
Hybrid Fund @ instruments- between 65% and scheme investing
80% of total assets; predominantly in
Debt instruments- between 20% equity and equity related
35% of total assets instruments
3 Dynamic Asset Investment in equity/ debt that An open ended dynamic
Allocation or is managed dynamically asset allocation fund
Balanced
Advantage
4 Multi Asset Invests in at least three asset An open ended scheme
Allocation ## classes with a minimum investing in __ , __ ,___
allocation of at least 10% each (mention the three different
in all three asset classes asset
classes)
5 Arbitrage Fund Scheme following arbitrage An open ended scheme
strategy. Minimum investment investing in arbitrage
in equity & equity related opportunities
instruments-
65% of total assets
6 Equity Savings Minimum investment in equity An open ended scheme
& equity related instruments- investing in equity,
65% of total assets and arbitrage and debt
minimum
investment in debt- 10% of total
assets
Minimum hedged & unhedged
to be stated in the SID.
Asset Allocation under defensive
considerations may also be
stated in the Offer Document
@ Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or
Balanced fund
## Foreign securities will not be treated as a separate asset class
D. Solution Oriented Schemes:
34 Master Circular for Mutual Funds
Sr. Category of Scheme Characteristics Type of scheme
No Schemes (uniform description of
scheme)
1 Retirement Scheme having a lock-in for at An open ended
Fund least 5 years or till retirement retirement solution
age whichever is earlier oriented scheme
having a lock-in of 5
years or till retirement
age (whichever is earlier)
2 Children's Scheme having a lock-in for at An open ended fund for
Fund least 5 years or till the child investment for children
attains age of majority having a lock-in for at
whichever is earlier least 5 years or till the
child attains age of
majority (whichever is
earlier)
E. Other Schemes:
Sr. Category of Scheme Characteristics Type of scheme (uniform
No Schemes description of scheme)
1 Index Funds/ Minimum investment in An open ended scheme
ETFs securities of a particular index replicating/ tracking _
(which is being index
replicated/ tracked)- 95% of
total
assets
2 FoFs Minimum investment in the An open ended fund of fund
(Overseas/ underlying fund- 95% of total scheme investing in fund
Domestic) assets (mention the underlying
fund)
2.6.2 As per the above, the existing ‘type of scheme’ (presently mentioned
below the scheme name in the offer documents/ advertisements/
marketing material/etc.) would be replaced with the type of scheme
(given in the third column of the tables) as applicable to each
category of scheme. This will enhance the existing disclosure.
2.6.3 In case of Solution oriented schemes, there will be specified period
of lock in as stated in the above tables.
35 Master Circular for Mutual Funds
However, the said lock- in period would not be applicable to any
existing investment by an investor, registered SIPs and incoming
STPs in the existing solution oriented schemes as on the date on
which such scheme is getting realigned with the provisions of this
circular.
2.6.4 The investment objective, investment strategy and benchmark of
each scheme shall be suitably modified (wherever applicable) to
bring it in line with the categories of schemes listed above.
2.7 Definition of Large Cap, Mid Cap and Small Cap:
2.7.1 In order to ensure uniformity in respect of the investment universe
for equity schemes, it has been decided to define large cap, mid cap
and small cap as follows:
i. Large Cap: 1st -100th company in terms of full market
capitalization
ii. Mid Cap: 101st -250th company in terms of full market
capitalization
iii. Small Cap: 251st company onwards in terms of full market
capitalization
2.7.2 Mutual Funds would be required to adopt the list of stocks prepared
by AMFI in this regard and AMFI would adhere to the following points
while preparing the list:
i. If a stock is listed on more than one recognized stock exchange,
an average of full market capitalization of the stock on all such
stock exchanges, will be computed;
36 Master Circular for Mutual Funds
ii. In case a stock is listed on only one of the recognized stock
exchanges, the full market capitalization of that stock on such
an exchange will be considered.
iii. This list would be uploaded on the AMFI website and the same
would be updated every six months based on the data as on the
end of June and December of each year. The data shall be
available on the AMFI website within 5 calendar days from the
end of the 6 months period.
iv. While preparing the single consolidated list of stocks, average
full market capitalization of the previous six month of the stocks
shall be considered54.
2.7.3 Subsequent to any updation in the list, Mutual Funds would have to
rebalance their portfolios (if required) in line with updated list, within
a period of one month.
2.8 Process to be followed for categorization and
rationalization of schemes:
2.8.1 Only one scheme per category would be permitted, except:
i. Index Funds/ ETFs replicating/ tracking different indices;
ii. Fund of Funds having different underlying schemes; and
iii. Sectoral/ thematic funds investing in different sectors/ themes
54 SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 04, 2017
37 Master Circular for Mutual Funds
CHAPTER 3
NEW PRODUCTS
3.1 Fund of Funds Scheme55
3.1.1 The SID and the advertisements pertaining to Fund of Funds
Scheme56 shall disclose that the investors are bearing the
recurring expenses of the scheme, in addition to the expenses of
other schemes in which the Fund of Funds Scheme makes
investments.
3.1.2 AMCs shall not enter into any revenue sharing arrangement with
the underlying funds in any manner and shall not receive any
revenue by whatever means/head from the underlying fund. Any
commission or brokerage received from the underlying fund shall
be credited into concerned scheme’s account57.
3.1.3 Fund of funds mutual fund schemes shall adopt the total expense
structures laid out in Regulations58, which Asset Management
Companies shall clearly indicate in the SIDs.
3.2 Gold Exchange Traded Fund Scheme59
3.2.1 A Gold Exchange Traded Fund (GETF) Scheme60 shall invest
primarily in:
55 SEBI Circular No. MFD/CIR. No.04/11488/2003 dated June 12, 2003.
56 Regulation 2(ma) of the Mutual Funds Regulations introduced vide Gazette Notification No.
S.O 632(E) dated May 29, 2003.
57 SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
58 Regulation 52(6)(a) of SEBI (Mutual Funds) Regulations, 1996
59 SEBI Circular No. SEBI/IMD/CIR. No.4/58422/06 dated January 24, 2006, SEBI Circular
No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006, SEBI Circular No. SEBI/IMD/CIR
No.14/84243/07 dated January 15, 2007.
60 Regulation 2(mb) of the SEBI (Mutual Funds) Regulations, 1996 introduced vide Gazette
Notification No. S.O. 38(E) dated January 12, 2006.
3 8 Master Circular for Mutual Funds
3.2.1.1 Gold and
3.2.1.2 Gold related instruments61. However investments in gold related
instruments shall be done only after such instruments are
specified by the Board62
3.2.1.3 Gold Deposit Scheme (GDS)63 of banks had been designated as
one such gold related instrument. However, as per RBI
notification dated October 22, 2015, the Gold Monetisation
Scheme, 2015 (GMS) will replace the Gold Deposit Scheme, 1999.
Accordingly, it has been decided that GMS will also be designated
as a gold related instrument64, in line with GDS of Banks.
3.2.1.4 Exchange Traded Commodity Derivatives (ETCDs)65 having gold
as the underlying, shall also be considered as ‘gold related
instrument’ for GETFs.
3.2.1.5 Investment in GDS, GMS and ETCD having gold as the
underlying by GETFs of mutual funds will be subject to following
conditions:
a. The cumulative exposure to gold related instruments i.e. GDS of
banks, GMS and ETCD having gold as the underlying shall not
exceed 50% of net asset value of the scheme. However, within the
50% limit, the investment limit for GDS of banks and GMS as part
of gold related instrument shall not exceed 20% of net asset value
of the scheme. The unutilized portion of the limit for GDS of banks
and GMS can be utilized for ETCD having gold as the underlying.
b. Before investing in GDS of Banks, GMS and ETCDs having gold
as the underlying, mutual funds shall put in place a written policy
61 Regulations 2(mc) of the Mutual Funds Regulations introduced vide Gazette Notification No.
S.O. 38(E) dated January 12, 2006.
62 SEBI Ci rcular No. SEBI/IMD/CIR No. 4/58422/06 dated January 24, 2006.
63 SEBI Circular No.CIR/IMD/DF/04/2013 dated February 15, 2013
64 SEBI Circular No. CIR/IMD/DF/11/2015 dated December 31, 2015
65 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/65 dated May 21, 2019
39 Master Circular for Mutual Funds
with regard to such investments with due approval from the Board
of the Asset Management Company and the Trustees. The policy
should have provision to make it necessary for the mutual fund
to obtain approval of trustees for investment proposal in GDS of
any bank and GMS. The policy shall be reviewed by mutual
funds, at least once a year.
c. Certificates issued in respect of investments made by GETFs in
GDS of banks and GMS can be held by the mutual funds in
dematerialized or physical form66.
3.2.1.6 Existing investments by Gold ETFs of Mutual Funds under the
GDS will be allowed to run till maturity unless these are
withdrawn prematurely.
3.2.2 Valuation:
3.2.2.1 Gold shall be valued based on the methodology provided in
Clause 3A of, Schedule Eight of the Mutual Funds Regulations67.
3.2.3 Determination of Net Asset Value68
3.2.3.1 The NAV of units under the GETF Scheme shall be
calculated up to four decimal points as shown below:
Market or Fair Value of Scheme's investments + Current
-
Assets Current Liabilities and Provision
NAV (in Rs. terms) = ______________________________________________
Number of Units outstanding under Scheme on the
Valuation Date
66 SEBI Circular No. CIR/IMD/DF/16/2013 dated October 18, 2013
67 SEBI Circular No. SEBI/IMD/CIR No.14/84243/07 dated January 15, 2007 read with Gazette
Notification F. No. SEBI/LAD/DoP/82534/2006 dated December 20, 2006.
68 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
4 0 Master Circular for Mutual Funds
3.2.4 Recurring Expenses69
3.2.4.1 The recurring expenses limits applicable to equity
schemes70 shall be applicable to GETF Scheme(s).
3.2.5 Benchmarks for GETF Scheme71
3.2.5.1 GETF Scheme(s) shall be benchmarked against the
price of gold.
3.2.6 Half yearly report by Trustees72
3.2.6.1 Physical verification of gold underlying the Gold ETF
units shall be carried out by statutory auditors of
mutual fund schemes and reported to trustees on half
yearly basis.
3.2.6.2 The confirmation on physical verification of gold as
above shall also form part of half yearly report73 by
trustees to SEBI.
3.3 Capital Protection Oriented Scheme74
3.3.1 The SID, KIM and advertisements pertaining to Capital Protection
Oriented Scheme75 shall disclose that the scheme is “oriented towards
protection of capital” and not “with guaranteed returns.” It shall also
be indicated that the orientation towards protection of capital
69 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
70 Regulation 52(6) of the SEBI (Mutual Funds) Regulations, 1996.
71 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
72 SEBI Circular No. Cir/IMD/DF/20/2010 dated December 06, 2010
73 Please refer to the section on Formats for the disclosures in the Half Yearly Trustee Report
w.r.t physical verification of Gold. This will be effective from the half yearly report ending April
2011 by Trustees to SEBI.
7 4 SEBI Circular No. SEBI/IMD/CIR No.9/74364/06 dated August 14, 2006.
75 Regulat ion 2(ea), 33(2A) and 38A of the Mutual Funds Regulations introduced vide Gazette
Notification No. S.O. 1254(E) dated August 3, 2006.
41 Master Circular for Mutual Funds
originates from the portfolio structure of the scheme and not from any
bank guarantee, insurance cover etc.
3.3.2 The proposed portfolio structure indicated in the SID and KIM shall
be rated by a Credit Rating Agency registered with the Board from the
view point of assessing the degree of certainty for achieving the
objective of capital protection and the rating shall be reviewed on a
quarterly basis.
3.3.3 The Trustees shall continuously monitor the portfolio structure of the
scheme and report the same in the Half Yearly Trustee Reports76 to
the Board. The AMC(s) shall also report on the same in its bimonthly
(CTR(s)77to the Board.
3.3.4 It shall also be ensured that the debt component of the portfolio
structure has the highest investment grade rating.
3.4 Real Estate Mutual Funds78:
3.4.1 A real estate mutual fund scheme79 can invest in real estate assets
in the cities mentioned in:
3.4.1.1. List of Million Plus Urban Agglomerations/Cities; or
3.4.1.2 List of Million Plus Cities
3.4.2 Such list appears in Census Statistics of India (2001) at
www.censusindia.gov.in. A printout of cities which appear in the
76 For format of Half Yearly Trustee Report please refer section on Formats
77 For format of bimonthly CTR please refer section on Formats
78 SEBI Circular No - SEBI/IMD/CIR No.4/124477/08 May 2,2008
79Regulation 49 A(a)(i) of SEBI (Mutual Fund) Regulations, 1996
42 Master Circular for Mutual Funds
foresaid categories taken from the said website is attached for ready
reference at Annexure 4.
3.5 Infrastructure Debt Schemes80
3.5.1 Placement Memorandum:
3.5.1.1 Private Placement to less than 50 investors has been
permitted as an alternative to New Fund Offer to the
public, in case of Infrastructure Debt Funds (IDF). In case
of private placement, the mutual funds would have to file
a Placement Memorandum with SEBI instead of a
Scheme Information Document and a Key Information
Memorandum. However, all the other conditions
applicable to IDFs offered through the NFO route like
kind of investments, investment restrictions, etc. would
be applicable to IDFs offered through private placement.
3.5.1.2 In terms of regulation 49-OA of the SEBI (Mutual Funds)
Regulations, 1996, the Placement Memorandum shall be
filed with SEBI as per the prescribed format81.
3.5.2 The Asset Management Companies shall ensure that the
Placement Memorandum is uploaded on their respective websites
after allotment of units, and on the website of such recognized
Stock Exchange, where it is proposed to be listed, at the time of
listing of the scheme.
3.5.3 FPIs which are long term investors
3.5.3.1 The universe of strategic investors in the IDF has been
expanded to include, inter alia, FPIs registered with SEBI
which are long term investors subject to their existing
80 SEBI Circular No. CIR/IMD/DF/7/2013 dated April 23, 2013
81 Please refer to section on Formats for requisite Formats
43 Master Circular for Mutual Funds
investment limits. With reference to regulation 49L of the
SEBI (Mutual Funds) Regulations, 1996 the following
categories of FPIs are designated as long term investors
only for the purpose of IDF:
a. Foreign Central Banks
b. Governmental Agencies
c. Sovereign Wealth Funds
d. International/Multilateral Organizations/ Agencies
e. Insurance Funds
f. Pension Funds
g. Foreign feeder funds, having at all times, at least 20%
of their assets under management held by investors
belonging to one of more of the above categories of
FPIs82
3.5.4 Investments by the IDF scheme
3.5.4.1 With reference to regulation 49P (1) of the SEBI (Mutual
Funds) Regulations, 1996, the investments in bank loans
shall be made only through the securitization mode.
82 SEBI Circular No. CIR/IMD/DF/20/2013 dated November 29, 2013
44 Master Circular for Mutual Funds
CHAPTER 4
RISK MANAGEMENT SYSTEM83
4.1 An Operating Manual84 for Risk Management has been developed to ensure
minimum standards of due diligence and Risk Management Systems for all
the Mutual Funds in various operational areas (for e.g. Fund Management,
Operations, Customer Service, Marketing and Distribution, Disaster
Recovery and Business Contingency, etc.) and is enclosed herewith as
Annexure 2.
4.2 The Risk Management practices covered in the Operating Manual are
under three categories as detailed below:
4.2.1 Existing Industry Practices:
4.2.1.1 Under each head of risk, the Manual covers the exemplary practices
followed by some / most of Mutual Funds in India. However, the
extent and degree of observance of these practices differs among the
Mutual Funds. Mutual Funds shall accordingly develop their systems
and follow these practices.
4.2.2 Practices to be followed on Mandatory Basis:
4.2.2.1 Mutual Funds shall follow the practices which have been indicated
as mandatory in the operating manual. These are (i) Risk
Management function that shall be assigned to Compliance Officer
or Internal Risk Management Committee or to an external agency,
8 3 SEBI Circular No. MFD/CIR/15/19133/2002 dated September 30, 2002.
84 The Manua l has been developed by AMFI in association with Pricewaterhouse Coopers as a
part of Indo-US Financial Institutions Reforms and Expansion Project.
45 Master Circular for Mutual Funds
(ii) Disaster Recovery and Business Contingency plans, and
(iii)Insurance cover against certain risks.
4.2.3 Best Practices to be followed by Mutual Funds:
4.2.3.1 Mutual Funds shall adopt these practices as a part of their due
diligence exercise after considering the size of their operations.
4.3 Implementation of the Risk Management System
4.3.1 Mutual Funds shall adopt the following approach to implement the Risk
Management System:
4.3.2 Identification of observance of each recommendation:
4.3.2.1 Mutual Funds shall identify areas of current adherence as well as
non-adherence of various Risk Management practices under each of
the three categories. They shall examine the areas where development
or improvement of systems is required.
4.3.2.2 After identifying the same, Mutual Funds shall review the progress
made on implementation of the systems on a monthly basis and place
the progress report in periodical meetings of the Board of the AMC
and Trustees.
4.3.3 Review of Progress of implementation by Board of AMC and Trustee(s):
4.3.3.1 The Board of the AMC and Trustee(s) shall review the progress made
by the Mutual Funds with regard to Risk Management practices and
46 Master Circular for Mutual Funds
the same shall be reported to the Board at the time of sending CTR(s)
and Half Yearly Trustee Reports.
4.3.4 Review by Internal Auditors:
4.3.4.1 The review of Risk Management Systems shall be a part of internal
audit and the auditors shall check their adequacy on a continuing
basis. Their reports shall be placed before the Board of the AMC and
Trustee(s) who shall comment on the adequacy of systems in the
CTRs and Half Yearly Reports filed with the Board.
4.4 Stress Testing of Liquid Fund and Money Market Mutual Fund
Schemes 85
4.4.1 As a part of risk management framework, Mutual Funds (MFs) carry out
stress testing of their portfolio, particularly for debt schemes. In order
to standardize this practice across industry, AMFI came out with Best
Practice Guidelines dated September 12, 2014 on stress testing of Liquid
Funds and Money Market Mutual Fund Schemes (MMMFs).
4.4.2 In order to further strengthen the risk management practices and to
develop a sound framework that would evaluate potential vulnerabilities
on account of plausible events and provide early warning on the health
of the underlying portfolio of Liquid Fund and MMMF Schemes, it has
been decided to stipulate the following guidelines:
4.4.2.1 As a part of the extant risk management framework, AMCs
should have stress testing policy in place which mandates
8 5 SEBI Circular No. CIR/IMD/DF/03/2015 dated April 30, 2015.
47 Master Circular for Mutual Funds
them to conduct stress test on all Liquid Fund and MMMF
Schemes.
4.4.2.2 The stress test should be carried out internally at least on
a monthly basis, and if the market conditions require so,
AMC should conduct more frequent stress test.
4.4.2.3 The concerned schemes shall be tested on the following
risk parameters, among others deemed necessary by the
AMC:
a) Interest rate risk;
b) Credit risk;
c) Liquidity & Redemption risk.
4.4.2.4 While conducting stress test, it will be required to evaluate
impact of the various risk parameters on the scheme and
its Net Asset Value (NAV). The parameters used and the
methodology adopted for conducting stress test on such
type of scheme, should be detailed in the stress testing
policy, which is required to be approved by the Board of
AMC.
4.4.2.5 Further, in the event of stress test revealing any
vulnerability or early warning signal, it would be required
to bring it to the notice of the Trustees and take corrective
action as deemed necessary, to reinforce their robustness.
Each AMC should also be required to have documented
guidelines, to deal with the adverse situation effectively.
4.4.2.6 Such stress-testing policy shall be reviewed by the Board
of AMC and Trustees, at least on an annual basis, in light
48 Master Circular for Mutual Funds
of the evolving market scenarios and should cover the
following aspects:
i. Adequacy of the documentation for various elements of
the stress testing framework
ii. Scope of coverage of the stress testing policy and the
levels of stress applied
iii. Integration of the stress testing framework in the day-
to-day risk management processes
iv. Adequacy of the corrective actions and the efficacy of the
systems for their activation.
4.4.2.7 Further, Trustees shall be required to report compliance
with this circular and steps taken to deal with adverse
situations faced, if any, in the Half Yearly Trustee Report
submitted to SEBI.
4.5 Internal Credit Risk Assessment86:
4.5.1 In order to ensure that mutual funds are able to carry out their own
credit assessment of assets and reduce reliance on credit rating
agencies, all AMCs are required to have an appropriate policy and
system in place to conduct an in-house credit risk assessment/ due
diligence of debt and money market instruments/ products at all points
of time i.e. before investing in such instruments/ products and also on
continuous basis in order to have proper assessment of the credit risk
of the portfolio. Further, the internal policy should have adequate
provisions to generate early warning signals (including yield based
alerts) on deterioration of credit profile of the issuer. Based on the alerts
86SEBI Circular No. SEBI/HO/IMD/DF2/CIR/2016/42 dated March 18, 2016 and SEBI
Circular No. SEBI/HO/IMD/DF2/CIR/2019/104 dated October 01, 2019.
49 Master Circular for Mutual Funds
generated, the AMCs shall take appropriate measures and report the
same to trustees.
4.6 Creation of segregated portfolio in mutual fund schemes87,88
4.6.1 In order to ensure fair treatment to all investors in case of a credit event
and to deal with liquidity risk, it has been decided to permit creation of
segregated portfolio of debt and money market instruments by mutual
funds schemes.
4.6.2 For this purpose,
4.6.2.1 The term ‘segregated portfolio’ shall mean a portfolio,
comprising of debt or money market instrument affected by a
credit event, that has been segregated in a mutual fund
scheme.
4.6.2.2 The term ‘main portfolio’ shall mean the scheme portfolio
excluding the segregated portfolio.
4.6.2.3 The term ‘total portfolio’ shall mean the scheme portfolio
including the securities affected by the credit event.
4.6.3 AMC may create segregated portfolio in a mutual fund scheme subject
to the following:
4.6.3.1 Segregated portfolio may be created, in case of a credit event at
issuer level i.e. downgrade in credit rating by a SEBI registered
Credit Rating Agency (CRA), as under:
a. Downgrade of a debt or money market instrument to
‘below investment grade’, or
8 7 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/160 dated December 28, 2018.
88 SEBI Circu lar No. SEBI/HO/IMD/DF2/CIR/P/2019/127 dated November 07, 2019.
50 Master Circular for Mutual Funds
b. Subsequent downgrades of the said instruments from ‘below
investment grade’, or
c. Similar such downgrades of a loan rating.
4.6.3.2 In case of difference in rating by multiple CRAs, the most
conservative rating shall be considered. Creation of segregated
portfolio shall be based on issuer level credit events as detailed
at paragraph 4.6.3.1-a and implemented at the ISIN level.
4.6.3.3 Segregated portfolio of unrated debt or money market
instruments may be created only in case of actual default of
either the interest or principal amount. Actual default by the
issuer of such instruments shall be considered as credit event
for creation of segregated portfolio.
4.6.3.4 AMCs shall inform AMFI immediately about the actual default
by the issuer. Upon being informed about the default, AMFI
shall immediately inform the same to all AMCs. Pursuant to
dissemination of information by AMFI about actual default by
the issuer, AMCs may segregate the portfolio of debt or money
market instruments of the said issuer.
4.6.3.5 Creation of segregated portfolio shall be optional and at the
discretion of the AMC. It should be created only if the Scheme
Information Document (SID) of the scheme has provisions for
segregated portfolio with adequate disclosures. All new
51 Master Circular for Mutual Funds
schemes89 shall have the enabling provisions included in the
SID for creation of segregated portfolio.
4.6.3.6 AMCs shall have a detailed written down policy on creation of
segregated portfolio and the same shall be approved by the
trustees.
4.6.4 Process for creation of segregated portfolio
4.6.4.1 AMC shall decide on creation of segregated portfolio on the day
of credit event. Once an AMC decides to segregate portfolio, it
shall
i. seek approval of trustees prior to creation of the segregated
portfolio.
ii. immediately issue a press release disclosing its intention to
segregate such debt and money market instrument and its
impact on the investors. The mutual fund should also
disclose that the segregation shall be subject to trustee
approval. Additionally, the said press release shall be
prominently disclosed on the website of the AMC.
iii. ensure that till the time the trustee approval is received,
which in no case shall exceed 1 business day from the day of
credit event, the subscription and redemption in the scheme
shall be suspended for processing with respect to creation of
units and payment on redemptions.
4.6.4.2 Once trustee approval is received by the AMC,
i. Segregated portfolio shall be effective from the day of credit
event
89 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/127 dated November 07, 2019.
52 Master Circular for Mutual Funds
ii. AMC shall issue a press release immediately with all relevant
information pertaining to the segregated portfolio. The said
information shall also be submitted to SEBI.
iii. An e-mail or SMS should be sent to all unit holders of the
concerned scheme.
iv. The NAV of both segregated and main portfolio shall be
disclosed from the day of the credit event.
v. All existing investors in the scheme as on the day of the credit
event shall be allotted equal number of units in the segregated
portfolio as held in the main portfolio.
vi. No redemption and subscription shall be allowed in the
segregated portfolio. However, in order to facilitate exit to unit
holders in segregated portfolio, AMC shall enable listing of
units of segregated portfolio on the recognized stock exchange
within 10 working days of creation of segregated portfolio and
also enable transfer of such units on receipt of transfer
requests.
4.6.4.3 If the trustees do not approve the proposal to segregate
portfolio, AMC shall issue a press release immediately
informing investors of the same.
4.6.5 Valuation and processing of subscriptions and redemptions
4.6.5.1 Notwithstanding the decision to segregate the debt and money
market instrument, the valuation should take into account the
credit event and the portfolio shall be valued based on the
principles of fair valuation (i.e. realizable value of the assets) in
53 Master Circular for Mutual Funds
terms of the relevant provisions of SEBI (Mutual Funds)
Regulations, 1996 and Circular(s) issued thereunder.
4.6.5.2 All subscription and redemption requests for which NAV of the
day of credit event or subsequent day is applicable will be
processed as per the existing circular on applicability of NAV as
under:
i. Upon trustees’ approval to create a segregated portfolio -
a. Investors redeeming their units will get redemption
proceeds based on the NAV of main portfolio and will
continue to hold the units of segregated portfolio.
b. Investors subscribing to the scheme will be allotted units
only in the main portfolio based on its NAV.
ii. In case trustees do not approve the proposal of segregated
portfolio, subscription and redemption applications will
be processed based on the NAV of total portfolio.
4.6.6 Disclosure Requirements
In order to enable the existing as well as the prospective investors to
take informed decision, the following shall be adhered to:
4.6.6.1 A statement of holding indicating the units held by the
investors in the segregated portfolio along with the NAV of both
segregated portfolio and main portfolio as on the day of the
credit event shall be communicated to the investors within 5
working days of creation of the segregated portfolio.
54 Master Circular for Mutual Funds
4.6.6.2 Adequate disclosure of the segregated portfolio shall appear in
all scheme related documents, in monthly and half-yearly
portfolio disclosures and in the annual report of the mutual
fund and the scheme.
4.6.6.3 The Net Asset Value (NAV) of the segregated portfolio shall be
declared on daily basis.
4.6.6.4 The information regarding number of segregated portfolios
created in a scheme shall appear prominently under the name
of the scheme at all relevant places such as SID, KIM-cum-
Application Form, advertisement, AMC and AMFI websites, etc.
4.6.6.5 The scheme performance required to be disclosed at various
places shall include the impact of creation of segregated
portfolio. The scheme performance should clearly reflect the fall
in NAV to the extent of the portfolio segregated due to the credit
event and the said fall in NAV along with recovery(ies), if any,
shall be disclosed as a footnote to the scheme performance.
4.6.6.6 The disclosures at paragraph 4.6.6.4 and 4.6.6.5 above
regarding the segregated portfolio shall be carried out for a
period of at least 3 years after the investments in segregated
portfolio are fully recovered/ written-off.
4.6.6.7 The investors of the segregated portfolio shall be duly informed
of the recovery proceedings of the investments of the segregated
portfolio. Status update may be provided to the investors at the
time of recovery and also at the time of writing-off of the
segregated securities.
55 Master Circular for Mutual Funds
4.6.7 TER for the Segregated Portfolio
4.6.7.1 AMC shall not charge investment and advisory fees on the
segregated portfolio. However, TER (excluding the investment
and advisory fees) can be charged, on a pro-rata basis only
upon recovery of the investments in segregated portfolio.
4.6.7.2 The TER so levied shall not exceed the simple average of such
expenses (excluding the investment and advisory fees) charged
on daily basis on the main portfolio (in % terms) during the
period for which the segregated portfolio was in existence.
4.6.7.3 The legal charges related to recovery of the investments of the
segregated portfolio may be charged to the segregated portfolio
in proportion to the amount of recovery. However, the same
shall be within the maximum TER limit as applicable to the
main portfolio. The legal charges in excess of the TER limits, if
any, shall be borne by the AMC.
4.6.7.4 The costs related to segregated portfolio shall in no case be
charged to the main portfolio.
4.6.8 Monitoring by Trustees
4.6.8.1 In order to ensure timely recovery of investments of the
segregated portfolio, trustees shall ensure that:
i. The AMC puts in sincere efforts to recover the investments of
the segregated portfolio.
ii. Upon recovery of money, whether partial or full, it shall be
immediately distributed to the investors in proportion to their
56 Master Circular for Mutual Funds
holding in the segregated portfolio. Any recovery of amount of
the security in the segregated portfolio even after the write off
shall be distributed to the investors of the segregated portfolio.
iii. An Action Taken Report (ATR) on the efforts made by the AMC
to recover the investments of the segregated portfolio is placed
in every trustee meeting till the investments are fully recovered/
written-off.
iv. The trustees shall monitor the compliance of this circular and
disclose in the half-yearly trustee reports filed with SEBI, the
compliance in respect of every segregated portfolio created.
4.6.8.2 In order to avoid mis-use of segregated portfolio, trustees shall
ensure to have a mechanism in place to negatively impact the
performance incentives of Fund Managers, Chief Investment
Officers (CIOs), etc. involved in the investment process of
securities under the segregated portfolio, mirroring the existing
mechanism for performance incentives of the AMC, including
claw back of such amount to the segregated portfolio of the
scheme.
4.6.9 AMCs desirous of having a provision of segregated portfolio in existing
scheme shall ensure that all relevant disclosures are made in the SID of
such schemes. The provision to enable creation of segregated portfolio
in the existing scheme shall be subject to compliance with Regulation
18(15A) of SEBI (Mutual Funds) Regulations, 1996.
4.6.10 The existence of the provisions for segregated portfolio should not
encourage the AMCs to take undue credit risk in the scheme portfolio.
57 Master Circular for Mutual Funds
Any mis-use of the provisions of segregated portfolio, would be
considered serious and stringent action may be taken.
4.7 Risk management framework for liquid and overnight funds90
In order to augment the risk management framework for liquid and overnight
funds, the following has been decided:
1. Liquid funds shall hold at least 20% of its net assets in liquid assets. For
this purpose, ‘liquid assets’ shall include Cash, Government Securities,
T-bills and Repo on Government Securities.
In case, the exposure in such liquid assets falls below 20% of net assets
of the scheme, the AMC shall ensure compliance with the above
requirement before making any further investments.
2. Liquid funds and Overnight Funds shall not park funds pending
deployment in short term deposits of scheduled commercial banks.
3. Liquid funds and Overnight Funds shall not invest in debt securities
having structured obligations (SO rating) and/ or credit enhancements
(CE rating). However, debt securities with government guarantee shall be
excluded from such restriction.
90 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/101 dated September 20, 2019.
58 Master Circular for Mutual Funds
4. Mutual Fund shall levy exit load on investors who exit the Liquid Fund
within 7 days of their investment.
To ensure uniformity across the industry, AMFI is advised to prescribe
the minimum exit load in a liquid fund on a graded basis as specified
above in consultation with SEBI.
4.8 Cyber Security and Cyber Resilience Framework for Mutual
Funds/ AMCs91
4.8.1 With rapid technological advancement in securities market,
there is greater need for maintaining robust cyber security and
to have cyber resilience framework to protect integrity of data
and guard against breaches of privacy.
4.8.2 As part of the operational risk management, the Mutual Funds
/ Asset Management Companies (AMCs) need to have robust
cyber security and cyber resilience framework in order to
provide essential facilities and services and perform critical
functions in securities market.
4.8.3 Based on the recommendation of SEBI’s High Powered Steering
Committee - Cyber Security, it has been decided that the
framework prescribed vide SEBI circular
CIR/MRD/DP13/2015 dated July 06, 2015 on cyber security
and cyber resilience also be made applicable to all Mutual
Funds / AMC. Accordingly, all Mutual Funds / AMCs shall
comply with the provisions of Cyber Security and Cyber
Resilience as placed at Annexure-8.
91 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/12 dated January 10, 2019
59 Master Circular for Mutual Funds
4.8.4 Mutual Funds / AMCs are advised to take necessary steps
to put in place systems for implementation of this circular.
4.9 Technology Committee for Mutual Funds/ AMCs92
4.9.1 With rapid technological advancement in securities market,
technology is playing a very important role in asset
management business and have a major impact on the various
processes and controls designed and implemented by AMCs.
The role of technology related aspects has become even more
critical in managing risks related to asset management
business.
4.9.2 In order to deal with various technology related issues, AMCs
are advised to constitute a Technology Committee comprising
experts proficient in technology. Such committee shall have at
least one independent external expert with adequate
experience in the area of technology in Mutual Fund industry
/ BFSI.
4.9.3 The aforementioned committee shall, inter alia, review the
cyber security and cyber resilience framework for Mutual
Funds / AMCs in terms of Para 7 of Annexure-8 and
also review the system audit related aspects of AMCs in terms
of Para 4 of SEBI circular on system audit framework for
mutual funds / AMCs.
92 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/58 dated April 11, 2019
60 Master Circular for Mutual Funds
4.10 Reporting for Artificial Intelligence (AI) and Machine Learning (ML)
applications and systems offered and used by Mutual Funds93
4.10.1 There is increasing usage of AI (Artificial Intelligence) and ML
(Machine Learning) as product offerings by market
intermediaries and participants (e.g.: “robo advisors”) in
investor and consumer facing products. SEBI is conducting a
survey and creating an inventory of the AI / ML landscape in
the Indian financial markets to gain an in-depth
understanding of the adoption of such technologies in the
markets and to ensure preparedness for any AI / ML policies
that may arise in the future.
4.10.2 As most AI / ML systems are black boxes and their behavior
cannot be easily quantified, it is imperative to ensure that any
advertised financial benefit owing to these technologies in
investor facing financial products offered by intermediaries
should not constitute to misrepresentation.
Scope definition
4.10.3 Any set of applications / software / programs / executable /
systems (computer systems) – cumulatively called application
and systems,
a. that are offered to investors (individuals and institutions) or
used internally by Mutual Funds to facilitate investing and
trading or for any other purpose,
OR
93 SEBI Circular No. SEBI/HO/IMD/DF5/CIR/P/2019/63 dated May 09, 2019
61 Master Circular for Mutual Funds
b. to disseminate investments strategies and advice,
OR
c. to carry out compliance / operations / activities,
where AI / ML is portrayed as a part of the public product offering
or under usage for compliance or management purposes, is included
in the scope of this circular. Here, “AI” / “ML” refers to the terms
“Artificial Intelligence” and “Machine Learning” used as a part of the
product offerings. In order to make the scope of this circular
inclusive of various AI and ML technologies in use, the scope also
covers Fin-Tech and Reg-Tech initiatives undertaken by market
participants that involves AI and ML.
4.10.4 Technologies that are considered to be categorized as AI and ML
technologies in the scope of this circular, are explained in Annexure
9.
Regulatory requirements
4.10.5 All registered Mutual Funds offering or using applications or
systems as defined in the Annexure 9, should participate in the
reporting process by completing the AI / ML reporting format94.
4.10.6 All the registered Mutual Funds using AI / ML based application or
system as defined in Annexure 9, are required to fill in the form as
94 Please see the formats section (SEBI Circular No. SEBI/HO/IMD/DF5/CIR/P/2019/63
dated May 09, 2019)
62 Master Circular for Mutual Funds
per the format94 and make submissions on quarterly basis within 15
calendar days of the expiry of the quarter to AMFI.
4.10.7 AMFI shall consolidate the information on AI / ML applications and
systems reported by Mutual Funds on quarterly basis and submit
to SEBI at email id AIML_MF@sebi.gov.in within 30 calendar days of
the expiry of the quarter.
4.10.8 AMFI shall ensure that confidentiality is maintained regarding the
information received by them from Mutual Funds.
63 Master Circular for Mutual Funds
CHAPTER 5
DISCLOSURES & REPORTING NORMS
PART I – DISCLOSURES
5.1 Portfolio Disclosures95
5.1.1.
a) Mutual Funds/ AMCs shall disclose portfolio (along with ISIN) as
on the last day of the month / half-year for all their schemes on
their respective website and on the website of AMFI within 10 days
from the close of each month/ half-year respectively in a user-
friendly and downloadable spreadsheet format.
b) In case of unit holders whose e-mail addresses are registered, the
Mutual Funds/ AMCs shall send via email both the monthly and
half-yearly statement of scheme portfolio within 10 days from the
close of each month/ half-year respectively.
c) Mutual Funds/ AMCs shall publish an advertisement every half-
year disclosing the hosting of the half-yearly statement of its
schemes portfolio on their respective website and on the website of
AMFI and the modes such as SMS, telephone, email or written
request (letter) through which a unit holder can submit a request
for a physical or electronic copy of the statement of scheme
portfolio. Such advertisement shall be published in the all India
edition of at least two daily newspapers, one each in English and
Hindi.
d) Mutual Funds/ AMCs shall provide a physical copy of the
statement of its scheme portfolio, without charging any cost, on
specific request received from a unit holder.
95 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012 and
SEBI/HO/IMD/DF2/CIR/P/2018/92 dated June 05, 2018
64 Master Circular for Mutual Funds
5.1.2. The format for monthly portfolio disclosure96 shall be same as that
of half yearly portfolio disclosures. The format97 for disclosure for
monthly and half yearly portfolio is placed at format section.
5.1.3. Mutual funds/AMCs may disclose additional information (such as
ratios, etc.) subject to compliance with the Advertisement Code.
5.1.4. The format for disclosure for monthly and half yearly portfolio is
placed at format section.
5.2 Disclosure of derivatives in Half Yearly Portfolios98
5.2.1 A format99 for the purpose of uniform disclosure of investments
in derivative instruments by Mutual Funds in half yearly portfolio
disclosure, annual report or in any other disclosures is
prescribed.
5.2.2 Further, while listing net assets, the margin amounts paid should
be reported separately under cash or bank balances.
5.3 Unaudited Half Yearly Financials100
5.3.1 The publication of the unaudited half-yearly results shall be
made in line with provisions of the Regulations101, in the format
prescribed in Twelfth Schedule.
5.3.2 The half yearly disclosures102 of the unaudited financial results
on respective website should be made in a user-friendly and
downloadable format (preferably in a spreadsheet).
96 Please refer to section on Formats for requisite Formats
97 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000, SEBI Circular No. MFD/CIR
No.10/310/01 dated September 25, 2001, SEBI Circular No. MFD/CIR/14/18337/2002 dated
September 19, 2002, SEBI Circular No. IMD/CIR 8/132968/2008 dated July 24, 2008
98 SEBI Circular Cir/ IMD/ DF/ 11/ 2010 dated August 18, 2010
99 For formats on disclosure of derivatives, please refer to the section on Formats
100 SEBI Circular MFD/CIR/1/200/2001 dated April 20, 2001 & SEBI Circular No. IMD/CIR
No.8/132968/2008 dated July 24, 2008
101 Regulation 59 of SEBI (Mutual Funds) Regulations, 1996
102 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012
65 Master Circular for Mutual Funds
5.4 Providing Annual Report or Abridged Summary 103
For providing annual report104 or abridged summary thereof, the
following shall be adhered
5.4.1 The scheme wise annual report shall be hosted on the website of the
Mutual Funds/ AMCs and on the website of AMFI. The Mutual
Funds/ AMCs shall display the link prominently on their websites
and make the physical copies available to the unit holders, at their
registered offices at all times.
5.4.2 Mutual Funds/ AMCs shall e-mail the scheme annual reports or
abridged summary thereof to those unit holders, whose email
addresses are registered with the Mutual Fund.
5.4.3 In case of unit holders whose email addresses are not registered with
the Mutual Fund, the Mutual Funds/ AMCs shall undertake an
exercise of communicating to the unit holders, through a letter
enclosing self-addressed envelope enabling unit holders to 'opt-in'
within 30 days, to continue receiving a physical copy of the scheme-
wise annual report or abridged summary thereof.
5.4.4 To ensure that unit holders get sufficient opportunity to
communicate their preference of ‘opt-in’ or ‘opt-out’ with respect to
receiving the annual report or abridged summary thereof in physical
copy, Mutual Funds/ AMCs shall conduct one more round of similar
exercise for those unit holders who have not responded to the ‘opt-
in’ communication as stated at paragraph 5.4.3 above, after a period
of not less than 30 days from the date of issuance of the first
communication. Further, a period of 15 days from the date of
103 SEBI Circular No. IMD/CIR No.8/132968/2008 dated July 24, 2008, Circular
No.Cir/IMD/DF/16/2011 dated September 8, 2011 and SEBI/HO/IMD/DF2/CIR/P/2018/92
dated June 05, 2018
104 For format of abridged scheme wise report, please refer the section on formats
66 Master Circular for Mutual Funds
issuances of the second communication may be given to unit holders
to exercise their option of ‘opt-in’ or ‘opt-out’.
5.4.5 Mutual Funds/ AMCs shall publish an advertisement every year
disclosing the hosting of the scheme wise annual report on their
respective website and on the website of AMFI and the modes such
as SMS, telephone, email or written request (letter), etc. through
which unit holders can submit a request for a physical or electronic
copy of the scheme wise annual report or abridged summary thereof.
Such advertisement shall be published in the all India edition of at
least two daily newspapers, one each in English and Hindi.
5.4.6 Mutual Funds/ AMCs shall provide a physical copy of the abridged
summary of the Annual Report, without charging any cost, on
specific request received from a unit holder.
5.4.7 The ‘opt-in’ facility to receive physical copy of the scheme-wise
annual report or abridged summary thereof shall be provided in the
application form for new subscribers.
5.4.8 These websites should also be linked with AMFI website so that the
investors and analyst(s) can access the annual reports of all mutual
funds at one place105. However, as per the Regulations106, a copy of
Scheme wise Annual Report shall be also made available to unit
holder(s) on payment of nominal fees.
105 SEBI Cir No – MFD/CIR/15/041/2002 dated March 14,2002
106 Regulation 56(1) & 56(3) of SEBI (Mutual Funds) Regulations, 1996
67 Master Circular for Mutual Funds
5.5 Disclosure of large unit holdings107
5.5.1 The number of investors holding over 25 % of the NAV108 in a scheme
and their total holdings in percentage terms shall be disclosed in the
Statement of Accounts issued after the NFO and also in the Half
Yearly and Annual Results109.
5.6 Asset Under Management (AUM) disclosure110
5.6.1 Wherever the Mutual Funds discloses the AUM figures for the fund,
disclosure on bifurcation of the AUM into debt/equity/ balanced etc,
and percentage of AUM by geography (i.e. top 5 cities, next 10 cities,
next 20 cities, next 75 cities and others) shall be made. The Mutual
Funds shall disclose the aforesaid data on their respective websites
& to AMFI and AMFI shall disclose industry wide figures on its
website.
5.6.2 Mutual Funds shall disclose the following on monthly basis on their
website and also share the same with Association of Mutual
Funds in India (AMFI)111:
a. Monthly AAUM112 from different categories of schemes such as
equity schemes, debt schemes, etc.
b. Contribution to Monthly AAUM from B-30113 cities (i.e. other than
top 30 cities as identified by AMFI) and T-30 cities (Top 30 cities).
c. Contribution to Monthly AAUM from sponsor and its associates.
107 SEBI Circular No. MFD/CIR No.3/211/2001 dated April 30, 2001.
, 1 08 For further details, refer Section II – Scheme Governance in the Chapter on Governance
Norms
,1 09 Please refer the section on Formats for requisite formats
110 SEBI Circular No.Cir/IMD/DF/13/2011 dated August 22, 2011
111 SEBI Circular No. CIR/IMD/DF/05/2014 dated March 24, 2014
112 SEBI Circular No. CIR/IMD/DF/07/2014 dated April 2, 2014
113 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/16 dated February 02, 2018.
68 Master Circular for Mutual Funds
d. Contribution to Monthly AAUM from entities other than sponsor
and its associates.
e. Contribution to Monthly AAUM from investors type (retail,
corporate, etc.) in different scheme type (equity, debt, ETF, etc.).
f. Monthly AAUM garnered through sponsor group/ non-sponsor
group distributors.
g. State-wise/Union Territory-wise contribution to MAAUM.
5.6.3 In order to have a holistic picture, Mutual Fund wise and
consolidated data on the above parameters shall also be disclosed on
AMFI website. The above shall be disclosed as per the format114.
5.6.4 AMCs shall disclose the above on their website (in spreadsheet
format) and forward to AMFI within 7 working days from the end
of the month. AMFI in turn shall disclose the consolidated data in
this regard on its website (in spreadsheet format).
5.7 Commission disclosure115
5.7.1 Mutual Funds / AMCs shall disclose on their respective websites the
total commission and expenses paid to distributors who satisfy one
or more of the following conditions with respect to non-institutional
(retail and HNI) investors:-
5.7.1.1 Multiple point of presence (More than 20 locations)
5.7.1.2 AUM raised over Rs.100 crore across industry in the non-
institutional category but including high net worth individuals
(HNIs).
114 For formats, please refer to chapter on Formats
115 SEBI Circular No. Cir/IMD/DF/13/2011 dated August 22, 2011
69 Master Circular for Mutual Funds
5.7.1.3 Commission received of over Rs.1 crore p.a. across industry
5.7.1.4 Commission received of over Rs.50 lakh from a single Mutual
Fund/AMC.
5.7.2 Mutual Fund / AMCs shall, in addition to the total commission and
expenses paid to distributors, make additional disclosures116
regarding distributor-wise gross inflows (indicating whether the
distributor is an associate or group company of the sponsor(s) of the
mutual fund), net inflows, average assets under management and
ratio of AUM to gross inflows on their respective website on an
yearly basis.
In case the data mentioned above suggests that a distributor has an
excessive portfolio turnover ratio, i.e. more than two times the
industry average, AMCs shall conduct additional due-diligence of
such distributors.
5.7.3 Mutual Funds / AMCs shall also submit the data mentioned in
5.7.1 and 5.7.2 to AMFI and the consolidated data in this regard shall
be disclosed on AMFI website.
5.8 Scheme Related Disclosures 117
In order to improve transparency as well as ease of access to Mutual
Fund (MF) scheme related information, it has been decided that: 118
5.8.1 Mutual Funds shall provide the following additional disclosures in
the offer documents (Scheme Information Document (SID) / Key
116 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
117 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated March 18, 2016
118 Effective from June 30, 2016
70 Master Circular for Mutual Funds
Information Memorandum (KIM)) of Mutual Fund scheme (for
existing scheme / new scheme, as applicable):
5.8.1.1 The tenure for which the fund manager has been managing
the scheme shall be disclosed, along with the name of
scheme’s fund manager(s);
5.8.1.2 Scheme’s portfolio holdings (top 10 holdings by issuer and
fund allocation towards various sectors), along with a
website link to obtain scheme’s latest monthly portfolio
holding;
5.8.1.3 In case of FoF schemes, expense ratio of underlying
scheme(s);
5.8.1.4 Scheme’s portfolio turnover ratio.
5.8.2 Further, the following additional disclosures shall be provided in SID
of the MF scheme:
5.8.2.1 The aggregate investment in the scheme under the following
categories:
a) AMC’s Board of Directors
b) Concerned scheme’s Fund Manager(s) and
c) Other key managerial personnel.
5.8.2.2 Illustration of impact of expense ratio on scheme’s returns
(by providing simple example).
5.8.3 Separate SID / KIM for each MF scheme managed by AMC shall also
be made available on MFs / AMCs website.
5.8.4 Each MF is required to have a dashboard on their website providing
performance and key disclosures pertaining to each scheme
managed by AMC. The information should include scheme’s AUM,
71 Master Circular for Mutual Funds
investment objective, expense ratios, portfolio details, scheme’s past
performance, among others. Such information shall be provided in a
comparable, downloadable (spreadsheet) and machine readable
format.
5.9 Disclosure of scheme performance119
AMCs shall disclose the performance of all schemes on the website of
AMFI. AMFI shall facilitate the disclosure in the following manner:
5.9.1 In case of all schemes, the scheme returns vis-à-vis the benchmark
return (Total Return Index) shall be disclosed in terms of CAGR for
various periods viz. 1 year, 3 year, 5 year, 10 year and since
inception.
Provided120 that all schemes that are in existence for less than one
year, other than overnight fund, liquid fund, ultra short duration
fund, low duration fund, and money market fund as defined in
Circular dated October 6, 2017 on Categorization and Rationalization
of Mutual Fund Schemes, shall be exempted from the aforesaid
disclosure.
5.9.2 In addition to the above, in case of schemes falling in categories such
as overnight fund, liquid fund, ultra short duration fund, low
duration fund, and Money Market Fund as defined in Circular dated
October 6, 2017 on Categorization and Rationalization of Mutual
Fund Schemes, scheme performance is also to be disclosed for a
period of 7 days, 15 days, 1 month, 3 months and 6 months.
119 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/137 dated October 22, 2018
120 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019
72 Master Circular for Mutual Funds
5.9.3 The said disclosure should be made for all plans and shall be
updated daily based on previous day NAV.
5.9.4 The said disclosure should be in investor friendly format with filtering
feature based on scheme-type, plan-type, etc. and sorting feature
based on return periods.
5.9.5 121The disclosure should include other important fields such as
scheme AUM (excluding overnight and liquid scheme) and previous
day NAV. In case of AUM of overnight and liquid schemes, the closing
AUM and the AAUM of the previous month has to be disclosed on
AMFI website on daily basis.
However, the day the AUM movement (both upward and downward)
of both overnight and liquid scheme is more than 10% cumulatively
from the previous disclosed AUM, the AUM of that day has to be
disclosed. Such disclosed AUM becomes the reference AUM for future
disclosure of AUM for the month.
Further, it has been decided that an appropriate disclosure regarding
the AUM of overnight and liquid schemes disclosed on AMFI website
on monthly basis including the trigger limit of 10% is to be made as
an explanation through footnote.
5.9.6 Trustees and AMCs shall ensure compliance of the provisions
mentioned at 5.9 above and trustees shall confirm the same to SEBI
in the half yearly trustee report.
121 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019
73 Master Circular for Mutual Funds
5.10 Annual report of the AMC 122
5.10.1 Annual report containing accounts of the asset management
companies should be displayed on the website of the mutual funds.
It should also be mentioned in the annual report of the mutual fund
schemes that the unit holders, if they so desire, may request for a
copy of the annual report of the asset management company.
5.11 Submission of bio data of key personnel123
5.11.1 AMCs are required to submit the bio data of all key personnel to
Trustees and the Board. For this purpose, ‘key personnel’ would be
the Chief Executive Officer (CEO), fund manager(s), dealer(s) & heads
of other departments of the AMC124.
5.12 Disclosure Of Executive Remuneration125
With the underlying objective to promote transparency in
remuneration policies so that executive remuneration is aligned with
the interest of investors, MFs /AMCs shall make the following
disclosures pertaining to a financial year on the MF/AMC website
under a separate head – 'Remuneration':
5.12.1 Name, designation and remuneration of Chief Executive Officer
(CEO), Chief Investment Officer (CIO) and Chief Operations Officer
(COO) or their corresponding equivalent by whatever name called.
122 MFD/CIR/9/120/2000 dated November 24, 2000
123 IIMARP/CIR /08/845/97 dated May 7,1997,IIMARP/MF/CIR/05/788/97 date April 28,1997
124 For format of bio-data of key personnel, please refer the section on Formats
125 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated March 18, 2016 and
SEBI/HO/IMD/DF2/CIR/P/2017/35 dated April 28, 2017
74 Master Circular for Mutual Funds
5.12.2 Name, designation and remuneration received by top ten
employees in terms of remuneration drawn for that financial year.
5.12.3 Name, designation and remuneration of every employee of
MF/AMC whose:
5.12.3.1 Annual remuneration was equal to or above one crore and
two lakh rupees for that financial year;
5.12.3.2 Monthly remuneration in the aggregate was not less than
eight lakh and fifty thousand rupees per month, if the
employee is employed for a part of that financial year.
5.12.4 The ratio of CEO's remuneration to median remuneration of
MF/AMC employees.
5.12.5 MF's total AAUM, debt AAUM and equity AAUM and rate of growth
over last three years.
For this purpose, remuneration shall mean remuneration as defined in
clause (78) of section 2 of the Companies Act, 2013. The AMCs/MFs shall
disclose this information within one month from the end of the respective
financial year (effective from FY 2016-17).
5.13 Disclosure of investor complaints with respect to
Mutual Funds126
5.13.1 Mutual Funds shall disclose127 on their websites, on the AMFI
website as well as in their Annual Reports, details of investor
complaints received by them from all sources. The said details should
126 SEBI Circular No. Cir /IMD/DF/2/2010 dated May 13, 2010
127 For disclosure format please refer to section on Formats.
75 Master Circular for Mutual Funds
be vetted and signed off by the Trustees of the concerned Mutual
Fund.
5.13.2 The Mutual Funds are advised to:
5.13.2.1 Upload the report for the financial year within 2 months of the
close of the financial year.
5.13.2.2 Include the report in their annual reports, as part of the Report
of the Trustees.
5.14 Brokerage and commission paid to associates128
5.14.1 Regulations129 govern payment of brokerage or commission if any,
to the sponsor or any of its associates, employees or their relatives.
5.14.2 Disclosures on brokerage and commission paid to
associates/related parties/group companies of sponsor/Asset
Management Company in the unaudited half yearly financial
results, the abridged scheme wise annual report and the SAI, shall
be made in the format as prescribed130.
5.15 Mutual Funds/ AMCs shall make continuous efforts to update email
ID and mobile number of all unit holders. The said contact details
shall be used for sending e-mails and SMS as envisaged in the
circular. 131
128 SEBI Circular No. SEBI/IMD/CIR No 18/198647/2010 dated March 15, 2010
129 Regulation 25 (8) of SEBI (Mutual Funds) Regulations, 1996
130 Please refer to the section on Formats
131 SEBI/HO/IMD/DF2/CIR/P/2018/92 dated June 05, 2018
76 Master Circular for Mutual Funds
PART II – REPORTS
5.16 Monthly Cumulative Report (MCR)132
5.16.1 Date and Mode of Submission:
5.16.1.1 MCR shall be submitted to the Board by 3rd working day of each
month by way of an email. Hard copy should also be sent by
hand delivery/courier.
5.16.1.2 In line with SEBI circulars dated October 6, 2017 and December
4, 2017 on “Categorization and Rationalization of Mutual Fund
Schemes”, the format of MCR133 has been revised.
5.16.1.3 As per the existing provision, a Mutual Fund scheme is
permitted to invest certain percentage of its AUM in schemes of
same Mutual Fund or other Mutual Funds. In order to avoid
such investments being considered by both the investee and
investing scheme, it is clarified that the investing scheme shall
exclude the same while reporting the data on AUM in the MCR.
5.16.2 Other Guidelines:
5.16.2.1 Details of the new schemes launched shall be reported in the MCR
for the month in which the allotment is done. For example, if an
NFO closes in the month of July and the allotment is done in the
month of August, then, the details of the new scheme shall be
132 SEBI circular MFD/CIR/07/206/2001 dated July 19, 2001, SEBI circular No IMD/Cir
No.15/87045/2007 dated February 22, 2007, SEBI circular SEBI/IMD/CIR No 3/124444/08
dated April 30, 2008, SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated March 18,
2016, SEBI/HO/IMD/DF3/CIR/P/2019/020 dated January 22, 2019
133 For format of MCR please refer to section on Formats - SEBI/HO/IMD/DF3/CIR/P/2019/020
dated January 22, 2019.
7 7 Master Circular for Mutual Funds
reported in the MCR for the month of August that will reach SEBI
by 3rd of September.
5.16.2.2 Further, additional report on overseas investment134 by Mutual
Funds in ADRs/GDRs, foreign securities and overseas exchange
traded funds (ETFs) shall also be provided as per the prescribed
format. For format please refer to the section on formats.
5.16.2.3 Compliance officers of all the Mutual Funds are advised to take
due care while forwarding the MCR data to SEBI. Compliance
Officers shall confirm that the data forwarded is correct and does
not require any revision.
5.17 New Scheme Report (NSR)135
5.17.1 All Mutual Funds shall submit the NSR to SEBI complete in all
respects within 10 working days from the date of allotment in the
prescribed format136.
5.18 Bi–monthly Compliance Test Reports137
5.18.1 AMCs’ shall do exception reporting on a bi-monthly basis. The
details sought in the annexures of the CTR shall be furnished to
the Board in case of non-compliance only along with exception
134 SEBI Circular No. SEBI/IMD/CIR NO 15/87045/07 dated February 22,2007
135 SEBI Circular No. SEBI/IMD/CIR NO 13/118899/08 dated February 29, 2008, SEBI Circular
No MFD/CIR/12/16588/02 dated August 28, 2002 & SEBI Circular No
IIMARP/MF/CIR/05/788/97 dated April 28, 1997, SEBI Circular No. IIMARP/10772/93 dated
July 14,1993,
136 For details on format of NSR please refer the section on Formats.
137 SEBI Circular No. SEBI/IMD/CIR NO 6/98057/07 dated July 5, 2007, SEBI Circular No
MFD/CIR/11/36222/2005 dated March 16,2005, SEBI Circular No
IIMARP/MF/CIR/10/1076/97 dated June 05,1997 & SEBI Circular No.MFD/CIR/5/360/2000
dated July 4, 2000,
7 8 Master Circular for Mutual Funds
report. This exception report shall also be placed before the
Trustee(s).
5.18.2 The CTRs138 should be submitted by the AMC to the Board once in
every two months so as to reach within 21 days of completion of
the two months period. As a compliance of SEBI Regulations is a
continuous process, AMCs are advised to incorporate the
modifications/additions under the relevant sections of the format,
based on amendments to the Regulations/guidelines issued in the
future from time to time.
5.19 Annual Statistical Report (ASR)139
5.19.1 AMC should submit the annual statistical report to SEBI in the
prescribed format by 30th of April each year140.
5.20 Daily Transaction Report141
5.20.1 All Mutual Funds shall submit details of transactions in secondary
market on daily basis in the prescribed format142. Accordingly,
Mutual Funds are advised to make necessary arrangements with
their custodians for the submission of reports on a daily basis. The
report is to be submitted to the Board in both hard as well as soft
copy.
138For CTR format, please refer the section on Formats.
139 IIMARP/CIR /08/845/97 DATED May 7,1997, MFD/CIR/02/110/02 dated April 26,2002, SEBI
Cir No- IMD/CIR No 6/72245/06 dated July 20,2006,
140 For format of ASR refer the section on Formats
Quarterly Movement of Net Assets- SEBI CIR – IIMARP/MF/CIR/05/788/97 dated April 28,
1997 required mutual funds to submit the statement for quarterly movement of net assets.
However, SEBI circular MFD/CIR/12/16588/02 dated August 28,2002 stated that such
Statement of movement of net assets /portfolios are no more to be submitted
141SEBI Circular No.MFD/CIR/07/384/99 dated December 17, 1999 and MFD/CIR/08/23026/99
dated December 23, 1999
142 For format of daily transaction report, please refer the section on formats
79 Master Circular for Mutual Funds
5.20.2 It must be ensured by the compliance officers of the custodians as
well as that of Mutual Funds that the information submitted is
correct and reaches the Board by 3.00 p.m. on the following working
day (T+1).
5.21 Responsibilities of AMC(s) and Trustees143
5.21.1 All information and documents relating to the compliance process
shall be authenticated and/or adopted by the Board of the AMC(s) to
strengthen the compliance mechanism.
5.21.2 The Trustee(s) shall also review all information and documents
received from the AMC(s) as required under the compliance process.
5.21.3 AMC(s) shall develop a suitable Management Information System for
reporting to the Trustees. The report shall contain specific comments
on all issues related to the operation of the Mutual Fund as
undertaken by the AMC including those provided in the format for
reporting by AMC to Trustees144.
5.21.4 The half-yearly report on the activities of the mutual fund to be
submitted by the trustees to the Board under the Mutual Funds
Regulations145 shall cover all issues mentioned in the prescribed
format as well as any other issue relevant to the operation of the
Mutual Fund146. The Trustees may mention in their report, if they so
desire, that they have relied on the reports obtained from the
independent auditor or internal/ statutory auditors or the
Compliance Officer as the case may be. The report shall mention that
143SEBI Circular No. MFD/CIR/09/014/2000 dated January 5, 2000, SEBI Circular No.
SEBI/MFD/CIR/10/039/2001 dated February 9, 2001.
144 Please refer the formats section for format for reporting by AMC to Trustees
145 Regulation 18(23)(a) of SEBI (MF) Regulations, 1996
146 For format of Trustee Report, please refer to the formats section.
8<< 0 Master Circular for Mutual Funds
the Trustees have satisfied themselves about the adequacy of
compliance systems in the Mutual Fund.
5.21.5 AMC(s) and the Trustees shall update the reporting formats including
relevant provisions of amendments made to the Mutual Funds
Regulations and/or guidelines and/or circulars issued by the Board
and shall specifically comment on their compliance.
5.22 Filing of Annual Information Return by Mutual
Funds147
5.22.1 Mutual Funds are required to submit the Annual Information
Return under section 285 BA in the Income-tax Act. As per this
requirement, Trustees of Mutual Funds or such other person
managing the affairs of the Mutual Funds (as may be duly
authorized by the trustees in this behalf) have to report specified
financial transactions in electronic media to Income Tax
Department giving PAN of the transacting parties in an Annual
Information Return (AIR).
5.22.2 Some common errors in these returns have been pointed out by
the Directorate of Income Tax (Systems) as:
5.22.2.1 Not mentioning PAN or mentioning invalid PAN.
147 SEBI cir no IMD/CIR No.8/73580/06 dated August 4,2006
It may be noted that Annual Information Returns (AIRs) constitute an important source of
information to Income Tax Department and, as such, it is imperative that the data furnished to
them is complete and accurate in all respects. It is therefore advised that to re-check the
accuracy of the data furnished by your office for the Financial Year 2004-05 and ensure that all
the columns are correctly filled-in and submit a ‘Supplementary Information Report’, if need be,
to the Income Tax Department.
The AIRs for the financial year 2005-2006 are required to be filed before August 31, 2006.
81 Master Circular for Mutual Funds
5.22.2.2 Entering incomprehensible/ incomplete names of transacting
parties, e.g. names of 2 or 3 letters.
5.22.2.3 Entering incomprehensible/ incomplete addresses of
transacting parties, e.g. ‘Nil’, ‘N/A’, ‘_’, in all address fields,
incomplete postal addresses, names of buildings split into
separate fields, names of two cities in address fields, wrong PIN
codes, etc.
5.22.2.4 Incorrect district and state codes.
5.22.2.5 Incorrect transaction codes.
5.22.2.6 Wrongly showing transaction as of ‘Govt.’ party.
5.22.3 In this regard, AIRs are required to be filed only by the Mutual Fund
and no separate AIR has to be furnished for each scheme of the
Mutual Fund.
82 Master Circular for Mutual Funds
CHAPTER 6
GOVERNANCE NORMS
PART I - FUND GOVERNANCE
6.1 Formation of Audit and Valuation Committees by the
Trustees and/or AMC148
6.1.1 Audit Committee
6.1.1.1 Trustees shall constitute an audit committee, comprising of the
Trustees and chaired by an Independent Trustee to review the
internal audit systems and recommendations of the internal and
statutory audit reports and ensure that the rectifications as
suggested by internal and external auditors are acted upon.
6.1.2 Valuation Committee
6.1.2.1 The AMC shall constitute an in-house valuation committee
consisting of senior executives including personnel from accounts,
fund management and compliance departments. This committee
shall, on a regular basis review the systems and practices of
valuation of securities.
6.2 Review and Reporting of Transactions149
6.2.1 Reporting of transactions
6.2.1.1 Transaction(s) by directors of the AMC
148 SEBI Circular No. MFD/CIR No.010/024/2000 dated January 17, 2000.
< 1 49 SEBI Circular No. MFD/CIR/09/014/2000 dated January 5, 2000, SEBI Circular No.
MFD/CIR No.010/024/2000 dated January 17, 2000, SEBI Circular No.
SEBI/MFD/CIR/10/039/2001 dated February 9, 2001.
83 Master Circular for Mutual Funds
a. Directors of the AMC shall file with the trustees on a quarterly basis
details of transactions in securities exceeding Rs.1 lac150.
6.2.1.2 Trustee(s) Directors
a. Trustees are required to report to Mutual Funds only those
transactions in securities that exceed Rs.1 lac in value151.
6.2.2 Review of transactions
6.2.2.1 Trustees shall review all transactions of the Mutual Fund with the
associates as defined below on a regular basis and ensure that
Regulations are complied with152.
6.3 Role of Independent Director on the Board of the AMC
and Independent Trustees153
6.3.1 An Independent Trustee shall not be associated in any manner with
the Sponsor(s)154. The independent directors on the Board of the
AMC shall not be associate of, or associated in any manner with,
the sponsor or any of its subsidiaries or the trustees155.
6.3.2 An ‘associate’ shall be defined as:
1 50 SEBI Circular No. SEBI/MFD/CIR/10/039/2001 dated February 9, 2001.
1 51 Regulation 18(11) of SEBI (MF) Regulations, 1996 and SEBI Circular No.
MFD/CIR/09/014/2000 dated January 5, 2000.
152 Regulations 18(6) and 18(7) of SEBI (Mutual Funds), Regulations, 1996 and SEBI Circular
No. MFD/CIR No.010/024/2000 dated January 17, 2000.
, 1 , 53 SEBI Circular No. MFD/CIR/11/354/2001 dated December 20, 2001, SEBI Circular No.
MFD/CIR/13/16799/2002 dated August 29, 2002, SEBI Circular No.
MFD/CIR/17/21105/2002 dated October 28, 2002.
154 Regulation 16(5) of the SEBI (Mutual Funds) Regulations, 1996.
155 Regulation 21(d) of the SEBI (Mutual Funds) Regulations, 1996
84 Master Circular for Mutual Funds
6.3.2.1 Relatives156 of Sponsor(s) or directors of the Sponsor Company or
relatives of Associate Directors of the AMC(s) and Trustee.
6.3.2.2 Persons providing any type of professional service to the Mutual
Funds, the AMC and the Trustees and the Sponsor(s). Also,
persons having a material pecuniary relationship with the above
mentioned entities that may, in the judgment of the Trustees, affect
their independence.
6.3.2.3 Nominees of the companies who are stakeholders in the Sponsor
company or AMC(s) (even if they are not deemed sponsors by virtue
of holding less than 40% of net worth of AMC(s)).
6.3.3 Cooling off Period
6.3.4 An “Associate”157 as defined above cannot be appointed as
Independent Director even after he ceases to be an “Associate”
unless a cooling off period of three years has elapsed from the date
of his disassociation.
6.3.5 Mutual Funds are required to have a minimum of 50 per cent and
two-third independent directors on the Board of the AMC(s) and
Trustees respectively158. In case the composition of the directors
does not meet these requirements, Mutual Funds are required to
inform the Board along with the steps proposed to ensure
compliance.
6.3.6 AMC(s) or Trustees shall appoint Independent Directors in place of
the resigning director(s) within a period of 3 months from the date
of resignation. Where Mutual Funds are unable to meet this time
156 As defined under Section 6 of the Companies Act 1956
157 Regulation 2(c) of the SEBI (Mutual Funds) Regulations, 1996
< 1 58 Regulation 21(d) and Regulation 16(5) of the SEBI (Mutual Funds) Regulations, 1996
85 Master Circular for Mutual Funds
limit, they shall report to the Board explaining the reasons for non-
compliance. Mutual Funds may maintain a panel of eligible persons
who can be appointed as Independent Directors159 as and when
required. They may also consider appointing more than the required
minimum number of Independent Directors to enhance the
standards of corporate governance and also to meet the regulatory
requirements in case of resignation of an independent director.
6.3.7 On appointment of new directors of the AMC or Trustee, their bio-
data160 shall be filed with the Board for information or approval
respectively.
6.4 Tenure of independent trustees and independent
directors161
6.4.1 Regulation 16 (5) and Regulation 21 (1) (d) of SEBI (Mutual
Funds) Regulations, 1996 mandate appointment of
independent trustees of MFs(“independent trustees”) and
independent directors of AMCs(“independent directors”)
respectively. With respect to tenure of independent trustees
and independent directors, it has been decided that:
6.4.1.1 An independent trustee and independent director shall hold
office for a maximum of 2 terms with each term not
exceeding a period of 5 consecutive years.
6.4.1.2 No independent trustee or independent director shall hold
office for more than two consecutive terms, however such
individuals shall be eligible for re-appointment after a cooling-
off period of 3 years. During the cooling-off period, such
individuals should not be associated with the concerned MF,
159 For bio data of directors (AMC and Trustee), please refer to section on Formats
160 For bio data of directors (AMC and Trustee), please refer to section on Formats
161 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2017/125 dated November 30, 2017.
86 Master Circular for Mutual Funds
AMC & its subsidiaries and / or sponsor of AMC in any manner
whatsoever.
6.4.1.3 Existing independent trustees and independent directors
shall hold office for a maximum of 10 years (including all
preceding years for which such individual has held office).
In this respect, the following may be noted:
a. Individuals who have held office for less than 9 years (as
on November 30, 2017) may continue for the residual period
of service.
b. Individuals who have held office for 9 years or more (as on
November 30, 2017) may comply the aforesaid provision in a
phase manner, within a period of 2 years. 162
c. Such individuals shall subsequently be eligible for re-
appointment after a cooling-off period of 3 years, in terms
of Para 6.4.1.1 and Para 6.4.1.2 above.
6.5 Auditors of Mutual Funds163:
6.5.1 The auditor of a MF, appointed in terms of Regulation 55 (1)
of SEBI (MFs) Regulations shall be a firm, including a
limited liability firm, constituted under the LLP Act, 2008.
6.5.2 Period of appointment: With respect to appointment of auditors
in terms of Regulation 55 (1) of SEBI (MFs) Regulation, 1996,
it has been decided that:
6.5.2.1 No MF shall appoint an auditor for more than 2 terms of maximum
five consecutive years. Such auditor may be re-appointed after
cooling off period of 5 years.
6.5.2.2 Further, during the cooling-off period of five years, the incoming
auditor may not include:
a. Any firm that has common partner(s) with the outgoing audit firm
162 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/19 dated February 07, 2018.
163 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2017/125 dated November 30, 2017.
87 Master Circular for Mutual Funds
b. Any associate / affiliate firm(s) of the outgoing audit firm
which are under the same network of audit firms wherein the
term “same network” includes the firms operating or
functioning, hitherto or in future, under the same brand name,
trade name or common control.
6.5.2.3 Existing auditors may be appointed for a maximum of 10
years(including all preceding years for which an auditor has been
appointed in terms of Regulation 55 (1) of SEBI (Mutual Funds)
Regulation, 1996). In this respect, the following may be noted:
a. Auditors who have conducted audit of the Mutual Fund for less
than 9 years (as on November 30, 2017) may continue for the
residual period of service.
b. Auditors who have conducted audit of the Mutual Fund
for 9 years or more may continue till the end of F.Y. 2018-
19164.
c. Such auditors shall subsequently be eligible for re-
appointment after a cooling-off period of 5 years, in terms
of Para 6.5.2.1 and Para 6.5.2.2.
6.6 Investment and/or for / Trading in Securities by the
employees of the AMC(s) and Trustee(s)165
The guidelines enumerated below specify the minimum requirements
that have to be followed. The AMC(s) and Trustees are free to set more
stringent norms for investment and/or trading in securities by their
employees. The Board of the AMC and Trustees shall ensure
compliance with these Guidelines on a continuous basis and shall
164 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/19 dated February 07, 2018.
165 SEBI Circular No. MFD/CIR No.4/216/2001 dated May 8, 2001, SEBI Circular No.
SEBI/IMD/CIR No.7/13391/03 dated July 11, 2003.
88 Master Circular for Mutual Funds
report any violations and remedial action taken by them in the
periodical reports submitted to the Board166.
6.6.1 Guidelines for Investment and/or Trading in Securities by Employees
of AMC(s) and Trustees:
6.6.1.1 Applicability
a. These Guidelines shall be applicable to all employees of AMC(s)
and Trustees and shall form a part of the Code of Conduct for
employees adopted by the AMC(s) and/or Trustees. New
employees shall be bound by these Guidelines from the date of
joining the AMC(s) and/or Trustees.
b. These Guidelines shall cover transactions for sale or purchase
of securities made167:
i. In the name of employees, either individually or
jointly,
ii. In the name of the employees’ spouse,
iii. As a member of HUF,
iv. In the name of employees’ parent, sibling and child of
such employee or of the spouse, any of whom is
either dependent financially on such employee, or
consults such employee in taking decisions relating to
trading in securities.
6.6.1.2 The objectives and principles of these Guidelines are:
a. To ensure that all securities transactions made by employees
in their personal capacity are conducted in consonance with
these Guidelines and in such manner as to avoid any actual or
potential conflict of interest or any abuse of an individual’s
position of trust and responsibility.
166 Regulation 25(9) & 23(b) of SEBI (MF) Regulations, 1996
167 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/124 dated November 17, 2016.
89 Master Circular for Mutual Funds
b. The employees of AMC(s) and Trustees especially Access
Persons shall not take undue advantage of any price sensitive
information that they may have about any company. Access
Person for the purpose of these Guidelines shall mean the
Head of the AMC (designated as CEO/Managing
Director/President or by any other name), the Fund
Managers, Dealers, Research Analysts, all employees in the
Fund Operations Department, Compliance Officer and Heads
of all divisions and/or departments or any other employee as
decided by the AMC(s) and/or Trustees.
c. To guide employees of AMC(s) and Trustees in maintaining a
high standard of probity that one would expect from an
employee in a position of responsibility.
6.6.2 General
6.6.2.1 Investments Covered:
a. 168 These Guidelines cover transactions for purchase or sale
of any securities such as shares, debentures, bonds,
warrants, derivatives and units of schemes floated by
Mutual Funds / AMCs where the concerned persons (in
terms of the applicability stated at 6.6.1.1 (a) above) are
employed.
b. These Guidelines do not apply to the following investments
by the employees:
1. Investments in fixed deposits with banks/financial
institutions/companies, life insurance policies,
provident funds (including public provident fund)
168 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/124 dated November 17, 2016.
90 Master Circular for Mutual Funds
or Investment in savings schemes such as
National Savings Certificates, National Savings
Schemes, Kisan Vikas Patra, or any other
similar investment.
2. Investments of a non-financial nature such as gold
etc., where there is no likely conflict between the
Mutual Fund’s interest and the employees’ interest.
3. Investments in government securities, money market
instruments, money market mutual fund schemes,
liquid schemes and schemes floated by other
Mutual Funds/ AMCs..
6.6.2.2 No employee shall pass on information to anybody inducing him
to buy/sell securities which are being bought and/or sold by the
Mutual Fund of which the AMC is the investment manager.
6.6.2.3 Prior approval of personal investment transactions:
a. All access persons except Compliance Officer shall apply in
the form prescribed by the AMC(s) and/or Trustees to the
Compliance Officer for prior approval of transactions for sale
or purchase of securities other than those expressly stated to
be exempt under these guidelines. The Compliance Officer
shall apply to the Head of the AMC(s). The decision of the
Compliance Officer shall be final and binding on the
employee.
b. In these Guidelines, in the case of the Compliance Officer’s
own transactions for purchase or sale of securities or
disclosure or any other related matter, the term "Compliance
Officer" wherever it appears, shall be read as "Head of the
AMC."
91 Master Circular for Mutual Funds
c. The Compliance Officer may coordinate with the Fund
Management Department of the Mutual Fund, wherever
necessary, to clear requests of investment and/or trading in
securities by the employees.
d. The approval of Compliance Officer for carrying out a
transaction of sale or purchase of a security by the
access person shall not be valid for more than 7 trading
days from the date of approval. If a transaction approved
by the Compliance Officer has not been effected within 7
trading days from the date of its approval, the access
person shall be required to obtain approval once again
from Compliance Officer prior to effecting the
transaction169.
e. If a transaction approved by Compliance Officer has not been
effected within seven170 calendar days from the date of its
approval, the access person shall be required to obtain
approval once again from Compliance Officer prior to
effecting the transaction.
f. All employees shall refrain from profiting from the purchase
and sale or sale and purchase of any security within a period
of 30 calendar days from the date of their personal
transaction171. However, in cases where it is done, the
employee shall provide a suitable explanation to the
Compliance Officer, which shall be reported to the Board of
the AMC and the Trustees at the time of review.
169 SEBI/HO/IMD/DF2/CIR/P/2016/124 dated November 17, 2016
170 SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
171 SEBI Circular No. SEBI/IMD/CIR No.7/13391/03 dated July 11, 2003.
92 Master Circular for Mutual Funds
6.6.3 Investments in Shares and/or Debentures and/or Bonds and/or
Warrants and/or Derivatives
Investments in securities shall broadly be classified into investments
through (a) primary markets and (b) secondary markets.
6.6.3.1 Investments through the primary markets:
a. An employee including access person is permitted to apply to a
public issue of shares and/or debentures and/or bonds and/or
warrants of any company, as long as the application is made in
the normal course of the public issue. Such an application may
be made without seeking the clearance from the Compliance
Officer. Employees of AMC(s) and Trustees are prohibited from
applying in any reserved quota such as promoters’ quota,
employees’ quota etc. Employees shall not participate in any
private placement of equity by any company.
b. Notwithstanding anything stated in (a) above, an employee of
an AMC(s) and/or Trustees may apply for shares and/or
debentures and/or bonds and/or warrants in a preferential
offer, in cases where such a preferential offer is being made by
a company that belongs to the same industrial group as the
company in which the employee already has an investment,
provided that such a preferential offer is made to all
shareholders and/or debenture holders of such companies.
Details of such applications made shall be intimated to the
Compliance Officer.
c. The employees of the AMC(s) and/or Trustees including access
person may apply for any rights offer of any company in which
they are already shareholders. Applications for additional rights
(over and above the normal rights entitlement) shares may be
93 Master Circular for Mutual Funds
made by the employees including access person without getting
the clearance from the Compliance Officer. An employee
including access person may also sell and/or renounce his
rights entitlement without getting the clearance from the
Compliance Officer. However, if an access person wishes to
purchase the “Rights renunciations” he shall get the clearance
of the Compliance Officer for the same. Such purchases shall
be done only at market prices. Details of any applications made
in any rights issue, whether in the normal course, or through
purchase of rights renunciations, shall be intimated to the
Compliance Officer.
6.6.3.2 Investments through the secondary markets:
a. An access person who wishes to make a secondary market
transaction shall submit a written application to that effect to
the Compliance Officer. Such an application shall specify the
name of the company whose securities the employee wishes to
buy and/or sell, type of security, and the number of shares
and/or debentures and/or bonds and/or warrants and/or
derivatives that the access person wishes to buy/sell.
b. The Compliance Officer shall clear these requests if the
following conditions are met:
1. If the shares and/or debentures and/or bonds and/or
warrants of the company or derivatives specified by the
access person are not held by any scheme of the Mutual
Fund of which the AMC is the investment manager;
94 Master Circular for Mutual Funds
2. 172If the shares and/or debentures and/or bonds and/or
warrants of the company or derivatives specified by the
employee are held by any Scheme of the Mutual Fund of
which the AMC is the investment manager, there should
be a "cooling off" period of 15 calendar days. The
Compliance Officer shall ensure that the last
transaction in that particular security was done by
the Mutual Fund at least 15 calendar days prior to
the date of the written application by the access
person. In other words, an application for a purchase
/sale transaction on a personal basis would be cleared
only if the Mutual Fund has not transacted in that
particular security for at least 15 calendar days. However,
trades executed pursuant to a trading plan submitted by
the employees in terms of SEBI (PIT) Regulations,
2015, shall be exempt from the requirement of a
“cooling off” period, provided that such trading plan:
i. Is in compliance with the norms prescribed in SEBI
(PIT) Regulations, 2015.
ii. Is publicly disclosed on the website of the concerned
Mutual Fund
The Compliance Officer shall also properly monitor
trades of the MF scheme and that of the access
person, as per the trading plan, in order to ensure
that such trading plan does not entail trading in
securities for market abuse.
c. The Compliance Officer shall keep a track of the transactions of the
employees and transactions of the Mutual Fund to ensure that there
is no conflict of interest between them i.e. the Compliance Officer
172 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/124 dated November 17, 2016.
95 Master Circular for Mutual Funds
should track whether the Mutual Fund has transacted in the same
securities either before or after the employee’s transaction(s).
d. The Compliance Officer shall maintain a record of all requests for pre
clearance regarding the purchase or sale of a security, including the
date of the request, the name of the access person, the details of the
proposed transaction and whether the request was approved or
denied and waivers given, if any, and its reasons.
e. No employee shall purchase any security (including derivatives) on a
“Carry Forward” basis or indulge in “Short Sale” of any security
(including derivatives) i.e. employees who effect any purchase
transaction(s) shall ensure that they take delivery of the securities
purchased, before selling them.
f. Any transaction of Front Running by any employee directly or
indirectly is strictly prohibited. For this purpose, “Front Running”
means any transaction of purchase and/or sale of a security carried
by any employee whether for self or for any other person, knowing
fully well that the AMC also intends to purchase and/or sell the same
security for its Mutual Fund operations. To ascertain that the
employee had no prior knowledge of the Mutual Fund's intended
transactions, the Compliance Officer may take a declaration in this
regard from the employee. Such declaration may be included in the
application form itself.
g. Any transaction of self-dealing by any employee either directly or
indirectly, whether alone or in concert with another person is
prohibited. For this purpose, “Self Dealing’ means trading in the
securities based on price sensitive information to which the employee
has access by virtue of his office. Declaration to this effect may be
taken from the employee while clearing the proposals for investment.
96 Master Circular for Mutual Funds
h. The employees shall not insist or suggest to the concerned brokers to
charge reduced brokerage, or accept any contract with a clause on
reduced brokerage charge.
6.6.4 Investments in units of Mutual Fund Schemes
6.6.4.1 Access persons as well as other employees do not require prior
permission of the Compliance Officer for purchase or sale of units of
Mutual Fund schemes. However, details of each such transaction,
excluding transactions in Money Market Mutual Fund schemes and
liquid schemes173 shall be reported by them to the Compliance
Officer within 7 calendar days from the date of transaction.
6.6.4.2 In case of investments in SIP of any Mutual Fund scheme, the
employees may report only at the time of making the first installment
of the SIP.
6.6.4.3 Notwithstanding anything mentioned earlier, in the following cases
employees of AMC & Trustees shall not purchase or sell /or
repurchase or redeem units of any scheme, including Money Market
Mutual Fund scheme and liquid scheme174 of their Mutual Fund:
a. There is a likelihood of a change in the investment objectives of
the concerned Mutual Fund Scheme(s) and this has not been
communicated to the investors;
b. There is a likelihood of a rights and/or bonus issue in the
concerned Mutual Fund Scheme(s) and this has not been
communicated to the investors;
173 SEBI/IMD/DF/10/2014 dated May 22, 2014
174 SEBI/IMD/DF/10/2014 dated May 22, 2014
97 Master Circular for Mutual Funds
c. The concerned Mutual Fund Scheme is contemplating to issue
dividend to the unit holders and this has not been
communicated to the investors;
d. There is a likelihood of a change in the accounting policy, or
a significant change in the valuation of any asset, or class of
assets and the same has not been communicated to the
investors;
e. There is a likelihood of conversion of a close ended scheme to
an open ended scheme and vice versa and this has not been
communicated to the investors.
6.6.5 Periodic Disclosures
6.6.5.1 All access persons shall submit, in the form prescribed by the
Mutual Fund of which the AMC is the investment manager, details
of their personal transactions of purchase or sale of securities to the
Compliance Officer. The details to be submitted are as follows:
a. Details of transactions effected for purchase and/or sale of
securities including transactions in rights entitlements through
the secondary market within 7 calendar days from the date of
transaction;
b. Details of allotment received against application for public and
rights issues within 7 calendar days from the date of receipt of
the allotment advice;
c. A statement of holding in securities as on March 31 within 30
calendar days from the end of every financial year ending March
31.
98 Master Circular for Mutual Funds
6.6.5.2 All employees other than access persons shall submit, in the form
prescribed by the Mutual Fund, to the Compliance Officer:
a. Details of each of their transactions for purchase or sale of
securities including allotment in public and rights issues within
7 calendar days.
b. A statement of holding in securities as on March 31 within 30
calendar days from the end of every financial year ending March
31.
c. A declaration shall also be included in the reporting form on
the lines of clause 6.6.3.2. (f) and 6.6.3.2 (g) regarding Front
Running and Self Dealing.
6.6.6 Review by the Board of Directors of AMC and the Trustee(s)
6.6.6.1 The Board of the AMC and the Trustees shall review the compliance
of these Guidelines in their periodic meetings. They shall review the
existing procedures and recommend changes in procedures based
on the AMCs experience, industry practices and/or developments
in applicable laws and regulations. They shall report compliance
and any violations and remedial action taken by them in their
reports submitted to the Board.
6.6.7 For ease of reference these provisions are consolidated and provided
at Annexure 7.
99 Master Circular for Mutual Funds
6.7 Applicability of Insider Trading Regulations175
6.7.1 Securities and Exchange Board of India (Prohibition of Insider
Trading) Regulations, 2015 shall be followed strictly by the Trustees,
Asset Management Companies and their employees and directors.
6.8 Responsibilities of AMC & Trustees176
6.8.1 For effective discharge of their responsibilities under the Mutual
Funds Regulations, the AMC(s) shall provide infrastructure and
administrative support to the Trustees. The Mutual Fund may
decide to appoint independent auditors and/or may have separate
full-fledged administrative set up for the Trustees. However, the
expenditure incurred in this regard shall be within the limits as
specified in Regulation 52(6) of the Mutual Funds Regulations.
AMC(s) shall place correspondence and reports submitted to SEBI
before the Trustees.
175 SEBI Cir MFD/CIR/05/432/2002 June 20, 2002 and SEBI Cir
SEBI/HO/IMD/DF2/CIR/P/2016/124 dated November 17, 2016
176 MFD/CIR/09/014/2000 dated January 5, 2000
100 Master Circular for Mutual Funds
PART II -SCHEME GOVERNANCE
6.9 Minimum Number of investors177
6.9.1 Applicability for an open-ended scheme
6.9.1.1 The Scheme/Plan shall have:
a. a minimum of 20 investors and
b. no single investor shall account for more than 25% of the
corpus of the Scheme/Plan(s).
6.9.1.2 If either/both of such limit(s) is breached during the NFO of the
Scheme, it shall be ensured that within a period of three months
or the end of the succeeding calendar quarter from the close of
the NFO of the Scheme, whichever is earlier, the Scheme
complies with these two conditions.
6.9.1.3 In case the Scheme / Plan(s) does not have a minimum of 20
investors in the stipulated period, the provisions of Regulation178
would become applicable automatically without any reference
from SEBI and accordingly the Scheme / Plan(s) shall be wound
up and the units would be redeemed at applicable NAV.
6.9.1.4 If there is a breach of the 25% limit by any investor over the
quarter, a rebalancing period of one month would be allowed
and thereafter the investor who is in breach of the rule shall be
given 15 days’ notice to redeem his exposure over the 25 % limit.
Failure on the part of the said investor to redeem his exposure
over the 25 % limit within the aforesaid 15 days would lead to
177 SEBI Circular No. SEBI/IMD/CIR No.10/22701/03 dated December 12, 2003, SEBI Circular
No. SEBI/IMD/CIR No.1/42529/05 dated June 14, 2005.
< 1 <, 78 Regulation 39(2)(c) of the SEBI (MF) Regulations, 1996
101 Master Circular for Mutual Funds
automatic redemption by the Mutual Fund on the applicable Net
Asset Value on the 15th day of the notice period.
6.9.1.5 The two conditions mentioned above shall also be complied
within each subsequent calendar quarter thereafter, on an
average basis, as specified by SEBI.
6.9.1.6 The Fund shall adhere to the requirements prescribed by SEBI
from time to time in this regard.
6.9.2 Applicability for a Close ended scheme/Interval scheme
6.9.2.1 The Scheme(s) and individual Plan(s) under the Scheme(s) shall
have:
a. A minimum of 20 investors and
b. No single investor shall account for more than 25% of the
corpus of the Scheme(s)/Plan(s).
6.9.2.2 These conditions will be complied with immediately after the
close of the NFO itself i.e. at the time of allotment.
6.9.2.3 In case of non-fulfillment with the condition of minimum 20
investors, the Scheme(s)/Plan(s) shall be wound up in
accordance with Regulation179 automatically without any
reference from SEBI.
6.9.2.4 In case of non-fulfillment with the condition of 25% holding by
a single investor on the date of allotment, the application to the
extent of exposure in excess of the stipulated 25% limit would
be liable to be rejected and the allotment would be effective only
to the extent of 25% of the corpus collected. Consequently, such
179 Reg. 39 (2) (c) of SEBI (MF) Regulations, 1996
102 Master Circular for Mutual Funds
exposure over 25% limits will lead to refund within 6 weeks of
the date of closure of the New Fund Offer.
6.9.2.5 For interval scheme the aforesaid provision will be applicable at
the end of NFO and specified transaction period.
6.9.2.6 Requisite disclosure in this regard shall be made in the SID.
6.9.3 Determination of breach:
6.9.3.1 The average shall be calculated, at the end of each quarter, on
the basis of number of investors at the end of the business hours
of the scheme on a daily basis.
6.9.3.2 To determine breach of 25% holding limit by an investor, net
assets under the scheme shall be calculated daily and the daily
holding limit shall be determined accordingly. At the end of the
quarter, average daily holding by each investor shall be
calculated and any breach of the 25% holding limit will be
accordingly determined.
6.9.4 Applicability
6.9.4.1 These Guidelines are applicable at the Portfolio level.
6.9.4.2 These Guidelines are not applicable to Exchange Traded Funds
(ETFs).
6.9.5 Redemptions
6.9.5.1 Redemptions effected pursuant to these Guidelines shall be
completed within 10 days from the day of winding up of the
scheme(s) and/or plan(s).
103 Master Circular for Mutual Funds
6.9.6 Reporting to the Board
6.9.6.1 Compliance with these Guidelines shall be reported in
Compliance Test Reports (CTRs) and Half Yearly Trustee
Reports.
6.10 Minimum Assets under Management (AUM) of Debt
Oriented Schemes 180
6.10.1 It has been observed that many debt oriented schemes are operating
with a very low AUM. In the interest of investors, it is important
that debt oriented schemes have an adequate corpus to ensure
adherence to the investment objectives as stated in Scheme
Information Document and compliance with investment
restrictions specified under SEBI (Mutual Funds) Regulations,
1996.
6.10.2 In this regard, it has been decided that:
a) The minimum subscription amount of debt oriented and
balanced schemes at the time of new fund offer shall be at least 20
crore and that of other schemes shall be at least 10 crore.
b) An average AUM of 20 crore on half yearly rolling basis shall
be maintained for open ended debt oriented schemes.
c) The existing open ended debt oriented schemes shall comply
with point (b) stated above within one year from the date of
issue of this circular.
d) In case of breach of points (b) and (c) above, the AMC shall scale up
the AUM of such scheme within a period of six months so as
to comply with point (b) stated above, failing which the
provisions of Regulation 39 (2) (c) of SEBI (Mutual Funds)
Regulations, 1996 would become applicable.
180 SEBI Circular No. Cir/IMD/DF/15/2014 dated June 20, 2014
104 Master Circular for Mutual Funds
e) The confirmation on compliance of the above shall be reported
to SEBI in the Half Yearly Trustee Reports.
6.11 Scheme Performance Review
6.11.1 AMCs and Trustees shall review the performance of their schemes
on periodic basis181. Such review can take place by comparing the
performance of the schemes with benchmark indices as well as in
light of the performance of the entire Mutual Funds industry by
relying on data published from time to time by independent research
agencies and financial newspapers and journals. Corrective action
if required may be taken in case of unsatisfactory performance. Its
compliance should be reported in the bimonthly CTRs of AMCs and
half-yearly reports of the Trustees to SEBI (while reporting
compliance of Regulation 25(2) on exercise of due diligence in
investment decisions).
6.12 Benchmarking of Scheme's performance to Total Return
Index182
6.12.1 Total Return variant of an Index (TRI) takes into account all
dividends/ interest payments that are generated from the basket of
constituents that make up the index in addition to the capital gains.
Hence, TRI is more appropriate as a benchmark to compare the
performance of mutual fund schemes.
181 SEBI Circular No. dated July 27, 2000 & SEBI Cir 16/400/02 dated March 26, 2002.
182 SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2018/04 dated January 04, 2018.
105 Master Circular for Mutual Funds
6.12.2 With an objective to enable the investors to compare the
performance of a scheme vis-a-vis an appropriate benchmark, it has
been decided that -
6.12.2.1 Selection of a benchmark for the scheme of a mutual fund shall
be in alignment with the investment objective, asset allocation
pattern and investment strategy of the scheme.
6.12.2.2 The performance of the schemes of a mutual fund shall be
benchmarked to the Total Return variant of the Index chosen as
a benchmark as stated in para 6.12.2.1 above
6.12.2.3 (i) Mutual funds shall use a composite CAGR figure of the
performance of the PRI benchmark (till the date from which TRI
is available) and the TRI (subsequently) to compare the
performance of their scheme in case TRI is not available for that
particular period(s).
(ii) The calculation of composite CAGR is elaborated with an
example in the following paragraph.
For instance, ABC scheme had been launched on August 2, 1995. The
benchmark PRI values are available from the date of inception of the fund. The
benchmark TRI values are available from June 30, 1999. The calculation of a
composite benchmark performance return in CAGR terms would be as given
below:
1
(Time period from the
last day of the month
preceding the date of
advertisement – date of
inception of the
scheme)
-1
Benchmark PRI value as on date of Benchmark TRI value as on last day of the
introduction of TRI value . month preceding the date of advertisement
X
Benchmark PRI value as on date of Benchmark TRI value as on date of
inception of the scheme introduction of TRI value
106 Master Circular for Mutual Funds
The aforesaid is explained with an example:
Example: Consolidated Benchmark CAGR (PRI and TRI)
Date Benchmark PRI values Benchmark TRI values
02/08/1995 1007.57
30/06/1999 1187.70 1256.38
30/11/2017 10226.55 13966.58
CAGR 12.20%
Thus, in the above example (for advertisements in the month of December, 2017 the last
of the preceding month would be November 30, 2017),
CAGR= [(1187.70/1007.57)*(13966.58/1256.38) ^ (1/22.3452)]-1
[1 year= 365 days]
CAGR= 12.20%
(iii) Mutual funds shall use the composite CAGR as explained above, subject to
making the following disclosure:
*As TRI data is not available since inception of the scheme, benchmark performance
is calculated using composite CAGR of XYZ (name of the benchmark index) PRI values
from date.... to date... and TRI values since date...."
6.12.3 This circular is applicable to all schemes of Mutual Funds with effect from
February 1, 2018.
107 Master Circular for Mutual Funds
PART III -SYSTEMS AUDIT FRAMEWORK FOR MUTUAL FUNDS /
AMCs183
6.13 Considering the importance of systems audit in technology driven
asset management activity and to enhance and standardize the
systems audit, guidelines in this regard are placed at Annexure-10.
These guidelines are indicative and not exhaustive in nature.
6.14 The aforementioned audit should be encompassing audit of systems
and processes, inter alia, related to examination of integration of front
office system with the back office system, fund accounting system
for calculation of net asset values, financial accounting and
reporting system for the AMC, Unit-holder administration and
servicing systems for customer service, funds flow
process, system processes for meeting regulatory requirements,
prudential investment limits and access rights to systems interface.
6.15 Mutual Funds / AMCs are advised to conduct systems audit on an
annual basis by an independent CISA / CISM qualified or equivalent
auditor to check compliance of the provisions of this circular.
6.16 Mutual Funds / AMCs are further advised to take necessary steps to
put in place systems for implementation of this circular. The exception
report as per the format184 provided should be placed before the
Technology Committee for review. The Technology Committee after
review shall place the same before the AMC & Trustee Board.
Thereafter, exception observation report along with trustee comments
starting from the financial year April 2019 – March 2020 should be
communicated to SEBI within six months of the respective financial
year. Further, System Audit Reports shall be made available for
inspection.
183 SEBI Circular No SEBI/HO/IMD/DF2/CIR/P/2019/57dated April 11, 2019
184 For format, please refer to the section on formats
108 Master Circular for Mutual Funds
PART IV – ROLE OF MUTUAL FUNDS IN CORPORATE
GOVERNANCE OF PUBLIC LISTED COMPANIES185
6.17 MFs should play an active role in ensuring better corporate governance
of listed companies.
6.18 AMCs shall disclose their general policies and procedures for
exercising the voting rights in respect of shares held by them on the
website of the respective AMC as well as in the annual report
distributed to the unit holders from the financial year 2010-11.
6.19 AMCs are required to disclose on the website of the respective AMC as
well as in the annual report distributed to the unit holders from the
financial year 2010-11, the actual exercise of their proxy votes in the
AGMs/EGMs of the investee companies in respect of the following
matters.
6.20 Corporate governance matters, including changes in the state of
incorporation, merger and other corporate restructuring, and anti-
takeover provisions
6.21 Changes to capital structure, including increases and decreases of
capital and preferred stock issuances.
6.22 Stock option plans and other management compensation issues;
6.23 Social and corporate responsibility issues.
6.24 Appointment and Removal of Directors.
6.25 Any other issue that may affect the interest of the shareholders in
general and interest of the unit-holders in particular.
6.26 AMCs shall be required to record and disclose specific rationale
supporting their voting decision (for, against or abstain) with
respect to each vote proposal186.
185 SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
186 SEBI Circular No. CIR/IMD/DF/05/2014 dated March 24, 2014
109 Master Circular for Mutual Funds
6.27 AMCs shall additionally be required to publish summary of the votes
cast across all its investee company and its break-up in terms of total
number of votes cast in favor, against or abstained from.
6.28 AMCs shall be required to make disclosure of votes cast on their
website (in spreadsheet format) on a quarterly basis, within 10
working days from the end of the quarter. Further, AMCs shall
continue disclosing voting details in their annual report. The votes
cast by the Mutual Funds may be given in the revised format187 for
disclosure of vote cast in respect of resolutions passed in general
meetings of the investee companies and in the format188 for
presenting summary of votes cast.
6.29 Further, on an annual basis, AMCs shall be required to obtain
certification on the voting reports being disclosed by them. Such
certification shall be obtained from a “scrutinizer” in terms of Rule 20
(3) (ix) of Companies (Management and Administration) Rules, 2014
and any future amendment/s to the said Rules thereof. The same shall
be submitted to the trustees and also disclosed in the relevant portion
of the Mutual Funds' annual report & website. 189
6.30 Board of AMCs and Trustees of Mutual Funds shall be required to
review and ensure that AMCs have voted on important decisions that
may affect the interest of investors and the rationale recorded for
vote decision is prudent and adequate. The confirmation to the
same, along with any adverse comments made by auditors, shall
have to be reported to SEBI in the half yearly trustee reports.
187 For formats, please refer to chapter on Formats
188 For formats, please refer to chapter on Formats
189 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/68 dated August 10, 2016
110 Master Circular for Mutual Funds
6.31 The format190 for disclosure of voting by mutual funds in general
meetings of listed companies is provided.
190 For disclosure of voting by mutual funds in general meetings of listed companies, please
refer to the section on formats
111 Master Circular for Mutual Funds
CHAPTER 7
SECONDARY MARKET ISSUES
7.1 Non Applicability of Listing Deposit191
7.1.1 The requirement of collecting listing deposit as specified under
Circular Letter No. SE/12936 dated April 6, 1992 shall not be
applicable to Mutual Fund schemes seeking listing on the Stock
Exchanges.
7.2 Payment of Margins192
7.2.1 The applicable margins shall be paid as per the guidelines issued by
SEBI and as directed by stock exchanges from time to time.
7.3 Unique Client Codes193
7.3.1 Mutual Funds are not permitted to operate in the securities market
without furnishing a valid Unique Client Code (UCC).194 Mutual Funds
are required to obtain UCC from the Bombay Stock Exchange Ltd.
(BSE) or The National Stock Exchange Ltd. (NSE) whenever a new
scheme(s) or plan(s) (wherever the portfolio of the plans is different) is
191 SEBI Circular No. SMD-II(N)/2113/94 dated April 12, 1994. Further, in this regard, circulars
issued by SEBI from time to time may be considered.
<1 92 SEBI Circular No. MFD/CIR/9/230/2001 dated August 14, 2001
193 SEBI Circular No. MFD/CIR No.8/290/01 dated July 30, 2001, SEBI Circular No.
SEBI/SMD/SE/11/2003/31/03 dated March 31, 2003, SEBI Circular No. SEBI/IMD/CIR
No.01/1756/04 dated January 27, 2004, SEBI Circular No. MRD/DoP/SE/Cir-35/2004
dated October 26, 2004, SEBI Circular No. SEBI/IMD/CIR No.2/46603/05 dated August
10, 2005. Further, in this regard, circulars issued by SEBI from time to time may be
considered
194 SEBI Circular No. SMDRP/Policy/Cir-39/2001 dated July 18, 2001.
1 12 Master Circular for Mutual Funds
launched195. Such UCC should be obtained before commencing the
trading on behalf of the scheme(s)/plan(s). At the time of entering an
order, the UCC pertaining to the parent Mutual Fund shall be provided
and the allocation to individual schemes shall be done in the post
closing session.196 The UCC can be shared with the unit holders to
facilitate tax benefits linked to payment of Securities Transaction Tax
(STT).
7.4 Trading in Exchange Traded Derivatives Contracts197
7.4.1 For trading in Exchange Traded Derivatives Contracts, following
should be observed:
7.4.1.1 Mutual Fund schemes can participate in derivatives market as per
the guidelines issued by SEBI in this regard from time to time.198
7.4.1.2 The Mutual Funds shall be treated at par with a registered FII in
respect of position limits in index futures, index options, stock
options and stock futures contracts. The Mutual Funds will be
considered as trading members like registered FIIs and the schemes
of Mutual Funds will be treated as clients like sub-accounts of FIIs.
7.4.1.3 Appropriate disclosures shall be made in the offer document
regarding the extent and manner of participation of the schemes of
195 SEBI Circular No. SEBI/IMD/CIR No.01/1756/04 dated January 27, 2004.
196 SEBI Circular No. MRD/DoP/SE/Cir-35/2004 dated October 26, 2004.
197 SEBI Circular No. DNPD/Cir-29/2005 dated September 14, 2005; SEBI Circular No.
DNPD/Cir-30/2006 dated January 20, 2006, SEBI Circular No. SEBI/DNPD/Cir-31/2006
dated September 22, 2006.
198 SEBI Circular No. DNPD/Cir-29/2005 dated September 14, 2005.
113 Master Circular for Mutual Funds
the Mutual Funds in derivatives and the risk factors, which should
be explained by suitable numerical examples.
7.4.1.4 The combined futures and options position limit of Mutual Funds
for stock derivatives contracts shall be 20% of the applicable
Market Wide Position Limit (MWPL). 199
7.4.1.5 Existing schemes of Mutual Funds, whose SIDs do not envisage
investments in derivatives, may participate in derivatives market
subject to the following conditions200:
a. The extent and the manner of the proposed participation
in derivatives shall be disclosed to the unit holders.
b. The risks associated with such participation shall be disclosed
and explained by suitable numerical examples.
c. Prior to commencing participation in derivatives, the scheme
shall comply with the provisions of Regulation 18 (15A) of SEBI
(Mutual Funds) Regulations, 1996 and all unit holders shall be
given at least 30 days to exercise option to exit at prevailing NAV
without charging of exit load.
7.4.1.6 Positions limits as specified by SEBI for Mutual Funds and its
schemes from time to time shall be applicable201.
199 SEBI Circular No. SEBI/HO/MRD/DP/CIR/P/2016/143 dated December 27, 2016.
200 Please refer SEBI Circular No SEBI/HO/IMD/DF2/CIR/P/2017/13 dated February 20, 2017
‘Participation in derivatives market by Mutual Funds.’
201 Please refer SEBI Circular No DNPD/Cir – 29/2005 Dated September 14, 2005 for position limits
and subsequent circulars issued in this regard from time to time.
114 Master Circular for Mutual Funds
7.5 Trading in Interest Rate Derivatives202
7.5.1 Mutual Fund schemes are permitted to undertake transactions in
Forward Rate Agreements and Interest Rate Swaps with banks, PDs &
FIs as per applicable RBI Guidelines203, mutual funds can also trade
in interest rate derivatives through the Stock Exchanges subject to
requisite disclosures in the SID204.
7.5.2 The following position limits205 in IRF shall be applicable for Mutual
Fund level and scheme level:
a. Mutual Funds shall have position limits as applicable to trading
members presently.
b. Schemes of Mutual Funds shall have position limits as applicable
to clients presently.
7.6 Transactions of mutual funds in Government Securities in
dematerialised form206
7.6.1 According to Regulation207, the Mutual Funds having an aggregate of
securities worth Rs.10 crore or more are required to settle their
transactions only through dematerialised securities. All Mutual Funds
should enter into transactions relating to government securities only
in dematerialised form.
202 SEBI Circular No. SEBI/MFD/CIR No.03/158/03 dated June 10, 2003.
203 RBI Circular dated November 1, 1999.
204 SEBI Circular No. SEBI/MFD/CIR No.03/158/03 dated June 10, 2003.
205 SEBI Circular No. CIR/MRD/DRMNP/26/2014 dated September 15, 2014
206 SEBI Circular No. MFD/CIR/05/432/2002 dated June 20, 2002
207 Regulation 44(1A) of SEBI (Mutual Funds) Regulations, 1996
115 Master Circular for Mutual Funds
CHAPTER 8
NET ASSET VALUE208
8.1 Disclosure of Net Asset Value209
8.1.1 Mutual Funds/ AMCs shall prominently disclose the NAVs of all
schemes under a separate head on their respective website and on the
website of Association of Mutual Funds in India (AMFI). Further,
Mutual Funds/ AMCs shall extend facility of sending latest available
NAVs to unit holders through SMS, upon receiving a specific request
in this regard.
8.1.2 NAV of all Mutual Fund schemes except for Fund of Fund Schemes
shall be updated on AMFI’s website and the Mutual Funds’ websites
by 11:00 p.m. of the same day210.
8.1.3 Fund of Fund Schemes shall have an extended time up to 10 a.m. the
following business day in this regard211.
8.1.4 Delay beyond 10 a.m. of the following business day in case of Fund of
Fund schemes and 11:00 p.m. on the same day for all other schemes
shall be explained in writing to AMFI and the Board and shall also be
reported in the CTR(s)212 in terms of number of days of non adherence
208 Regulation 48(1) of SEBI (Mutual Funds) Regulations, 1996
209 SEBI Circular No. IIMARP/MF/CIR/07/844/97 dated May 5, 1997, SEBI Circular No.
MFD/CIR No.11/171/01 dated February 9, 2001, SEBI Circular No. MFD/CIR/13/087/2001
dated March 28, 2001; SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29,
2006, SEBI Circular No. SEBI/IMD/CIR No.5/96576/2007 dated June 25, 2007, SEBI Cir
No. SEBI/IMD/Cir No.12/147132/08 dated December 11,2008;
SEBI/HO/IMD/DF2/CIR/P/2018/92 dated June 05, 2018 and SEBI Circular
No.SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
<2 10 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
211 SEBI Circular No. SEBI/IMD/CIR No.5/96576/2007 dated June 25, 2007.
212 For format of CTR, please refer to section on formats
1,,, 16 Master Circular for Mutual Funds
of time limit for uploading NAV on AMFI’s website and the reasons for
the same. Corrective steps taken by AMC to reduce the number of
occurrences shall also be disclosed213.
8.1.5 214 Mutual Funds/ AMCs shall explain the methodology of calculating
the sale and repurchase price of unit with the help of a simple
numerical example at all relevant places such as on their respective
website, AMFI website and Scheme Information Documents, etc.
8.1.6 In case the NAVs are not available before the commencement of
business hours on the following day due to any reason, Mutual Funds
shall issue a press release giving reasons for the delay and explain
when they would be able to publish the NAVs215.
8.2 Rounding off NAVs216
8.2.1 To ensure uniformity, Mutual Funds shall round off NAV up to four
decimal places for index funds and all types of debt & liquid/money
market schemes.
8.2.2 For all equity oriented and balanced fund schemes, Mutual Funds
shall round off NAVs up to two decimal places. However, Mutual Funds
can round off the NAVs up to more than two decimal places in case of
equity oriented and balanced fund schemes also, if they so desire217.
Relevant disclosure in this regard shall be made in the SID/SAI218.
213 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
,2, 14 SEBI/HO/IMD/DF2/CIR/P/2018/92 dated June 05, 2018
215 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
, 2 16 SEBI Circular No. MFD/CIR/08/514/2002 dated July 22, 2002, SEBI Circular No.
MFD/CIR/11/16159/2002 dated August 22, 2002.
, 2 , 17 SEBI Circular No. MFD/CIR/11/16159/2002 dated August 22, 2002.
, 2 18 SEBI Circular No. MFD/CIR/08/514/2002 dated July 22, 2002.
1 17 Master Circular for Mutual Funds
8.3 Uniform Cut off Timings for applicability of Net Asset Value
of Mutual Fund scheme(s) and/ or plan(s)219
8.3.1 Mutual Funds should follow the Guidelines enumerated below with
respect to uniform Cut -off Timings:
8.3.2 Definitions:
8.3.2.1 In these Guidelines, unless the context otherwise requires:
a. ‘Cut-off Timing’, in relation to an investor making an application to
a Mutual Fund for purchase or sale of units, shall mean, the outer
limit of timing within a particular day which is relevant for
determination of the NAV applicable for his transaction;
b. ‘International scheme’ means a Mutual Fund scheme having
substantial investments in foreign securities valued as per time
zones other than Indian Standard Time zone;
c. ‘Liquid fund schemes and plans’ shall mean the schemes and plans
of a Mutual Fund as specified in the guidelines220 issued by SEBI in
this regard221.
8.3.3 Applicability
8.3.3.1 The Guidelines on Cut off Timings for applicability of Net Asset Value
of Mutual Fund scheme(s) and/ or plan(s) shall be applicable to all
schemes and plans of Mutual Funds except:
a. International schemes and
219 SEBI Circular No. SEBI/IMD/CIR No. 11/78450/06 dated October 11, 2006.
, 2 20 Please refer to the Section on liquid schemes
221 SEBI Circular No.SEBI/IMD/CIR No.13/150975/09 dated January 19, 2009
118 Master Circular for Mutual Funds
b. Transactions in Mutual Fund units undertaken on a recognized
Stock Exchange.
8.3.4 Fixation of uniform Cut-off Timings
8.3.4.1 Mutual Funds shall reckon the Cut-off Timings for their schemes
and plans in compliance with these Guidelines and the same shall
be uniformly implemented for all investors.
8.3.4.2 Mutual Funds shall ensure that each payment instrument for
subscription or purchase of units is deposited in a bank
expeditiously by utilization of the appropriate banking facility, so as
to comply with the requirement in Clause 8.3.4.1 above.
8.3.4.3 AMCs shall compensate any loss occasioned to any investor or to
the scheme and/or plan on account of non compliance with Clause
8.3.4.2 above.
8.3.5 Cut-off Timings for liquid fund schemes and plans
For determining the applicable NAV222:
8.3.5.1 The following cut-off timings shall be observed by a mutual fund in
respect of purchase of units in liquid fund schemes and their plans,
and the following NAVs shall be applied for such purchase:
a. where the application is received up to 1.30 p.m. on a day and funds
are available for utilization before the cut-off time without availing
any credit facility, whether, intra-day or otherwise – the closing NAV
of the day immediately preceding the day of receipt of application;
222 SEBI Circular No SEBI/IMD/DF/15/2010 dated November 26, 2010, SEBI Circular No
SEBI/HO/IMD/DF2/CIR/P/2019/101 dated September 20, 2019
119 Master Circular for Mutual Funds
b. where the application is received after 1.30 p.m. on a day and funds
are available for utilization on the same day without availing any
credit facility, whether, intra-day or otherwise – the closing NAV of
the day immediately preceding the next business day ; and
c. irrespective of the time of receipt of application, where the funds are
not available for utilization before the cut-off time without availing
any credit facility, whether, intra-day or otherwise – the closing NAV
of the day immediately preceding the day on which the funds are
available for utilization.
8.3.5.2 For allotment of units in respect of purchase in liquid schemes, it
shall be ensured that:
a. Application is received before the applicable cut-off time.
b. Funds for the entire amount of subscription/purchase as per the
application are credited to the bank account of the respective liquid
schemes before the cut-off time.
c. The funds are available for utilization before the cut-off time without
availing any credit facility whether intra-day or otherwise, by the
respective liquid schemes.
8.3.5.3 For allotment of units in respect of switch-in to liquid schemes from
other schemes, it shall be ensured that:
a. Application for switch-in is received before the applicable cut-off
time.
b. Funds for the entire amount of subscription/purchase as per the
switch-in request are credited to the bank account of the respective
switch-in liquid schemes before the cut-off time.
120 Master Circular for Mutual Funds
c. The funds are available for utilization before the cut-off time without
availing any credit facility whether intra-day or otherwise, by the
respective switch-in schemes.
8.3.5.4 The following Cut-off Timings shall be observed by Mutual Funds
with respect to repurchase of units in liquid fund schemes and plans
and the following NAVs shall be applied for such repurchase:
a. Where the application is received up to 3.00 pm – the closing NAV
of day immediately preceding the next business day; and
b. Where the application is received after 3.00 pm – the closing NAV of
the next business day.
8.3.5.5 Mutual Funds shall calculate NAV for each calendar day for their
liquid fund schemes and plans.
a. Explanation: “Business Day” does not include a day on which the
Money Markets are closed or otherwise not accessible.
8.3.6 Cut-off Timings for schemes and plans other than liquid fund schemes
and plans
8.3.6.1 A Mutual Fund shall reckon only prospective NAV, in accordance
with this clause, in respect of all their schemes and plans i.e. for
other than liquid fund schemes and plans
8.3.6.2 The following Cut-off Timings shall be observed by Mutual Funds in
respect of purchase of units in other schemes and plans and
following NAVs shall be applied for such purchase:
8.3.6.2.1 Where the application is received up to 3.00 pm with a local
cheque or demand draft payable at par at the place where it is
121 Master Circular for Mutual Funds
received – closing NAV of the day on which the application is
received;
8.3.6.2.2 Where the application is received after 3.00 pm with a local
cheque or demand draft payable at par at the place where it is
received – closing NAV of the next business day; and
8.3.6.2.3 Where the application is received with an outstation cheque or
demand draft which is not payable on par at the place where it
is received – closing NAV of day on which the cheque or demand
draft is credited.
In respect of purchase of units of mutual fund schemes (other
than liquid schemes), the closing NAV of the day on which the
funds are available for utilization shall be applicable for application
amount equal to or more than Rs. 2 lakh, irrespective of the time of
receipt of such application223.
8.3.6.3 For allotment of units in respect of purchase in income/debt
oriented mutual fund schemes/plans other than liquid schemes, it
shall be ensured that224:
8.3.6.3.1 Application is received before the applicable cut-off time (3 pm).
8.3.6.3.2 Funds for the entire amount of subscription/purchase as per
the application are credited to the bank account of the
respective schemes before the cut-off time (3 pm).
223 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
224 SEBI Circular No SEBI/IMD/DF/15/2010 dated November 26, 2010
122 Master Circular for Mutual Funds
8.3.6.3.3 The funds are available for utilization before the cut-off time (3
pm) without availing any credit facility whether intra-day or
otherwise, by the respective scheme.
8.3.6.4 For allotment of units in respect of switch-in to income/debt
oriented mutual fund schemes/plans other than liquid schemes
from other schemes, it shall be ensured that:
8.3.6.4.1 Application for switch-in is received before the applicable cut-
off time.
8.3.6.4.2 Funds for the entire amount of subscription/purchase as per
the switch-in request are credited to the bank account of the
respective switch-in income/debt oriented mutual fund
schemes/plans before the cut-off time.
8.3.6.4.3 The funds are available for utilization before the cut-off time
without availing any credit facility whether intra-day or
otherwise, by the respective switch-in income/debt oriented
mutual fund schemes/plans.
8.3.6.5 The following Cut-off Timings shall be observed by Mutual Funds in
respect of repurchase of units in its other schemes and their plans,
and the following NAVs shall be applied for such repurchase:
8.3.6.5.1 Where the application is received up to 3.00 pm – closing NAV
of the day on which the application is received; and
8.3.6.5.2 An application received after 3.00 pm – closing NAV of the next
business day.
123 Master Circular for Mutual Funds
8.3.7 Switch and Sweep Transactions
8.3.7.1 Paragraphs 8.3.5 and 8.3.6 shall apply to ‘switch in’ transactions
as if they were purchase transactions and to ‘switch out’
transactions as if they were repurchase transactions.
8.3.7.2 Paragraphs 8.3.5 and 8.3.6 shall apply to ‘sweep’ transactions as if
they were purchase transactions and to ‘reverse sweep’
transactions as if they were repurchase transactions.
8.3.7.3 In case of ‘switch’ transactions from one scheme to another, the
allocation shall be in line with redemption payouts.
8.3.8 Time Stamping
8.3.8.1 Application from investors shall be received by Mutual Funds only
at official points of acceptance, addresses of which shall be disclosed
in the SID and on Mutual Funds’ websites.
8.3.8.2 Cut off timings as prescribed under Paragraphs 8.3.5 and 8.3.6 shall
apply with reference to the point of time at which the applications
are received at such official points of acceptance.
8.3.8.3 Time stamping machines at all official points of acceptance shall be
in compliance with the requirements mentioned in Section 8.4.
8.3.9 Compliance Reporting
8.3.9.1 Status of compliance with these Guidelines shall be reported to the
Board in the CTR(s)225 of the AMC(s) and the Half Yearly Trustee
Reports226.
225 for CTR format, please refer to the section on formats
, 2 ,,,, 26 For Trustee report, please refer to the section on formats
1
,
2 4 Master Circular for Mutual Funds
8.3.9.2 The Half Yearly Trustee Reports shall contain a declaration on
whether the Trustees are satisfied with the systems and procedures
of the Mutual Fund designed for the purpose of compliance with
these Guidelines.
8.3.9.3 Further, the substance of these Guidelines shall be disclosed to
investors in the SID or in any addendum thereto.
8.3.9.4 Encumbrance of the scheme property227
Regulations228 provides that the AMC shall not acquire any of the
assets out of the scheme property which involves the assumption of
any liability which is unlimited or which may result in encumbrance
of the scheme property in any way. AMC’s are advised to strictly
adhere to the said provision.
8.4 Requirements with respect to time stamping machines
[pursuant to Clause 8(3)]
8.4.1 For every machine, running serial number shall be stamped from
the first number to the last number as per its capacity before
repetition of the cycle.
8.4.2 Every application for purchase shall be stamped on the face and the
corresponding payment instrument shall be stamped on the back
indicating the date and time of receipt and running serial number.
The application and the payment instrument shall contain the same
serial number.
8.4.3 Every application for redemption shall be stamped on the face
thereof and on the investor’s acknowledgment copy (or twice on the
227 SEBI Circular No SEBI/IMD/DF/15/2010 dated November 26, 2010
228 Fourth Schedule of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996
125 Master Circular for Mutual Funds
application if no acknowledgment is issued) indicating the date and
time of receipt and running serial number.
8.4.4 Different applications shall not be bunched together with the same
serial number.
8.4.5 Blank papers shall not be time stamped. Genuine errors, if any, shall
be recorded with reasons and the corresponding applications requests
shall also be preserved.
8.4.6 The time stamping machine shall have a tamper proof seal and the
ability to open the seal for maintenance or repairs must be limited to
vendors or nominated persons of the mutual fund, to be entered in a
proper record.
8.4.7 Breakage of seal and/or breakdown of the time stamping process shall
be duly recorded and reported to the Trustees.
8.4.8 Every effort should be made to ensure uninterrupted functioning of
the time stamping machine. In case of breakdown, the Mutual Funds
shall take prompt action to rectify the situation. During the breakdown
period, Mutual Funds shall adopt an alternative time stamping method
that has already been approved by the Board of the AMC and the
Trustee(s). An audit trail shall be available to check and ensure the
accuracy of the time stamping process during the said period.
8.4.9 Any alternate mode of application that does not have any physical or
electronic trail shall be converted into a physical piece of information
and time stamped in accordance with these Guidelines.
8.4.10 Mutual Funds shall maintain and preserve all applications/ requests,
duly time stamped as aforesaid, at least for a period of eight years229
229 Regulation 50(2) of SEBI (Mutual Funds) Regulations, 1996
126 Master Circular for Mutual Funds
to be able to produce them as and when required by the Board or
auditors appointed by the Board.
8.5 Uniformity in calculation of sale and repurchase price230
8.5.1 The following method is being prescribed
8.5.1.1 To streamline the calculation of sale and repurchase price of
mutual fund units231,
8.5.1.2 To avoid variation in the amounts payable to investors and/or
number of units allotted to them, and
8.5.1.3 To make the calculations more comprehensible to the investors.
8.5.2 Exit loads shall be charged as a percentage of the NAV i.e. applicable load
as a percentage of NAV will be subtracted from the NAV to calculate the
repurchase price.
8.5.3 The formula for the same is as follows:
8.5.3.1 Sale Price = Applicable NAV
8.5.3.2 Repurchase Price = Applicable NAV *(1 – Exit Load, if any)
230 SEBI Circular No. MFD/CIR/08/514/2002 dated July 22, 2002 & SEBI Circular No.
SEBI/IMD/CIR No. 4/ 168230/09 dated June 30, 2009
, 2 , 31 Regulation 49(3) of the SEBI (Mutual Funds) Regulations, 1996.
127 Master Circular for Mutual Funds
CHAPTER 9
VALUATION
9.1 Definitions232
9.1.1 Non Traded Securities233
9.1.1.1 When a security (other than Government Securities, money market
and debt securities) is not traded on any Stock Exchange for a period
of thirty days prior to the valuation date, the scrip shall be treated
as a non traded security.
9.1.1.2 A money market or debt security shall be considered as non-traded
when, on the date of valuation, there are no trades (in marketable
lots) in such security on any recognized Stock Exchange or no trades
(in marketable lots) have been reported on trade reporting platform
of recognized stock exchanges or the Clearing Corporation of India
Ltd. (CCIL).
9.1.2 Thinly Traded Securities
9.1.2.1 Thinly traded equity/ equity related securities:234
a. When trading in an equity and/or equity related security (such
as convertible debentures, equity warrants etc.) in a month is
both less than Rs.5 lacs and the total volume is less than
50,000 shares, the security shall be considered as thinly
traded security and valued accordingly.
232 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000, SEBI Circular No.
MFD/CIR/14/088/2001 dated March 28, 2001,SEBI Circular No. MFD/CIR/14/442/2002
dated February 20, 2002 and SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated
S eptember 24, 2019.
233 <, SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000 & SEBI Circular No.
SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019.
, 2 34 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001.
128 Master Circular for Mutual Funds
b. In order to determine whether a security is thinly traded or not,
the volumes traded in all recognized Stock Exchanges in India
may be taken into account.
c. For example, if the volume of trade is 1,00,000 and value is
Rs.4,00,000, the shares do not qualify as thinly traded. Also if
the volume traded is 40,000, but the value of trades is
Rs.6,00,000, the shares do not qualify as thinly traded.
d. Where a Stock Exchange identifies the thinly traded securities
by applying the above parameters for the preceding calendar
month and publishes or provides the required information
along with the daily quotations, the same can be used by the
Mutual Funds.
e. If the shares are not listed on the Stock Exchanges which
provide such information, then Mutual Funds shall make their
own analysis in line with the above criteria to check whether
such securities are thinly traded or not and then value them
accordingly.
9.1.3 Traded money market / debt security235:
9.1.3.1 A money market or debt security shall be considered as traded
when, on the date of valuation, there are trades (in marketable lots)
in that security on any recognized Stock Exchange or there are
trades reported (in marketable lots) on the trade reporting platform
of recognized stock exchanges or The Clearing Corporation of India
235 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
129 Master Circular for Mutual Funds
Ltd. (CCIL). In this regard, the marketable lots shall be defined by
AMFI, in consultation with SEBI.
9.1.4 Below investment grade and default235:
9.1.4.1 A money market or debt security shall be classified as “below
investment grade” if the long term rating of the security issued by a
SEBI registered Credit Rating Agency (CRA) is below BBB- or if the
short term rating of the security is below A3.
9.1.4.2 A money market or debt security shall be classified as “Default” if
the interest and / or principal amount has not been received, on the
day such amount was due or when such security has been
downgraded to “Default” grade by a CRA. In this respect, Mutual
Funds shall promptly inform to the valuation agencies and the
CRAs, any instance of non-receipt of payment of interest and / or
principal amount (part or full) in any security.
9.2 Valuation of Securities
9.2.1 Traded Securities (other than debt securities):236
9.2.1.1 When a security (other than debt securities) is not traded on any
Stock Exchange on a particular valuation day, the value at which it
was traded on the selected Stock Exchange, as the case may be, on
the earliest previous day may be used provided such date is not
more than thirty days prior to valuation date.
236 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002 and SEBI Circular No.
SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
130 Master Circular for Mutual Funds
9.2.2 Non-Traded /and/or Thinly Traded Equity Securities:237
9.2.2.1 AMCs shall value non traded and/or thinly traded securities “in
good faith” based on the Valuation norms prescribed below:
9.2.2.2 Based on the latest available Balance Sheet, Net Worth shall be
calculated as follows:
a. Net Worth per share = [Share Capital+ Reserves (excluding
Revaluation Reserves) – Miscellaneous expenditure and Debit
Balance in Profit and Loss Account] / Number of Paid up Shares.
b. Average Capitalization rate (P/E ratio) for the industry based
upon either BSE or NSE data (which shall be followed
consistently and changes, if any, noted with proper justification
thereof) shall be taken and discounted by 75 per cent i.e. only 25
per cent. Of the industry average P/E shall be taken as
Capitalization rate (P/E ratio). Earnings per share (EPS) of the
latest audited annual accounts shall be considered for this
purpose.
c. The value as per the Net Worth value per share and the capital
earning value calculated as above shall be averaged and further
discounted by 10 per cent. for illiquidity so as to arrive at the fair
value per share.
d. In case the EPS is negative, EPS value for that year shall be taken
as zero for arriving at capitalised earning.
e. In case where the latest Balance Sheet of the company is not
available within nine months from the close of the year, unless
237 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000 and SEBI Circular No.
SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
131 Master Circular for Mutual Funds
the accounting year is changed, the shares of such companies
shall be valued at zero.
f. In case an individual security accounts for more than 5 per cent.
of the total assets of the scheme, an independent valuer shall be
appointed for the valuation of the said security. To determine if a
security accounts for more than 5 per cent. of the total assets of
the scheme, it shall be valued by the procedure above and the
proportion which it bears to the total net assets of the scheme to
which it belongs will be compared on the date of valuation238.
g. In case trading in an equity security is suspended up to thirty
days, then the last traded price shall be considered for valuation
of that security. If an equity security is suspended for more than
thirty days, then the AMC(s) or Trustees shall decide the
valuation norms to be followed and such norms shall be
documented and recorded.
9.2.3 Debt and Money Market Securities
a. Valuation of money market and debt securities with residual
maturity of upto 30239 days:
1. Amortization based valuation is permitted for money market
and debt securities including floating rate securities, with
residual maturity of upto 30 days. Further, the amortized price
shall be compared with the reference price which shall be the
average of the security level price of such security as provided
238 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001
239 SEBI Circular No. SEBI/IMD/CIR No.16/ 193388/2010 dated February 02, 2010 and SEBI
Circular No. Cir/IMD/DF/6/2012 dated February 28, 2012,
SEBI/HO/IMD/DF4/CIR/P/2019/41 dated March 22, 2019 and SEBI Circular No.
SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
132 Master Circular for Mutual Funds
by the agency(ies) appointed by AMFI for said purpose
(hereinafter referred to as “valuation agencies”). The amortized
price shall be used for valuation only if it is within a threshold
of ±0.025% of the reference price. In case of deviation beyond
this threshold, the price shall be adjusted to bring it within the
threshold of ±0.025% of the reference price.
2. It is further clarified that in case of floating rate securities with
floor and caps on coupon rate and residual maturity of upto 30
days then those shall be valued on amortization basis taking
the coupon rate as floor.
3. In case security level prices given by valuation agencies are not
available for a new security (which is currently not held by any
Mutual Fund), then such security may be valued on
amortization basis on the date of allotment / purchase.
4. Further, with effect from April 01, 2020 onwards, amortization
based valuation shall be dispensed with and irrespective of
residual maturity, all money market and debt securities shall
be valued in terms of paragraph b below.
b. Valuation of money market and debt securities with residual
maturity of over 30240 days:
1. All money market and debt securities including floating rate
securities, with residual maturity of over 30 days shall be
240 SEBI Circular No. SEBI/IMD/CIR No.16/ 193388/2010 dated February 02, 2010, SEBI
Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012,
SEBI/HO/IMD/DF4/CIR/P/2019/41 dated March 22, 2019 and SEBI Circular No.
SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
133 Master Circular for Mutual Funds
valued at average of security level prices obtained from
valuation agencies.
2. In case security level prices given by valuation agencies are not
available for a new security (which is currently not held by any
Mutual Fund), then such security may be valued at purchase
yield on the date of allotment / purchase.
c. Methodology: 241
For arriving at security level pricing, a waterfall approach shall be
followed for the valuation of money market and debt securities.
1. AMFI shall ensure that valuation agencies have a documented
waterfall approach for valuation of money market and debt
securities. The said waterfall approach shall be documented in
consultation with SEBI.
2. The following broad principles should be adopted as part of the
aforesaid waterfall approach, for arriving at the security level
prices:
i. All traded securities shall be valued on the basis of traded
yields, subject to identification of outlier trades by the
valuation agencies.
ii. Volume Weighted Average Yield (VWAY) for trades in the last
one hour of trading shall be used as the basis for valuation
of Government Securities (including T-bills). Valuation of all
241 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
134 Master Circular for Mutual Funds
other money market and debt securities (including
Government securities not traded in last one hour) shall be
done on the basis of VWAY of all trades during the day.
iii. An indicative list of exceptional events shall form part of the
documented waterfall approach mentioned above. In case of
any exceptional events on a day, only VWAY of trades post
such event may be considered for valuation. Further, all
exceptional events along-with valuation carried out on such
dates shall be documented with adequate justification.
iv. All trades on stock exchanges and trades reported on trade
reporting platforms till end of the trade reporting time
(excluding Inter-scheme transfers), should be considered for
valuation on that day. Towards this end, the timing for
disclosure of Net Asset Value (NAV) on website of respective
AMCs and AMFI, stands extended as per paragraph 8.1.2.
v. Considering the importance of polling in the valuation
process, guidelines shall be issued by AMFI on polling by
valuation agencies and on the responsibilities of Mutual
Funds in the polling process, as part of the aforesaid
waterfall approach. These guidelines shall inter-alia include
the following:
(a) Valuation agencies shall identify the Mutual Funds who
shall participate in the polling process on a particular
day, taking into account factors such as diversification
of poll submitters and portfolio holding of the Mutual
Funds. Mutual Funds who are identified by the
135 Master Circular for Mutual Funds
valuation agencies shall necessarily participate in the
polling process. However, in case any Mutual Fund does
not participate in the polling process, detailed reason for
the same shall be recorded and made available during
SEBI inspections.
(b) The minimum number of polls to be considered for
valuation along-with the operational modalities of
polling, shall be specified.
(c) AMCs shall have a written policy, approved by the Board
of AMC and Trustees, on governance of the polling
process. The aforesaid policy shall include measures for
mitigation of potential conflicts of interest in the polling
process and shall identify senior officials responsible for
polling.
(d) AMCs shall ensure that participation in the polling
process is not mis-used to inappropriately influence the
valuation of securities. The officials of the AMC who are
responsible for polling in terms of paragraph (c) above,
shall also be personally liable for any mis-use of the
polling process.
(e) AMCs shall maintain an audit trail for all polls submitted
to valuation agencies.
3. The aforesaid waterfall approach shall form part of the
valuation policy of individual AMCs which is uploaded on their
respective websites. AMFI shall ensure that the said waterfall
136 Master Circular for Mutual Funds
approach is also available on the website of the valuation
agencies
d. Deviation from valuation guidelines:242
1. As per the Principles of Fair Valuation specified in Eighth
Schedule of SEBI (Mutual Funds) Regulations, 1996, AMCs are
responsible for true and fairness of valuation and correct NAV.
Considering the same, in case an AMC decides to deviate from
the valuation price given by the valuation agencies, the detailed
rationale for each instance of deviation shall be recorded by the
AMC.
2. The rationale for deviation along-with details such as
information about the security (ISIN, issuer name, rating etc.),
price at which the security was valued vis-a-vis the price as per
the valuation agencies and the impact of such deviation on
scheme NAV (in amount and percentage terms) shall be
reported to the Board of AMC and Trustees.
3. The rationale for deviation along-with details as mentioned
under paragraph 9.2.3(d)(2) above shall be disclosed immediately
and prominently, under a separate head on the website of AMC.
4. Further, while disclosing the total number of instances of
deviation in the monthly and half-yearly portfolio statements,
AMCs shall also provide the exact link to their website for
accessing the information mentioned at paragraph 9.2.3(d)(3).
242 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
137 Master Circular for Mutual Funds
e. Valuation of money market and debt securities which are rated
below investment grade243:
1. In order to have uniformity and consistency across the Mutual Fund
industry on valuation of money market and debt securities rated
below investment grade, the following has been decided:
i. All money market and debt securities which are rated below
investment grade shall be valued at the price provided by
valuation agencies.
ii. Till such time the valuation agencies compute the valuation of
money market and debt securities classified as below
investment grade, such securities shall be valued on the basis
of indicative haircuts provided by these agencies. These
indicative haircuts shall be applied on the date of credit event
i.e. migration of the security to sub-investment grade and shall
continue till the valuation agencies compute the valuation price
of such securities. Further, these haircuts shall be updated and
refined, as and when there is availability of material information
which impacts the haircuts.
iii. Consideration of traded price for valuation:
(a) In case of trades during the interim period between date of credit
event and receipt of valuation price from valuation agencies,
AMCs shall consider such traded price for valuation if it is lower
243 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/41 dated March 22, 2019 and SEBI
Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
138 Master Circular for Mutual Funds
than the price post standard haircut. The said traded price shall
be considered for valuation till the valuation price is determined
by the valuation agencies.
(b) In case of trades after the valuation price is computed by the
valuation agencies as referred above and where the traded price
is lower than such computed price, such traded price shall be
considered for the purpose of valuation and the valuation price
may be revised accordingly.
(c) The trades referred above shall be of a minimum size as
determined by valuation agencies.
iv. AMCs may deviate from the indicative haircuts and/or the
valuation price for money market and debt securities rated
below investment grade provided by the valuation agencies
subject to the following:
(a) The detailed rationale for deviation from the price post haircuts
or the price provided by the valuation agencies shall be recorded
by the AMC.
(b) The rationale for deviation along-with details such as
information about the security (ISIN, issuer name, rating etc.),
price at which the security was valued vis-a-vis the price post
haircuts or the average of the price provided by the valuation
agencies (as applicable) and the impact of such deviation on
scheme NAV (in amount and percentage terms) shall be
reported to the Board of AMC and Trustees.
(c) The rationale for deviation along-with details as mentioned at
para (b) above shall also be disclosed to investors. In this
regard, all AMCs shall immediately disclose instances of
deviations under a separate head on their website. Further, the
139 Master Circular for Mutual Funds
total number of such instances shall also be disclosed in the
monthly and half-yearly portfolio statements for the relevant
period along-with an exact link to the website wherein the
details of all such instances of deviation are available.
v. Treatment of accrued interest, future interest accrual and future
recovery:
(a) The treatment of accrued interest and future accrual of interest,
in case of money market and debt securities classified as below
investment grade or default, is detailed below:
1. The indicative haircut that has been applied to the principal
should be applied to any accrued interest.
2. In case of securities classified as below investment grade but
not default, interest accrual may continue with the same
haircut applied to the principal. In case of securities
classified as default, no further interest accrual shall be
made.
(b) The following shall be the treatment of how any future recovery
should be accounted for in terms of principal or interest:
1. Any recovery shall first be adjusted against the outstanding
interest recognized in the NAV and any balance shall be
adjusted against the value of principal recognized in the
NAV.
2. Any recovery in excess of the carried value (i.e. the value
recognized in NAV) should then be applied first towards
amount of interest written off and then towards amount of
principal written off.
140 Master Circular for Mutual Funds
9.3 Valuation of securities with Put/Call Options:244
9.3.1 The option embedded securities would be valued as follows:
9.3.1.1 Securities with call option
a. The securities with call option shall be valued at the lower of the
value as obtained by valuing the security to final maturity and
valuing the security to call option. In case there are multiple call
options, the lowest value obtained by valuing to the various call
dates and valuing to the maturity date is to be taken as the value
of the instrument.
9.3.1.2 Securities with Put option
a. The securities with put option shall be valued at the higher of the
value as obtained by valuing the security to final maturity and
valuing the security to put option. In case there are multiple put
options, the highest value obtained by valuing to the various put
dates and valuing to the maturity date is to be taken as the value
of the instruments.
9.3.1.3 Securities with both Put and Call option on the same day
a. Only securities with put / call options on the same day and having
the same put and call option price, shall be deemed to mature on
such put / call date and shall be valued accordingly. In all other
cases, the cash flow of each put / call option shall be evaluated and
the security shall be valued on the following basis:
244 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000 and SEBI Circular No.
SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
141 Master Circular for Mutual Funds
1. Identify a ‘Put Trigger Date’, a date on which ‘price to put option’ is
the highest when compared with price to other put options and
maturity price.
2. Identify a ‘Call Trigger Date’, a date on which ‘price to call option’ is
the lowest when compared with price to other call options and
maturity price.
3. In case no Put Trigger Date or Call Trigger Date (‘Trigger Date”) is
available, then valuation would be done to maturity price. In case
one Trigger Date is available, then valuation would be done as to
the said Trigger Date. In case both Trigger Dates are available, then
valuation would be done to the earliest date.
9.3.2 If a put option is not exercised by a Mutual Fund when exercising such
put option would have been in favour of the scheme, in such cases the
justification for not exercising the put option shall be provided to the
Board of AMC and Trustees.
9.4 Valuation of Government Securities245
Irrespective of the residual maturity, Government Securities (including T-
bills) shall be valued on the basis of security level prices obtained from
valuation agencies.
245 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
142 Master Circular for Mutual Funds
9.5 Valuation of other money market / debt securities, short-
term deposits with banks (pending deployment) and OTC
derivatives: 246
9.5.1 The valuation of bills purchased under rediscounting scheme shall be as
per the guidelines mentioned for valuation of money market instruments,
at paragraphs 9.2.3 (a) and 9.2.3 (b), as the case may be.
9.5.2 Investments in short-term deposits with banks (pending deployment) and
repurchase (repo) transactions (including tri-party repo i.e. TREPS) with
tenor of upto 30 days, shall be valued on cost plus accrual basis.
9.5.3 In order to have uniformity in valuation methodology, prices for all OTC
derivatives and market linked debentures shall be obtained from valuation
agencies.
9.6 Illiquid Securities247
9.6.1 Aggregate value of “illiquid securities” under a scheme, which are
defined as non-traded, thinly traded and unlisted equity shares, shall
not exceed 15 per cent of the total assets of the scheme and any illiquid
246 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
247 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
1. Provided that in case any scheme has illiquid securities in excess of 15% of total assets as
on September 30, 2000 then such a scheme shall within a period of two years bring down
the ratio of illiquid securities within the prescribed limit of 15 per cent. in the following
time frame:
a. All the illiquid securities above 20 per cent. of total assets of the scheme shall be
assigned zero value on September 30, 2001.
b. All the illiquid securities above 15 per cent. of total assets of the scheme shall be
assigned zero value on September 30, 2002.
2. In respect of closed ended funds, for the purposes of valuation of illiquid securities, the
limits of 15 per cent. and 20 per cent. applicable to open ended funds should be increased
to 20 per cent. and 25 per cent respectively.
3. Where a scheme has illiquid securities as at September 30, 2001 not exceeding 15% in the
case of an open-ended fund and 20% in the case of closed fund, the concessions of giving
time period for reducing the illiquid security to the prescribed limits would not be
applicable and at all time the excess over 15% or 20% shall be assigned nil value
143 Master Circular for Mutual Funds
securities held above 15 per cent of the total assets shall be assigned
zero value.
9.6.2 All Mutual Funds shall disclose as on March 31 and September 30 the
scheme wise total illiquid securities in value and percentage of the net
assets while disclosing Half Yearly Portfolios to the unit holders. In the
list of investments, an asterisk mark shall be given against all such
investments which are recognised as illiquid securities.
9.6.3 Mutual Funds shall not be allowed to transfer illiquid securities among
their schemes.
9.7 Investment in Unlisted Equity Shares248
9.7.1 To ensure uniformity in calculation of NAV the following guidelines are
issued:
9.7.1.1 Methodology for Valuation - unlisted equity shares of a company
shall be valued "in good faith" as below:
a. Based on the latest available audited balance sheet, Net Worth shall
be calculated as the lower of item (1) and (2) below:
1. Net Worth per share = [Share Capital + Free Reserves (excluding
revaluation reserves) - Miscellaneous expenditure not written off
or deferred revenue expenditure, intangible assets and
accumulated losses] / Number of Paid up Shares.
2. After taking into account the outstanding warrants and options,
Net Worth per share shall again be calculated and shall be =
[Share Capital + consideration on exercise of Option and/or
Warrants received/receivable by the Company + Free Reserves
248 SEBI Circular No. MFD/CIR/03/526/2002 dated May 9, 2002.
144 Master Circular for Mutual Funds
(excluding Revaluation Reserves) - Miscellaneous expenditure
not written off or deferred revenue expenditure, intangible assets
and accumulated losses] / Number of Paid up Shares plus
Number of Shares that would be obtained on conversion and/or
exercise of Outstanding Warrants and Options.
3. The lower of (1) and (2) above shall be used for calculation of Net
Worth per share and for further calculation in (c) below.
b. Average capitalisation rate (P/E ratio) for the industry based upon
either BSE or NSE data (which shall be followed consistently and
changes, if any, noted with proper justification thereof) shall be
taken and discounted by 75 per cent. i.e. only 25 per cent of the
industry average P/E shall be taken as capitalisation rate (P/E
ratio). Earnings per share (EPS) of the latest audited annual
accounts will be considered for this purpose.
c. The value as per the Net Worth value per share and the capital
earning value calculated as above shall be averaged and further
discounted by 15 per cent for illiquidity so as to arrive at the fair
value per share.
9.7.1.2 The above valuation methodology shall be subject to the following
conditions:
a. All calculations shall be based on audited accounts.
b. If the latest Balance Sheet of the company is not available within
nine months from the close of the year, unless the accounting year
is changed, the shares of such companies shall be valued at zero.
c. If the Net Worth of the company is negative, the share would be
marked down to zero.
145 Master Circular for Mutual Funds
d. In case the EPS is negative, EPS value for that year shall be taken
as zero for arriving at capitalised earning.
e. In case an individual security accounts for more than 5 per cent of
the total assets of the scheme, an independent valuer shall be
appointed for the valuation of the said security. To determine if a
security accounts for more than 5 per cent of the total assets of the
scheme, it shall be valued in accordance with the procedure as
mentioned above on the date of valuation.
9.7.2 At the discretion of the AMCs and with the approval of the Trustees,
unlisted equity shares may be valued at a price lower than the value
derived using the aforesaid methodology.
9.7.3 Due Diligence
9.7.3.1 Mutual Funds shall not make Investment in unlisted equity shares
at a price higher than the price obtained by using the aforesaid
methodology. However, this restriction is not applicable for
investment made in the Initial Public Offers (IPOs) of the companies
or firm allotment in public issues where all the regulatory
requirements and formalities pertaining to public issues have been
complied with by the companies and where the Mutual Funds are
required to pay just before the date of public issue.
9.7.3.2 The Board of the AMC and Board of Trustees shall lay down the
parameters for investing in unlisted equity shares. They shall pay
specific attention as to whether due diligence was exercised while
making such investments and shall review the performance of such
investments in their periodical meetings249.
249 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
1 46 Master Circular for Mutual Funds
9.7.4 Reporting of Compliance
9.7.4.1 Comments on compliance of these Guidelines shall be indicated by
the AMCs and Trustees in their CTRs250 and Half Yearly Reports251
filed with the Board.
9.8 Valuation of securities not covered under the current
valuation policy252:
9.8.1 In case of securities purchased by mutual funds do not fall within the
current framework of the valuation of securities then such mutual
fund shall report immediately to AMFI regarding the same. Further, at
the time of investment AMCs shall ensure that the total exposure in
such securities does not exceed 5% of the total AUM of the scheme.
9.8.2 AMFI has been advised that the valuation agencies should ensure that
the valuation of such securities gets covered in the valuation
framework within six weeks from the date of receipt of such intimation
from mutual fund.
9.8.3 In the interim period, till AMFI makes provisions to cover such
securities in the valuation of securities framework, the mutual funds
shall value such securities using their proprietary model which has
been approved by their independent trustees and the statutory
auditors.
250 For CTR format please refer to the section on formats
251 For Half Yearly Reports, please refer to the section on formats
252 SEBI/IMD/CIR No.16/193388/2010 dated February 02, 2010 and Cir/IMD/DF/4/2010 dated
June 21, 2010
147 Master Circular for Mutual Funds
9.9 Use of own trade for valuation253
9.9.1 Various instances have come to notice wherein Mutual Funds have
used their own trades of relatively small quantity in order to value the
entire holding of such security. In order to address possible mis-use
as mentioned above, Mutual Funds shall not use their own trades for
valuation of debt and money market securities and for Inter-scheme
transfers.
9.10 Inter-scheme transfers (IST) 254:
With respect to Inter-scheme transfers, it has been decided that:
9.10.1 AMCs shall seek prices for IST of any money market or debt security
(irrespective of maturity), from the valuation agencies.
9.10.2 AMFI, in consultation with valuation agencies shall decide a turn-
around-time (TAT), within which IST prices shall be provided by the
agencies.
9.10.3 If prices from the valuation agencies are received within the pre-agreed
TAT, an average of the prices so received shall be used for IST pricing.
9.10.4 If price from only one valuation agency is received within the agreed
TAT, that price may be used for IST pricing.
9.10.5 If prices are not received from any of the valuation agencies within the
agreed TAT, AMCs may determine the price for the IST, in accordance
with Clause 3 (a) of Seventh Schedule of SEBI (Mutual Funds)
Regulations, 1996.
253 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
254 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
148 Master Circular for Mutual Funds
9.11 Changes in Terms of Investment 255
While making any change to terms of an investment, Mutual Funds shall adhere
to the following conditions:
9.11.1 Any changes to the terms of investment, which may have an impact on
valuation, shall be reported to the valuation agencies immediately.
9.11.2 Any extension in the maturity of a money market or debt security shall
result in the security being treated as “Default”, for the purpose of
valuation.
9.11.3 If the maturity date of a money market or debt security is shortened
and then subsequently extended, the security shall be treated as
“Default” for the purpose of valuation.
9.11.4 Any put option inserted subsequent to the issuance of the security
shall not be considered for the purpose of valuation and original terms
of the issue will be considered for valuation.
9.12 Dissemination of information:
9.12.1 All mutual funds shall provide transaction details, including inter
scheme transfers, of money market and debt securities on daily basis to
the agency entrusted for providing the benchmark yield/ matrix of spread
over risk free benchmark yield. Submission of data256 would help in daily
matrix generation and would improve uniformity and accuracy of
valuation in the mutual funds industry.
9.12.2 The AMCs shall also disclose all details of debt and money market
securities transacted (including inter scheme transfers) in its schemes
portfolio on its website and the same shall be forwarded to AMFI for
255 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
256 SEBI Circular No.MFD/CIR/23 /066 / 2003 dated March 7, 2003. For disclosure of transaction
details, please refer to the section on Formats
149 Master Circular for Mutual Funds
consolidation and dissemination as per format257. These disclosures shall
be made settlement date wise on daily basis with a time lag of 30 days258.
9.12.3 All Mutual Funds shall provide transaction details of various types of
debt securities like NCDs, Mibor linked floaters and CPs on daily basis in
the prescribed format enclosed at Annexure 3 to the agency
recommended by AMFI.259.
9.13 Valuation and disclosure of upfront fees260:
9.13.1 Guidelines for valuation of any upfront fee (or any other consideration,
by whatever name called) received in a Mutual Fund scheme, shall be
issued by AMFI, in consultation with SEBI.
9.14 Guidelines for investments in partly paid debentures261
9.14.1 Guidelines for investment by Mutual Funds in partly paid debentures
shall be issued by AMFI, in consultation with SEBI.
9.15 Guidelines to be issued by AMFI262:
9.15.1 The guidelines to be issued by AMFI, in consultation with SEBI under
paragraphs 9.1.4.1, 9.2.3 (C) (1), 9.13 and 9.14 above shall necessarily
be followed by all Mutual Funds / AMCs. Any future changes to these
guidelines shall be made by AMFI in consultation with SEBI, prior to
implementation.
257 For format please refer to the section on formats
258 SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
259 SEBI Circular No. MFD/CIR.No 23 / 066 /2003 dated March 7,2003
260 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
261 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
262 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
150 Master Circular for Mutual Funds
9.15.2 Further, AMFI shall submit the aforementioned guidelines to SEBI,
within 15 days from date of issuance of this circular.
9.16 Consistency
9.16.1 All AMC’s shall ensure that similar securities held under its various
schemes shall be valued consistently.
151 Master Circular for Mutual Funds
CHAPTER 10
LOADS, FEES, CHARGES AND EXPENSES
10.1 Limits on fees and expenses charged to schemes263
10.1.1 Mutual Funds may charge certain expenses to a scheme, as specified
under Regulations.264 Apart from the these expenses, any other
expense as may be approved by SEBI under clause (xiii) of Sub
Regulation 52(4) can also be charged to the Mutual Fund schemes.
Other expenses directly attributable to a scheme may be charged with
the approval of trustees within the overall limits as provided in the
Regulation 52(6).265
10.1.2 Additional TER266 can be charged up to 30 basis points on daily net
assets of the scheme as per Regulation 52267, if the new inflows from
retail investors268 from beyond top 30 cities269 are at least (a) 30% of
gross new inflows in the scheme or (b) 15% of the average assets
under management (year to date) of the scheme, whichever is higher.
Inflows of amount upto Rs.2,00,000/-270 per transaction, by
individual investors shall be considered as inflows from “retail
investor”.
263 SEBI Circular No. IIMARP/MF/CIR/01/428/97 dated February 28, 1997, SEBI Circular No.
IIMARP/MF/CIR/07/826/98 dated April 15, 1998, SEBI Circular No.
MFD/CIR/9/120/2000 dated November 24, 2000.
264 Regulation 52(4) of the Mutual Funds Regulations,1996
265 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
266 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
267 Regulation 52 of the Mutual Funds Regulations,1996
268 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019
269 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/16 dated February 02, 2018.
270 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019
152 Master Circular for Mutual Funds
In case inflows from beyond top 30 cities from retail investors is less
than the higher of (a) or (b) above, additional TER on daily net assets
of the scheme shall be charged as follows:
Daily net assets X 30 basis points X New inflows from retails investors from beyond top 30 cities
365* X Higher of (a) or (b) above
* 366, wherever applicable.
The top 30 cities shall mean top 30 cities based on Association
of Mutual Funds in India (AMFI) data on ‘AUM by Geography –
Consolidated Data for Mutual Fund Industry’ as at the end of the
previous financial year.
10.1.3 The additional TER on account of inflows from beyond top 30 cities so
charged shall be clawed back in case the same is redeemed within a
period of 1 year from the date of investment.
Accordingly, Annexure A1 mentioned at para A(2) of SEBI Circular
CIR/IMD/DF/05/2014 dated March 24, 2014, are modified, whereby
at all relevant places, the terms “15 cities”, “T15” and “B15” would be
substituted with “30 cities”, “T30” and “B30” respectively, while
keeping the other provisions of the circular unchanged.
10.1.4 The additional commission for B 30 cities shall be paid as trail only.
10.1.5 Trustees and AMCs shall ensure compliance of the provisions
mentioned above at paras 10.1.2 and 10.1.4 and trustees shall
confirm the same to SEBI in the half yearly trustee report.
10.1.6 271Regulation 52 (6A) (c) of SEBI (Mutual Funds) Regulations,
1996, allows an AMC to charge additional expenses, incurred towards
271 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/15 dated February 02, 2018
153 Master Circular for Mutual Funds
different heads mentioned under Regulation 52 (2) and Regulation
52 (4), not exceeding 0.05272 per cent of daily net assets of the
scheme.
In this respect, Mutual Fund schemes including close ended
schemes, wherein exit load is not levied / not applicable, the AMCs
shall not be eligible to charge the above mentioned additional
expenses for such schemes.
Further, existing Mutual Fund schemes including close ended
schemes, wherein exit load is not levied / not applicable, shall
discontinue, with immediate effect, the levy of above mentioned
additional expenses, if any.
10.1.7 Total Expense Ratio – Change and Disclosure 273
(a) AMCs shall prominently disclose on a daily basis, the TER
(scheme-wise, date-wise) of all schemes except infrastructure debt
fund (IDF) schemes under a separate head –“Total Expense Ratio
of Mutual Fund Schemes” on their website and on the website of
AMFI in a downloadable spreadsheet format.274.
(b) Any change in the base TER (i.e. TER excluding additional
expenses provided in Regulation 52(6A)(b), 52(6A)(c) of SEBI
(Mutual Funds) Regulations, 1996 and Goods and Services Tax
on investment and advisory fees) in comparison to previous base
TER charged to any scheme/plan shall be communicated to
investors of the scheme/plan through notice via email or SMS at
least three working days prior to effecting such change. (For
example, if changed TER is to be effective from January 8, 2018,
272 Regulation 52(6A)(c) of the SEBI (Mutual Funds) Regulations, 1996.
273 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/18 dated February 5, 2018,
SEBI/HO/IMD/DF2/CIR/P/2018/91 dated June 05, 2018 and
SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019.
274 Please refer to section on Formats for requisite formats.
154 Master Circular for Mutual Funds
then notice shall be given latest by January 2, 2018, considering
at least three working days prior to effective date). Further, the
notice of change in base TER shall be updated in the aforesaid
section of website at least three working days prior to effecting
such change.
275Provided that any increase or decrease in TER in a mutual fund
scheme due to change in AUM and any decrease in TER in a
mutual fund scheme due to various other regulatory
requirements would not require issuance of any prior notice to
the investors.
10.1.8 276 The above change in the base TER in comparison to previous
base TER charged to the scheme shall be intimated to the Board
of Directors of AMC along with the rationale recorded in writing.
10.1.9 The changes in TER shall also be placed before the Trustees on
quarterly basis along with rationale for such changes.
10.1.10 Mutual funds/AMCs shall make complete disclosures in the half
yearly report of Trustees to SEBI regarding the efforts
undertaken by them to increase geographical penetration of
mutual funds and the details of opening of new branches,
especially at locations beyond top 30 cities.
10.1.11 Transparency in TER277
In order to bring transparency in expenses, reduce portfolio churning
and mis-selling in mutual fund (MF) schemes, the following shall be
adhered to:
275 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019
276 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/18 dated February 05, 2018
277 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/137 dated October 22, 2018
155 Master Circular for Mutual Funds
(a) In terms of Regulation 52(1) of SEBI (Mutual Funds) Regulations,
1996, all scheme related expenses including commission paid to
distributors, by whatever name it may be called and in whatever
manner it may be paid, shall necessarily be paid from the scheme
only within the regulatory limits and not from the books of the
Asset Management Companies (AMC), its associate, sponsor,
trustee or any other entity through any route.
Provided278 that the expenses that are very small in value but high
in volume may be paid out of AMC’s books. Such expenses can be
paid out of AMC’s books at actuals or not exceeding 2 bps of
respective scheme AUM, whichever is lower. A list of such
miscellaneous expenses may be provided by AMFI in consultation
with SEBI. Such expenses incurred by AMC should be properly
recorded and audited in the books of account of AMC at year end.
(b) MFs/ AMCs shall adopt full trail model of commission in all
schemes, without payment of any upfront commission or
upfronting of any trail commission, directly or indirectly, in cash
or kind, through sponsorships, or any other route. However,
upfronting of trail commission will be allowed only in case of
inflows through Systematic Investment Plans (SIPs).
(c) In respect of inflows through SIPs into MF schemes, a carve out
has been considered only for new investors to the MF industry (to
be identified based on PAN). The upfronting of trail commissions,
based on SIP inflows, shall be up to 1% payable yearly in advance,
for a maximum period of three years.
278 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019
156 Master Circular for Mutual Funds
(d) The payment of upfront trail commission would be subject to the
following 279:
i. The upfronting of trail commission may be for SIP of upto Rs.
3,000 per month, per scheme, for an investor who is investing
for the first time in Mutual Fund schemes.
ii. For a new investor, as identified above, only the first SIP(s)
purchased by the investor shall be eligible for up-fronting. In
this regard, if multiple SIP(s) are purchased on different dates,
the SIP(s) in respect of which the instalment starts on the
earliest date shall be considered for upfronting.
iii. The upfront trail commission shall be paid from AMC’s books.
iv. The said commission shall be amortized on daily basis to the
scheme over the period for which the payment has been made.
A complete audit trail of upfronting of trail commissions from
the AMC’s books and amortization of the same to scheme(s)
thereafter shall be made available for inspection.
v. The said commission should be charged to the scheme as
‘commissions’ and should also account for computing the TER
differential between regular and direct plans in each scheme.
vi. The commission paid shall be recovered on pro-rata basis from
the distributors, if the SIP is not continued for the period for
which the commission is paid.’
(e) In case of misuse of the carve out for SIPs, the same would be
discontinued and appropriate action would be taken against the
279 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019
157 Master Circular for Mutual Funds
errant participants. Further, the need of this carve out would be
reviewed by SEBI as and when required.
(f) All fees and expenses charged in a direct plan (in percentage terms)
under various heads including the investment and advisory fee
shall not exceed the fees and expenses charged under such heads
in a regular plan.
(g) No pass back, either directly or indirectly, shall be given by MFs/
AMCs/Distributors to the investors.
(h) Training sessions and programmes conducted for distributors
should continue and should not be misused for providing any
reward or non-cash incentive to the distributors.
10.1.12 Trustees and AMCs shall ensure compliance of the provisions
mentioned at para 10.1.11 above and trustees shall confirm the
same to SEBI in the half yearly trustee report.
10.1.13 Brokerage and transaction cost280 incurred for the purpose of
execution of trade may be capitalized to the extent of 12bps
and 5bps for cash market transactions and derivatives
transactions respectively. Any payment towards brokerage and
transaction cost, over and above the said 12 bps and 5bps for
cash market transactions and derivatives transactions respectively
may be charged to the scheme within the maximum limit of Total
Expense Ratio (TER) as prescribed under regulation 52281. Any
expenditure in excess of the said prescribed limit (including
280 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012 & SEBI Circular No.
CIR/IMD/DF/24/2012 dated November 19, 2012.
281 Regulation 52 of the SEBI (Mutual Funds) Regulations, 1996
158 Master Circular for Mutual Funds
brokerage and transaction cost, if any) shall be borne by the AMC
or by the trustee or sponsors.
10.1.14 Soft-dollar arrangement refers to an arrangement between AMCs
and brokers in which the AMC executes trades through a particular
broker and in turn the broker may provide benefits such as free
research, hardware, software or even non-research-related
services, etc., to the AMC. It may be noted that such arrangements
between AMCs and brokers should be limited to only benefits (like
free research report, etc.) that are in the interest of investors and
the same should be suitably disclosed282.
10.1.15 Investor Education and Awareness283:
(a) Mutual Funds/AMCs shall annually set apart at least 2 basis
points on daily net assets within the maximum limit of TER as
per regulation 52 of the Regulations for investor education and
awareness initiatives. Mutual Funds shall make complete
disclosures in the half yearly trustee report to SEBI regarding the
investor education and awareness initiatives undertaken.
(b) 284Certain portion of the 2 basis points of daily net assets
is being set aside by Mutual Funds/AMCs for investor
education and awareness initiatives at industry level.
(c) In this respect, for the purpose of increasing awareness of
Mutual Funds as a financial product category it has been
decided to permit celebrity endorsements at industry level,
subject to the following conditions:
282 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated March 18, 2016
283 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012
284 SEBI Circular No. CIR/IMD/DF/23/2017 dated March 15, 2017
159 Master Circular for Mutual Funds
i. Celebrity endorsement shall be allowed only at industry level, for
the purpose of increasing awareness of Mutual Funds as a
financial product category. Such celebrity endorsements
should not promote a scheme of a particular Mutual Fund or be
used as a branding exercise of a Mutual Fund house/ AMC.
ii. Expenses towards such celebrity endorsements for
increasing awareness of Mutual Funds shall be limited to
the amounts that are aggregated by Mutual Funds at
industry level for the purpose of conducting investor
education and awareness initiatives, in terms of clause F of
SEBI circular dated September 13, 2012.
iii. Prior approval of SEBI shall be required for issuance of
any endorsement of Mutual Funds as a financial product,
which features a celebrity for the purpose of increasing
awareness of Mutual Funds.
10.1.16 285The following expenses cannot be charged to the schemes of
Mutual Funds:
a. Penalties and fines for infraction of laws.
b. Interest on delayed payment to the unit holders.
c. Legal, marketing, publication and other general expenses not
attributable to any scheme(s).
d. Fund Accounting Fees.
e. Expenses on investment management/general management.
f. Expenses on general administration, corporate advertising and
infrastructure costs.
g. Depreciation on fixed assets and software development expenses.
h. Such other costs as may be prohibited by the Board.
285 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000
160 Master Circular for Mutual Funds
10.1.17 The expenditure and/or fee payable by Mutual Funds to the
Depositories may either be capitalized or included as part of
recurring expenditure within the limits prescribed under
Regulation 52(6) of the Mutual Funds Regulations286.
10.1.18 Further, each item of expenditure accounting for more than 10%
of total expenditure shall be disclosed in the accounts or the notes
thereto of the schemes287.
10.1.19 Provision of charging of additional management fees by the Asset
Management Companies in case of schemes launched on no load
basis288.
a. AMC shall not collect any additional management fees referred to
in Regulation289.
Mutual Fund Schemes to be launched including those for which
b.
observation letter have been issued under Regulation290 would be
required to carry out the changes in SID and file the same with
SEBI before the launch.
10.2 Restriction on paying brokerage or commission291
10.2.1 In case of investments made by the Sponsor(s), no brokerage or
commission shall be paid.
286 SEBI Circular No. IIMARP/MF/CIR/07/826/98 dated April 15, 1998.
, 2 ,, 87 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
288 SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
289 Regulation 52(3) of SEBI Mutual Funds Regulation, 1996 and SEBI Circular No.
SEBI/IMD/CIR No. 4/ 168230/09 dated June 30, 2009
290 Regulation 29 of SEBI (Mutual Funds) Regulations, 1996
291 SEBI Circular No. MFD/CIR No.3/211/2001 dated April 30, 2001, SEBI Circular No.
MFD/CIR No.5/153/2001 dated May 24, 2001.
1 61 Master Circular for Mutual Funds
10.3 Restriction on charging Service Tax292
10.3.1 AMC(s) can charge Service Tax, as per applicable Taxation Laws, to
the scheme(s) within the limits prescribed under Regulations293
10.3.2 Mutual funds /AMCs may charge service tax on investment and
advisory fees to the scheme in addition to the maximum limit of
TER as prescribed in Regulation 52294.
10.3.3 Service tax on other than investment and advisory fees, if any, shall
be borne by the scheme within the maximum limit of TER as per
Regulation 52295.
10.3.4 Service tax on exit load, if any, shall be paid out of the exit load
proceeds and exit load net of service tax, if any, shall be credited to
the scheme.
10.3.5 Service tax on brokerage and transaction cost296 paid for execution of
trade, if any, shall be within the limit prescribed under regulation 52
of the Regulations.
10.4 Empowering investors through transparency in payment of
commission and load structure297
10.4.1 In order to empower investors in deciding the commission paid to
distributors in accordance with the level of service received, it has
been mandated that:
292 SEBI Circular No. MFD/CIR/04/430/2002 dated June 19, 2002, SEBI Circular No.
CIR/IMD/DF/21/2012 dated September 13, 2012.
293 Reg.52(6) of the SEBI (Mutual Funds) Regulations, 1996.
294 Regulation 52 of SEBI (Mutual Funds) Regulations, 1996
295 Regulation 52 of SEBI (Mutual Funds) Regulations, 1996
296 SEBI Circular No. CIR/ IMD/ DF/ 24/2012 dated November 19, 2012
297, 219 SEBI Circular No SEBI/IMD/CIR No. 4/ 168230/09 dated June 30, 2009
162 Master Circular for Mutual Funds
a. There shall be no entry load298 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. The load balances are maintained as ‘liabilities’ in the books of the
scheme and are not included in the net asset value (NAV). The
usage299 of the load account shall be subject to the following:
a. The load balance shall be segregated into two accounts in
the books of accounts of the scheme - one to reflect the
balance as on July 31, 2009 and the other to reflect
accretions since August 01, 2009.
b. However, not more than one-third of load balance as on
July 31, 2009 shall be used in any financial year. It is
clarified though the unutilized balances can be carried
forward, yet in no financial year the total spending can be
more than one third of the load balances on July 31, 2009.
The accretions after July 31, 2009 can be used by mutual funds
for marketing and selling expenses including
distributor’s/agent's commissions without any restrictions
mentioned in Para (b) above.
298 Waiver of load for direct applications - Vide SEBI Circular No. SEBI/IMD/CIR
No.10/112153/07 dated December 31, 2007,SEBI mandated w.e.f January 4,2009 no entry
load shall be charged for applications received directly by the AMC(s) through internet or
submitted directly to the AMC(s) or Collection Center/Investor Service Centre and not
routed through any distributor or agent or broker. This waiver was applicable to both
additional purchases under the same folio and ‘switch in’ to a scheme from other schemes
also done directly by the investor. AMCs shall follow the provisions pertaining to informing
the unitholders upon a change in load structure as per clause 3(d) of standard observations.
299 SEBI Circular No.CIR/IMD/DF/4/2011 dated March 9, 2011
163 Master Circular for Mutual Funds
d. The exit load charged300, if any, after the commencement of SEBI
(Mutual Funds) (Second Amendment) Regulations, 2012, shall be
credited to the scheme.
e. 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.
10.4.2 The above guidelines became applicable for:
a. Investments in mutual fund schemes (including additional
purchases and switch-in to a scheme from other schemes) w.e.f
August 1, 2009
b. Redemptions from mutual fund schemes (including switch-out
from other schemes) w.e.f August 1, 2009
c. New mutual fund schemes launched on or after August 1, 2009
d. All Systematic Investment Plans (SIP) including SIPs registered
prior to August 1, 2009301.
10.4.3 The AMCs are required to bring the contents of these guidelines to the
notice of their distributors and monitor compliance.
10.5 Transaction Charges302
10.5.1 A transaction charge per subscription of Rs.10,000/- and above be
allowed to be paid to the distributors of the Mutual Fund products.
300 Regulation 51A of SEBI (Mutual Funds) Regulations, 1996.
301 SEBI Circular No.MFD/CIR/04/430/2002 dated June 19, 2002, SEBI Circular No.
CIR/IMD/df/21/2012 dated September 13, 2012, SEBI/HO/IMD/DF2/CIR/P/2019/42 dated
March 25, 2019
302 SEBI Circular no. CIR/IMD/DF/13/2011 dated August 22, 2011
164 Master Circular for Mutual Funds
However, there shall be no transaction charges on direct investments.
The transaction charge shall be subject to the following:
a. For existing investors in a Mutual Fund, the distributor may be
paid Rs.100/- as transaction charge per subscription of
Rs.10,000/- and above.
b. As an incentive to attract new investors, the distributor may be
paid Rs.150/- as transaction charge for a first time investor in
Mutual Funds.
c. The terms and conditions relating to transaction charge shall
be part of the application form in bold print.
d. The transaction charge, if any, shall be deducted by the
AMC from the subscription amount and paid to the
distributor; and the balance shall be invested.
e. The statement of account shall clearly state that the net
investment as gross subscription less transaction charge and give
the number of units allotted against the net investment.
f. Distributors shall be able to choose to opt out of charging the
transaction charge. However, the ‘opt-out’ shall be at distributor
level and not investor level i.e. a distributor shall not charge
one investor and choose not to charge another investor.
Further, Distributors shall have also the option to either opt in or
165 Master Circular for Mutual Funds
opt out of levying transaction charge based on type of the
product303.
g. The AMCs shall be responsible for any malpractice/mis-selling by
the distributor while charging transaction costs.
h. There shall be no transaction charge on subscription below
Rs.10,000/-
i. In case of SIPs, the transaction charge shall be applicable
only if the total commitment through SIPs amounts to
Rs.10,000/- and above. In such cases the transaction charge
shall be recovered in 3-4 installments.
j. There shall be no transaction charge on transactions other
than purchases/ subscriptions relating to new inflows.
10.5.2 Mutual Funds shall institute systems to detect if a distributor is
splitting investments in order to enhance the amount of transaction
charges and take stringent action including recommendations to AMFI
to take appropriate action.
10.5.3 Mutual Funds/AMCs shall carry out an exercise of de-duplication of
folios across all Mutual Funds within a period of 6 months from
August 22, 2011.
10.6 No Load on Bonus Units and Units allotted on
Reinvestment of Dividend304
303 SEBI Circurlar No. CIR/IMD/DF/21/2012 dated September 13, 2012
304 SEBI Circular No. SEBI/IMD/CIR No. 14/120784/08 dated March 18, 2008
166 Master Circular for Mutual Funds
10.6.1 AMC(s) shall not charge entry and/or exit load on bonus units and
units allotted on reinvestment of dividend. Necessary disclosures in
this regard shall be made in the SID filed with the Board305
10.7 Filing fees 306
10.7.1 Revised filing fee307 as per the SEBI (Payment of Fees) Amendment
Regulations 2014 would be applicable to those scheme(s) whose SID
has been filed with SEBI on or after May 23, 2014.
10.8 Exit load parity
10.8.1 While charging exit loads, no distinction among unit holders should
be made based on the amount of subscription308. While complying
with the same, Mutual Funds should ensure that “any imposition or
enhancement in the load shall be applicable on prospective
investments only.309
10.8.2 Further, the parity among all classes of unit holders in terms of
charging exit load shall be made applicable at the portfolio level.310
10.9 Borrowing Costs 311
10.9.1 With regard to the cost of borrowings in terms of Regulation 44(2) of
SEBI (Mutual Funds) Regulations, 1996, it has been decided that for
a given scheme, the same shall be adjusted against the portfolio
yield of the scheme and borrowing costs in excess of portfolio yield,
if any, shall be borne by the AMC.
259 SEBI Circular No. CIR/ IMD/DF/24/2012 dated November 19, 2012
306 SEBI Cir No. SEBI / IMD / CIR No. 5 / 169030 / 2009 dated July 8, 2009
307 Gazettee Notification No. LAD-NRO/GN/20014-15/03/1089 on SEBI (Payment of Fees)
(Amendment) Regulations, 2014 dated 23 May, 2014
308 SEBI Circular No. SEBI / IMD / CIR No. 6 /172445/ 2009 dated August 7,2009 All
Mutual Funds shall ensure compliance with this circular on or before August 24, 2009
309 SEBI Circular No - SEBI / IMD / CIR No. 7 /173650 / 2009 dated August 17,2009 and
SEBI circular No. SEBI/IMD/CIR No. 5/126096/08 dated May 23, 2008 (clause 16 of the
standard observations)
310 SEBI Circular No - SEBI / IMD / CIR No. 7 /173650 / 2009 dated August 17,2009
311 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/42 dated March 25, 2019
1 67 Master Circular for Mutual Funds
CHAPTER 11
DIVIDEND DISTRIBUTION PROCEDURE
312, 313
11.1 Regulations314 permit Mutual Funds to distribute returns including
dividend. To introduce uniform practices in dividend distribution, the
following guidelines should be followed:
11.2 These guidelines are applicable to all Mutual Fund schemes/plans
which intend to declare the dividend irrespective of their dates of
launch.315
11.2.1 Unlisted Scheme(s)/ Plan(s)
11.2.1.1 The Trustees shall decide the quantum of dividend and the record
date in their meeting316. Dividend so decided, shall be paid,
subject to availability of distributable surplus.
11.2.1.2 Record date shall be the date which will be considered for the
purpose of determining the eligibility of investors whose names
appear on the register of unit holders for receiving dividends. The
NAV shall be adjusted to the extent of dividend distribution and
statutory levy, if applicable, at the close of business hours on
record date.
11.2.1.3 Within one calendar day of the decision of the Trustees with
respect to the dividend to be distributed, the AMC(s) shall issue a
notice to the public communicating the decision including the
312 SEBI Circular No. SEBI/IMD/CIR No.1/64057/06 dated April 4, 2006.
313 For details on advertisement on dividend please refer to Chapter on ‘Advertisements’
314 Regulation 53(a) of the SEBI (Mutual Funds) Regulations, 1996
315 SEBI Circular No SEBI/IMD/CIR No. 3/65370/06 dated April 21,2006
316 Clause 20 of Third Schedule of SEBI (Mutual Funds) Regulations, 1996
168 Master Circular for Mutual Funds
record date. The record date shall be five calendar days from the
issue of public notice.
11.2.1.4 Before the issue of such notice, no communication whatsoever
indicating the probable date of dividend declaration shall be
issued by any Mutual Fund or its distributors of its products.
11.2.1.5 Such notice shall be given in at least one English daily newspaper
having nationwide circulation as well as in a newspaper published
in the language of the region where the head office of the Mutual
Fund is situated.
11.2.1.6 The notice shall, in font size 10, bold, categorically state that
pursuant to dividend distribution, NAV of the scheme would fall
to the extent of payout and statutory levy (if applicable).
11.2.2 Liquid / Debt Schemes with frequent dividend distribution
11.2.2.1 The requirement of giving notice is not mandatory for scheme(s)/
plan(s)/ option(s) with dividend distribution frequency ranging from
daily up to monthly distribution if requisite disclosures in this
regard are made in the SID.
11.2.3 Listed Schemes/Plans
11.2.3.1 Listed scheme(s)/ plan(s) shall follow the requirements stipulated
in the Listing Agreement for dividend declaration and distribution.
169 Master Circular for Mutual Funds
11.3 Non availability of Unit Premium Reserve for dividend
distribution317
11.3.1 Regulations318 provide the accounting policies to be followed for
determining distributable surplus and accounting the sale and
repurchase of units in the books of the Mutual Fund. The format for
Scheme Balance Sheet (including Abridged) provides for disclosure
of Unit Premium Reserve.
11.3.2 Unit Premium Reserve, which is part of the sales price of units that
is not attributable to realized gains, cannot be used to pay dividend.
Therefore:
11.3.2.1 When units of an open-ended scheme are sold, and sale price is
higher than face value of the unit, part of sale proceeds that
represents unrealized gains shall be credited to a separate account
(Unit Premium Reserve) and shall be treated at par with unit
capital and the same shall not be utilized for the determination of
distributable surplus.
11.3.2.2 When units of an open-ended scheme are sold, and sale price is
less than face value of the unit, the difference between the sale
price and face value shall be debited to distributable reserves and
the dividend can be declared only when distributable reserves
become positive after adjusting the amount debited to reserves as
per Regulations319.
317 SEBI circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
318 Ninth and Eleventh Schedule of SEBI (Mutual Funds) Regulations, 1996
319 Paragraph 2(a) (ix) of Eleventh Schedule of SEBI (Mutual Funds) Regulations, 1996
170 Master Circular for Mutual Funds
CHAPTER 12
INVESTMENT BY SCHEMES320
12.1 Investment in Listed and Unrated Debt Instruments321
12.1.1 Mutual fund scheme shall not invest in unlisted debt instruments
including commercial papers (CPs), other than (a) government
securities, (b) other money market instruments and (c) derivative
products such as Interest Rate Swaps (IRS), Interest Rate Futures
(IRF), etc. which are used by mutual funds for hedging.
However, mutual fund schemes may invest in unlisted Non-
Convertible Debentures (NCDs) not exceeding 10% of the debt
portfolio of the scheme subject to the condition that such unlisted
NCDs have a simple structure (i.e. with fixed and uniform coupon,
fixed maturity period, without any options, fully paid up upfront,
without any credit enhancements or structured obligations) and are
rated and secured with coupon payment frequency on monthly basis.
12.1.2 For the purpose of the provisions of paragraph 12.1, listed debt
instruments shall include listed and to be listed debt instruments.
12.1.3 All fresh investments by mutual fund schemes in CPs would be made
only in CPs which are listed or to be listed.
12.1.4 Further, investment in unrated debt and money market instruments,
other than government securities, treasury bills, derivative products
320 Investments in Money Market instruments (MMIs)
In case of the existing schemes ( i.e. existing on date of issue of SEBI Circular No - SEBI /
IMD / CIR No.3 / 166386 / 2009 dated June 15, 2009) where the investments in money
market instruments of an issuer are not in compliance with the Gazette Notification No.
LAD – NRO/GN/2009-10/07/165404 dated June 5, 2009, AMC shall ensure compliance
within a period of 3 months from the date of notification.
<3< 21 SEBI circular No. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 1, 2019
171 Master Circular for Mutual Funds
such as Interest Rate Swaps (IRS), Interest Rate Futures (IRF), etc.
by mutual fund schemes shall be subject to the following:
a. Investments should only be made in such instruments, including
bills re-discounting, usance bills, etc., that are generally not rated
and for which separate investment norms or limits are not
provided in SEBI (Mutual Fund) Regulations, 1996 and various
circulars issued thereunder.
b. Exposure of mutual fund schemes in such instruments, shall not
exceed 5% of the net assets of the schemes.
c. All such investments shall be made with the prior approval of the
Board of AMC and the Board of trustees.
12.2 Restrictions on Investment in debt instruments having
Structured Obligations / Credit Enhancements:322
12.2.1 The investment of mutual fund schemes in the following instruments
shall not exceed 10% of the debt portfolio of the schemes and the
group exposure in such instruments shall not exceed 5% of the debt
portfolio of the schemes:
a. Unsupported rating of debt instruments (i.e. without factoring-in
credit enhancements) is below investment grade and
b. Supported rating of debt instruments (i.e. after factoring-in credit
enhancement) is above investment grade.
For the purpose of this provision, ‘Group’ shall have the same
meaning as defined in paragraph B(3)(b) of SEBI Circular
322 SEBI circular No. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 1, 2019
172 Master Circular for Mutual Funds
No.SEBI/HO/IMD/DF2/CIR/P/2016/35 dated February 15,
2016.
12.2.2 Investment limits as mentioned in paragraph 12.2.1 above shall not
be applicable on investments in securitized debt instruments, as
defined in SEBI (Public Offer and Listing of Securitized Debt
Instruments) Regulations 2008.
12.2.3 Investment in debt instruments, having credit enhancements backed
by equity shares directly or indirectly, shall have a minimum cover
of 4 times considering the market value of such shares.
AMCs may ensure that the investment in debt instruments having
credit enhancements are sufficiently covered to address the market
volatility and reduce the inefficiencies of invoking of the pledge or
cover, whenever required, without impacting the interest of the
investors. In case of fall in the value of the cover below the specified
limit, AMCs should initiate necessary steps to ensure protection of
the interest of the investors.
12.2.4 The existing investments by mutual fund schemes in debt
instruments that are not in terms of the provisions of paragraph C
may be grandfathered till maturity date (as stands as on the date of
this circular) of such debt instruments.
12.2.5 Details of investments in debt instruments having structured
obligations or credit enhancement features should be disclosed
distinctively in the monthly portfolio statement of mutual fund
schemes.
173 Master Circular for Mutual Funds
12.3 Investments by Index Funds:323
12.3.1 Investments by index funds shall be in accordance with the weightage
of the scrips in the specific index as disclosed in the SID324 In case of
sector or industry specific scheme, the upper ceiling on investments
may be in accordance with the weightage of the scrips in the
representative sectoral index or sub index as disclosed in the SID or
10% of the NAV of the scheme, whichever is higher.
12.4 Investments by Liquid Schemes and plans325
12.4.1 The ‘liquid fund schemes and plans’ shall make investment in
/purchase debt and money market securities with maturity of upto 91
days only 326. This shall also be applicable in case of inter scheme
transfer of securities 327
12.4.1.1 Explanation:
a. In case of securities where the principal is to be repaid in a single payout
the maturity of the securities shall mean residual maturity. In case the
principal is to be repaid in more than one payout then the maturity of
the securities shall be calculated on the basis of weighted average
maturity of security.
b. In case of securities with put and call options (daily or otherwise) the
residual maturity of the securities shall not be greater than 91 days328
323 SEBI Circular No - MFD/CIR/09/014/2000 dated January 5, 2000
324 See Clause 10, Seventh Schedule of Mutual Funds Regulations.
<3 25 SEBI Circular No - SEBI/IMD/CIR No.13/150975 / 09 dated January 19, 2009
326 With effect from February 01, 2009 make investment in /purchase debt and money market
securities with maturity of upto182 days only.
327 Transition provision:
Inter-scheme transfers of securities having maturity upto 365 days and held in other schemes
as on February 01, 2009 shall be permitted till October 31, 2009. With effect from November
1, 2009 the requirements stated at paragraph 12.2.1 above shall apply to such inter-se
scheme transfers also.
<3 28 w.e.f May 01, 2009.
174 Master Circular for Mutual Funds
c. In case the maturity of the security falls on a non-business day then
settlement of securities will take place on the next business day.
12.4.2 The above requirements shall be disclosed in the SID and shall form
part of the investment allocation pattern. Any deviation from these
requirements shall be viewed as violation of investment restrictions.
12.5 Investments by close ended debt schemes:
12.5.1 Close ended debt schemes shall invest only in such securities which
mature on or before the date of the maturity of the scheme329
12.6 Prudential limits and disclosures on portfolio
concentration risk in debt oriented mutual fund
schemes330,331
12.6.1 332Mutual Funds/AMCs shall ensure that total exposure of debt
schemes of mutual funds in a particular sector (excluding
investments in Bank CDs, CBLO, G-Secs, TBills, short term
deposits of Scheduled Commercial Banks and AAA rated securities
issued by Public Financial Institutions and Public Sector Banks) shall
not exceed 20% of the net assets of the scheme;
Provided that an additional exposure to financial services sector
(over and above the limit of 20%) not exceeding 10% of the net assets
of the scheme shall be allowed only by way of increase in exposure to
Housing Finance Companies (HFCs); Further, an additional exposure
329 SEBI Circular No IMD/CIR No 12/147132/08 dated December 11, 2008.
330 SEBI Circular No.CIR/IMD/ DF/ 21/ 2012 dated September 13, 2012 and SEBI Circular No.
CIR/IMD/DF/24/2012 dated November 19, 2012 SEBI/ HO/ IMD/ DF2/CIR/P/2016/35
dated February 15, 2016 and SEBI Circular No. SEBI/ HO/ IMD/ DF2/CIR/P/2016/68 dated
August 10, 2016
331 SEBI circular No. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 1, 2019
332 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2017/14 dated February 22, 2017
175 Master Circular for Mutual Funds
of 5% of the net assets of the scheme has been allowed for
investments in securitized debt instruments based on retail housing
loan portfolio and/or affordable housing loan portfolio.
However the overall exposure in HFCs shall not exceed the sector
exposure limit of 20% of the net assets of the scheme.
Provided further that the additional exposure to such securities
issued by HFCs are rated AA and above and these HFCs are registered
with National Housing Bank (NHB) and the total investment/
exposure in HFCs shall not exceed 20% of the net assets of the
scheme.
12.6.2 Further, appropriate disclosures in this regard shall be made in
Scheme Information Document (SID) and Key Information
Memorandum (KIM) of debt schemes333.
12.6.3 Group Exposure –
a) Mutual Funds/ AMCs shall ensure that total exposure of debt
schemes of mutual funds in a group (excluding investments in
securities issued by Public Sector Units, Public Financial
Institutions and Public Sector Banks) shall not exceed 20% of the
net assets of the scheme. Such investment limit may be extended to
25% of the net assets of the scheme with the prior approval of the
Board of Trustees.
b) The investments by debt mutual fund schemes in debt and
money market instruments of group companies of both the sponsor
and the asset management company shall not exceed 10% of the net
333 SEBI circular No. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 1, 2019
176 Master Circular for Mutual Funds
assets of the scheme. Such investment limit may be extended to 15%
of the net assets of the scheme with the prior approval of the Board
of Trustees. 334
c) For this purpose, a group means a group as defined under
regulation 2 (mm) of SEBI (Mutual Funds) Regulations, 1996
(Regulations) and shall include an entity, its subsidiaries, fellow
subsidiaries, its holding company and its associates.
d) All AMCs shall publish on their respective website a list of their
group companies and those of their sponsor(s).335
e) AMFI shall publish on its website a list of all group companies
along with names and identifier of the respective group that are
considered for calculation of group exposure by mutual fund
schemes and also the sector to which each company belongs.335
f) The disclosures at paragraphs 12.6.3(d) and 12.6.3(e) above
shall be made on 1st working day of each calendar quarter starting
from January 1, 2020.335
12.6.4 Trustee shall review exposure of a mutual fund, across all its
schemes, towards individual issuers, group companies and sectors.
Trustee should satisfy themselves on the levels of exposure and
confirm the same to SEBI in the half-yearly trustee report starting
from the half-year ending March 31, 2016.
12.6.5 The revised investment restrictions at issuer level, sector level and
group level shall be applicable to all new schemes and fresh
334 SEBI circular No. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 1, 2019
335 SEBI circular No. SEBI/HO/IMD/DF2/CIR/P/2019/152 dated December 10, 2019
177 Master Circular for Mutual Funds
investments by existing schemes from the date of this circular (i.e.
February 15, 2016).
12.6.6 Existing mutual fund schemes shall comply with the revised
investment restrictions at issuer level, sector level and group level
within a period of one year from the date of issue of this circular (i.e.
February 15, 2016). Existing close ended schemes shall not be
required to sell their investments to comply with the restrictions.
However, if existing close ended schemes sell their investments then
their fresh investments shall be subject to the restrictions.
12.7 Portfolio Concentration Norms for Equity Exchange Traded
Funds (ETFs) and Index Funds336
12.7.1 In order to address the risk related to portfolio concentration in ETFs
and Index Funds, it has been decided to adopt the following norms:
a) The index shall have a minimum of 10 stocks as its constituents.
b) For a sectoral/ thematic Index, no single stock shall have more
than 35% weight in the index. For other than sectoral/ thematic
indices, no single stock shall have more than 25% weight in the
index.
c) The weightage of the top three constituents of the index,
cumulatively shall not be more than 65% of the Index.
d) The individual constituent of the index shall have a trading
frequency greater than or equal to 80% and an average impact
cost of 1% or less over previous six months.
Accordingly, any ETF/ Index Fund that seeks to replicate a particular
Index shall ensure that such index complies with the aforesaid norms.
336 SEBI Circular No SEBI/HO/IMD/DF3/CIR/P/2019/011 dated January 10, 2019.
1, 78 Master Circular for Mutual Funds
12.7.2 Compliance Procedure:
a) The aforesaid norms shall be applicable to all ETFs/ Index Funds
tracking equity indices.
b) The ETF/ Index Fund issuer shall evaluate and ensure compliance
to the aforesaid norms for all its ETFs/ Index Funds at the end of
every calendar quarter.
c) The ETF/Index Fund issuer shall ensure that the updated
constituents of the Indices (for all its ETFs/ Index Funds) are
available on the website of such ETF/Index Fund issuers at all points
of time.
12.8 Norms for Debt Exchange Traded Funds (ETFs)/Index
Funds337
12.8.1 The following norms are prescribed for Debt ETFs/Index Funds to be
adopted by all AMCs:
a. The constituents of the index shall be aggregated at issuer level.
b. The index shall have a minimum of 8 issuers.
c. No single issuer shall have more than 15% weight in the index.
d. The rating of the constituents of the index shall be investment grade.
e. The constituents of the index shall have a defined credit rating and
defined maturity as specified in the index methodology.
12.8.2 Replication of the Index by Debt ETFs/Index Funds shall be as
follows:
a) Debt ETFs/Index Funds shall replicate the index completely.
337
SEBI Circular No SEBI/HO/IMD/DF3/CIR/P/2019/147 dated November 29, 2019.
,
179 Master Circular for Mutual Funds
b) In the event, if the condition laid down in para 12.8.2(a) above is not
feasible due to non-availability of issuances of the issuer forming part
of the index, the Debt ETFs/Index Funds shall be allowed to invest
in other issuances issued by the same issuer having deviation of +/-
10% from the weighted average duration of issuances forming part of
the index, subject to single issuer limit. Further, at aggregate
portfolio level, the duration of Debt ETF/Index Fund shall not deviate
+/- 5% from the duration of the index.
c) In the event, if the conditions laid down in para 12.8.2(a) and para
12.8.2(b) above are not feasible, the Debt ETFs/Index Funds shall be
allowed to invest in issuances of other issuer(s) within the index
having duration, yield and credit rating in line with that of the non-
available issuances of the issuer(s) forming part of the index, subject
to single issuer limits. The duration of Debt ETF/Index Fund shall
not deviate +/- 5% from the duration of the index.
d) In the event, if the conditions laid down in para 12.8.2(a), para
12.8.2(b) and para 12.8.2(c) above are not feasible, the Debt
ETFs/Index Funds shall be allowed to invest in issuances of issuer(s)
not forming part of the index with duration yield and credit rating in
line with that of the non-available issuances of issuer(s) forming part
of the index. Such investment in issuances of issuer(s) not forming
part of the index shall be maximum of 20% of the aggregate portfolio
of the Debt ETF/Index Fund.
e) The rationale for any deviation from para 12.8.2(a) above shall be
recorded.
12.8.3 In an event where the credit rating of an issuance falls below the
investment grade or rating mandated in the index methodology,
180 Master Circular for Mutual Funds
rebalancing by Debt ETFs/Index Funds shall be done within a period
of 5 working days.
12.8.4 Accordingly, any Debt ETF/Index Fund that seeks to replicate a
particular Index shall ensure that such index complies with the
aforesaid norms.
12.8.5 Compliance Procedure:
a) The aforesaid norms shall be applicable to all Debt ETFs/ Index
Funds tracking debt indices.
b) The Debt ETF/Index Fund issuer shall ensure compliance to the
aforesaid norms for rebalancing at the end of every calendar quarter.
c) The Debt ETF/Index Fund issuer shall ensure that the updated
constituents of the Indices and methodology (for all its Debt ETFs/
Index Funds) are available on their respective websites at all points
of time.
12.8.6 Applicability:
a) The above norms shall not be applicable to Debt ETFs/Index Funds
tracking debt indices having constituents as Government Securities
(G-Secs), Treasury Bills and Tri-party Repo (TREPS) only.
181 Master Circular for Mutual Funds
12.9 Stock Lending Scheme338
12.9.1 The following guidelines are issued to facilitate lending of securities
by Mutual Funds through intermediaries approved by the Board in
accordance with the Stock Lending & Borrowing Scheme.339
12.9.2 Disclosure Requirements
12.9.2.1 The following information shall be disclosed in the SID to enable
the investors and unit holders to take an informed decision:
a. Intention to lend securities belonging to a particular Mutual
Fund scheme in accordance with the guidelines on securities
lending and borrowing scheme issued by SEBI from time to
time.340
b. Exposure limit with regard to securities lending, both for the
scheme as well as for a single intermediary.
c. Risks factors such as loss, bankruptcy etc. associated with such
transactions.
12.9.3 Reporting Requirement
12.9.3.1 The AMC(s) shall report to the Trustees on a quarterly basis about
the level of lending, in terms of value, volume and intermediaries
and also earnings and/or losses, value of collateral security etc.
12.9.3.2 The Trustees shall periodically review the securities lending
contract and take reasonable steps to ensure that the same is not,
338 SEBI Circular No MFD/CIR/01/047/99 dated February 10, 1999.
, 3 39 Regulation 44(4) of the SEBI (Mutual Funds) Regulations, 1996.
340 SEBI Circular No - SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
182 Master Circular for Mutual Funds
in any way, detrimental to the interests of the unit holders of the
scheme.
12.9.3.3 The Trustees shall offer their comments on the above aspects in the
Half Yearly Trustee Report filed with the Board.341
12.9.4 Existing schemes
12.9.4.1 In case an existing SID does not provide for lending of securities,
Mutual Funds may still lend securities belonging to the scheme, in
accordance with the SEBI Guidelines, provided approval is obtained
from the Trustees and the intention to lend securities is conveyed
to the unit holders.
12.10 Approval for Investment in Unrated Debt Instruments342
12.10.1 Mutual Funds may, for the purpose of operational flexibility,
constitute committees to approve investment proposals in unrated
instruments. However, detailed parameters for investment in
unrated debt instruments have to be approved by the Board of the
AMC and Trustees. Details of such investments shall be
communicated by the AMCs to the Trustees in their periodical
reports, along with clear indication as to how the parameters set for
investments have been complied with. Prior approval of the Board of
the AMC and Trustees shall be required in case investment is sought
to be made in an unrated security falling outside the prescribed
parameters.
341 Regulation 18(23)(a) of the Mutual Funds Regulations. Further, for format of Half Yearly
Trustee Report please refer to section on Formats.
342 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
183 Master Circular for Mutual Funds
12.11 Investments in Units of Venture Capital Funds343
12.11.1 Mutual Fund schemes can invest in listed or unlisted securities or
units of Venture Capital Funds within the prescribed investment
limits as applicable.344
12.12 Investment limits for Government guaranteed debt
securities345
12.12.1 Prudential investment norms as per Regulations stipulating limits
for investments in debt securities346 issued by a single issuer are
applicable to all debt securities issued by public bodies or
institutions such as electricity boards, municipal corporations, state
transport corporations etc. guaranteed by either State / Central
Government. Government securities issued by Central and/or State
Government or on its behalf, by the RBI are however exempt from
these limits.
12.13 Investment Restrictions for Securitised Debt347
12.13.1 For investments made in Securitised Debt (mortgage backed
securities and asset backed securities), restrictions as per Clause 1
of Seventh Schedule348 shall not apply at the originator level.
343 SEBI Circular No. MFD/CIR/9/230/2001 dated August 14, 2001.
, 3 ,, 44 Clauses 10 and 11, Seventh Schedule of SEBI (Mutual Funds), Regulations, 1996.
, 3 , 45 SEBI Circular No. SEBI/IMD/CIR No.8/18944/03 dated October 6, 2003.
, 3 46 Clauses 1 and 1A, Seventh Schedule of SEBI (Mutual Funds), Regulations, 1996.
, 3 , 47 SEBI Circular No. SEBI/IMD/CIR No.6/63715/06 dated March 29, 2006.
348 Clause I of Schedule VII of SEBI (Mutual Fund), Regulations, 1996
184 Master Circular for Mutual Funds
12.14 Investments in Short Term Deposits (STDs) of Scheduled
Commercial Banks - pending deployment349
12.14.1 The guidelines for deployment of funds in short term deposits of
commercial banks for schemes are as under:
12.14.1.1 “Short Term” for parking of funds by Mutual Funds shall be
treated as a period not exceeding 91 days.350
12.14.1.2 Such deposits shall be held in the name of the concerned scheme.
12.14.1.3 No mutual fund scheme shall park more than 15% of their net
assets in short term deposits of all scheduled commercial banks
put together. This limit however may be raised to 20% with prior
approval of the Trustees. Also, parking of funds in short term
deposits of associate and sponsor scheduled commercial banks
together shall not exceed 20% of the total deployment by the
Mutual Fund in short term deposits.
12.14.1.4 No mutual fund scheme shall park more than 10% of the net
assets in short term deposits with any one scheduled commercial
bank including its subsidiaries.
12.14.1.5 Trustees/AMCs shall ensure that no funds of a scheme is parked
in Short Term Deposit of a bank which has invested in that
scheme. Trustees/AMCs shall also ensure that the bank in which
a scheme has STD do not invest in the said scheme until the
scheme has STD with such bank.351
349 SEBI Circulars No. SEBI/IMD/CIR No.9/20306/03 dated November 12, 2003, SEBI Circular
No. SEBI/IMD/Cir No.1/91171/07 dated April 16, 2007, SEBI and Clause 8 of Seventh
Schedule of Mutual Funds Regulations, 1996.
, 3 ,, 50 SEBI Circular No. SEBI/IMD/Cir No.1/91171/07 dated April 16, 2007.
351 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/093 dated August 16, 2019.
1,,,,,, 85 Master Circular for Mutual Funds
12.14.1.6 Asset Management Company (AMC) shall not be permitted to
charge investment management and advisory fees for parking of
funds in short term deposits of scheduled commercial
banks.”352Half Yearly portfolio statements shall disclose all funds
parked in short term deposit(s) under a separate heading. Details
shall also include name of the bank, amount of funds parked,
percentage of NAV.
12.14.1.7 Trustees shall, in the Half Yearly Trustee Reports certify that
provisions of the Mutual Funds Regulations pertaining to parking
of funds in short term deposits pending deployment are complied
with at all points of time. The AMC(s) shall also certify the same
in its CTR(s).
12.14.1.8 Investments made in short term deposits pending deployment of
funds353 shall be recorded354 and reported to the Trustees
including the reasons for the investment especially comparisons
with interest rates offered by other scheduled commercial
banks.355
12.14.1.9 Except for clause (12.14.1.7) the above guidelines shall not apply
to term deposits placed as margins for trading in cash and
derivatives market356. However, duration of such term deposits
shall be disclosed in the Half Yearly Portfolio357.
352 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/101 dated September 20, 2019.
353 Clause 8, Schedule Seven, SEBI (Mutual Funds), Regulations, 1996.
, 3 ,,,,, 54 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
, 3 , 55 SEBI Circular No. SEBI/IMD/CIR No.9/20306/03 da ted November 12, 2003.
, 356 SEBI Circular No. SEBI/IMD/Cir No.7/129592/08 dated June 23, 2008.
357 SEBI Circular No. SEBI/IMD/Cir No.7/129592/08 dated June 23, 2008
186 Master Circular for Mutual Funds
12.15 Reconciliation Procedure for Investment in Government
Securities358
12.15.1 According to the RBI guidelines359 issued to all SGL account holders,
to make transactions in government securities transparent, a monthly
reconciliation system has been introduced between RBI and Mutual
Funds maintaining SGL/CSGL accounts with respect to Government
Securities on an ongoing basis.
12.15.2 Mutual Funds shall reconcile the balances reported in the monthly
statements furnished by RBI with the transactions undertaken by
them.
12.15.3 The reconciliation procedure shall be made part of internal audit and
the auditors shall on a continuous basis, check the status of
reconciliation and submit a report to the Audit Committee. These
reports shall be placed in the meetings of the Board of the AMC and
Trustees. Mutual Funds shall submit, on a quarterly basis to the RBI,
a certificate confirming compliance with these requirements and any
other guidelines issued by the RBI from time to time in this regard.
Compliance shall also be reported to the Board in the CTRs of AMC(s)
and Half Yearly Trustee Reports.
358 SEBI Circular No. MFD/CIR/19/22474/2002 dated November 20, 2002.
, 3 , 59 RBI Circular No.P.D.O.SGL.CIRR/1945/2002-2003 dated November 1, 2002.
1 87 Master Circular for Mutual Funds
12.16 Participation of mutual funds in repo in corporate debt
securities360
12.16.1 Mutual funds can participate in repos in corporate debt securities as
per the guidelines issued by RBI from time to time, subject to the
following conditions:
12.16.1.1 The gross exposure of any mutual fund scheme to repo
transactions in corporate debt securities shall not be more than
10 % of the net assets of the concerned scheme.
12.16.1.2 The cumulative gross exposure through repo transactions in
corporate debt securities along with equity, debt and derivatives
shall not exceed 100% of the net assets of the concerned
scheme.
12.16.1.3 Mutual funds shall participate in repo transactions only in
AA361 and above rated corporate debt securities.
12.16.1.4 In terms of Regulation 44 (2) of the Securities and Exchange
Board of India (Mutual Funds) Regulations, 1996, mutual funds
shall borrow through repo transactions only if the tenor of the
transaction does not exceed a period of six months.
12.16.1.5 The Trustees and the Asset Management Companies shall frame
guidelines about, inter alia, , the following in context of these
transactions keeping in mind the interest of investors in their
schemes:
a. Category of counterparty
b. Credit rating of counterparty
360 SEBI Circular No. CIR/IMD/DF/19/2011 dated November 11, 2011
361 SEBI Circular No. CIR/IMD/DF/23/2012 dated November 15, 2012
188 Master Circular for Mutual Funds
c. Tenor of collateral
d. Applicable haircuts
12.16.1.6 Mutual funds shall ensure compliance with the Seventh Schedule
of the Mutual Funds Regulations about restrictions on
investments, wherever applicable, with respect to repo
transactions in corporate debt securities.
12.16.1.7 The details of repo transactions of the schemes in corporate debt
securities, including details of counterparties, amount involved
and percentage of NAV shall be disclosed to investors in the half
yearly portfolio statements and to SEBI in the half yearly trustee
report.
12.16.1.8 To enable the investors in the mutual fund schemes to take an
informed decision, the concerned Scheme Information Document
shall disclose the following:
a. The intention to participate in repo transactions in
corporate debt securities in accordance with directions
issued by RBI and SEBI from time to time;
b. The exposure limit for the scheme; and
c. The risk factors associated with repo transactions in corporate
bonds
189 Master Circular for Mutual Funds
12.17 Overseas Investment362
12.17.1 Applicable limits:
12.17.1.1 Aggregate ceiling for overseas investments is US $ 7 billion363
and within this overall limit, Mutual Funds can make overseas
investments subject to a maximum of US $ 300 million per
Mutual Fund.
12.17.1.2 Aggregate ceiling for investment by Mutual Funds in overseas
Exchange Traded Fund (ETF(s)) that invest in securities is US $
1 billion subject to a maximum of US $ 50 million per Mutual
Fund.
12.17.2 Permissible Investments:
12.17.2.1 ADR(s) and/or GDR(s) issued by Indian or foreign companies.
12.17.2.2 Equity of overseas companies listed on recognized Stock
Exchanges overseas.
12.17.2.3 Initial and Follow on Public Offerings for listing at recognized
Stock Exchanges overseas.
12.17.2.4 Foreign debt securities in the countries with fully convertible
currencies, short term as well as long term debt instruments
with rating not below investment grade by accredited/ registered
credit rating agencies.
362 SEBI Circular No. SEBI/IMD/CIR No.7/104753/07 dated September 26, 2007 & SEBI
Circular No. SEBI/IMD/CIR No.2/122577/08 dated April 8, 2008.
363 SEBI Circular No. SEBI/IMD/CIR No.2/122577/08 dated April 8, 2008.
190 Master Circular for Mutual Funds
12.17.2.5 Money Market Instruments rated not below investment grade.
12.17.2.6 Repos in form of investment, where the counterparty is rated not
below investment grade; repo shall not however involve any
borrowing of funds by Mutual Funds.
12.17.2.7 Government securities where the countries are rated not below
investment grade.
12.17.2.8 Derivatives traded on recognized stock exchanges overseas only
for hedging and portfolio balancing with underlying as securities.
12.17.2.9 Short term deposits with banks overseas where the issuer is
rated not below investment grade.
12.17.2.10 Units / securities issued by overseas Mutual Funds or unit
trusts registered with overseas regulators and investing in
a. Aforesaid Securities
b. Real Estate Investment Trusts listed on recognized Stock
Exchanges overseas or
c. Unlisted overseas securities, not exceeding 10% of their net
assets
12.17.3 Other Conditions: Funds Regulations and guidelines issued from
time to time, Mutual Funds shall adhere to the following specific
guidelines while making overseas investments:
12.17.3.1 Appointment of a Dedicated Fund Manager:
a. A dedicated fund manager shall be appointed for making the
above overseas investments stipulated under clause 12.17.2.1 to
12.17.2.10.
191 Master Circular for Mutual Funds
12.17.3.2 Due Diligence:
a. The Board of the AMC and Trustees shall exercise due diligence
in making investment decisions and record the same.364 They
shall make a detailed analysis of risks and returns of overseas
investment and how these investments would be in the interest of
investors. Investment shall be made in liquid actively traded
securities /instruments.
b. The Board of the AMC and Trustees may prescribe detailed
parameters for making such investments which may include
identification of countries, country rating, country limits etc. They
shall satisfy themselves that the AMC has experienced key
personnel, research facilities and infrastructure for making such
investments. Other specialized agencies and service providers
associated with such investments e.g. custodian, bank, advisors
etc. shall also have adequate expertise and infrastructure
facilities. Their past track record of performance and regulatory
compliance record, if they are registered with foreign regulators,
should also be considered. Necessary agreements may be entered
into with them as required.
12.17.3.3 Mandatory Disclosure Requirements for Mutual Fund
schemes proposing overseas investments:
a. Intention to invest in foreign securities and/or ETF(s) shall be
disclosed in the SID. The attendant risk factors and returns
ensuing from such investments shall be explained clearly in the
SID. Mutual Funds shall also disclose as to how such investments
will help in the furtherance of the investment objectives of the
364 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
192 Master Circular for Mutual Funds
scheme(s). Such disclosures shall be in a language
comprehensible to an average investor
b. Mutual Funds shall disclose the name of the Dedicated Fund
Manager for making overseas investments as stipulated under
paragraph 12.17.3.1.a.
c. Mutual Funds shall disclose exposure limits i.e. the percentage of
assets of the scheme they would invest in foreign securities /
ETF(s).
d. Such investments shall be disclosed while disclosing Half Yearly
portfolios in the prescribed format under a separate heading
"Foreign Securities and/or overseas ETF(s)." Scheme wise
percentage of investments made in such securities shall be
disclosed while publishing Half Yearly Results in the prescribed
format365 as a footnote.
12.17.3.4 Investment by Existing Schemes:
a. Existing schemes of Mutual Funds where the SID provides for
investment in foreign securities and attendant risk factors but
which have not yet invested, may invest in foreign securities,
consistent with the investment objectives of the schemes,
provided a Dedicated Fund Manager has been appointed as
stipulated in paragraph 12.17.3.1. Additional disclosures
specified above shall be included by way of addendum and unit
holders will be informed accordingly.
b. In case the SID of an existing scheme does not provide for
overseas investment, the scheme, if it so desires, may make such
investments in accordance with these Guidelines, provided that
365 For Half Yearly Results, please refer to the section on Formats
193 Master Circular for Mutual Funds
prior to the overseas investments for the first time, the AMC shall
ensure that a written communication about the proposed
investment is sent to each unit holder and an advertisement is
given in one English daily newspaper having nationwide
circulation as well as in a newspaper published in the language
of the region where the Head Office of the Mutual Fund is
situated. The communication to unit holders shall also disclose
the risk factors associated with such investments.
12.17.3.5 Detailed periodic reporting to Trustees by AMC(s) shall
include:
a. Performance of overseas investments
b. Amount invested in various schemes and any breach of the
exposure limit laid down in the SID.
12.17.3.6 Review of Performance:
a. The Board of the AMC and Trustees shall review the performance
of schemes making overseas investments with appropriate
benchmark(s) as disclosed in the SID.
12.17.3.7 Reporting to the Board:
a. The Trustees shall offer their comments on the compliance of
these guidelines in the Half Yearly Reports filed with the Board.
12.17.3.8 Prudential Investment Norms:
a. Investment restrictions specified in Schedule Seven of the Mutual
Funds Regulations are applicable to overseas investments
stipulated under paragraph 12.17.2.1- 12.17.2.10.
194 Master Circular for Mutual Funds
b. However, Clause 4 of the Seventh Schedule of the Mutual Funds
Regulations that restricts investments in Mutual Fund units up
to 5% of net assets and prohibits charging of fees, shall not be
applicable to investments in Mutual Funds in foreign countries
made in accordance with these Guidelines.
c. Management fees and other expenses charged by the Mutual
Funds in foreign countries along with the management fee and
recurring expenses charged to the domestic Mutual Fund scheme
shall not exceed the total limits on expenses as prescribed under
Regulation 52(6) of the Mutual Funds Regulations. Where the
scheme is investing only a part of the net assets in overseas
Mutual Funds, the same principle shall be applicable for that part
of investment. Details of calculation for charging such expenses
shall be reported to the Board of the AMC and the Trustees and
shall also be disclosed in the Annual Report of the scheme
d. The application366 for seeking approval for investing in foreign
securities, ADR/GDR/overseas ETF(s) shall be made in advance
of making investments. On receipt of approval from the Board,
intimation may be sent by the AMC(s) to Overseas Investment
Division, Foreign Exchange Department, RBI.
12.18 Investments in Indian Depository Receipts (IDRs)367
12.14.1 Mutual funds can invest in Indian Depository Receipts368 [Indian
Depository Receipts as defined in Companies (Issue of Indian
Depository Receipts) Rules, 2004] subject to compliance with SEBI
(Mutual Funds) Regulations 1996 and guidelines issued there under,
366 Please refer the section on formats for format of proposal for investments in foreign securities
and ETFs
367 SEBI Circular No. IMD/CIR. No.1/165935/2009 dated June 09, 2009
368 Regulation 43(1) of SEBI (Mutual Funds) Regulations, 1996
195 Master Circular for Mutual Funds
specifically investment restrictions as specified in the Seventh
Schedule of the Regulations.'
12.19 Investments in units of REITs / InvITs369
a. The investment restrictions mentioned at Clause 13 in the Seventh
Schedule of SEBI (Mutual Funds) Regulations, 1996 shall be applicable to
all fresh investments by all schemes, including an existing scheme.
b. Any existing scheme intending to invest in units of REITs/InvITs shall abide
by the provisions of Regulation 18 (15A) of SEBI (Mutual Funds)
Regulations, 1996.
c. For investment in units of REITs / InvITs by an existing Mutual Fund
scheme, unit holders of the scheme shall be given a time period of at least
15 days for the purpose of exercising the exit option.
12.20 Investment Restrictions370
12.20.1 All investment restrictions as contained in the Regulations371 shall
be applicable at the time of making investment.
12.21 Recording of Investment Decisions372
12.21.1 AMC(s) shall exercise due diligence and care in all investment
decisions as would be exercised by other persons engaged in the
same business.373 Further AMC(s) shall maintain records in support
of each investment decision which will indicate data, facts and
opinion leading to that decision. While broad parameters for
investments can be prescribed by the Board of Directors of the AMC,
369 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2017/17 dated February 28, 2017.
370 SEBI Circular No. MFD/CIR/09/014/2000 dated January 5, 2000.
371 Seventh Schedule of SEBI (Mutual Funds) Regulations, 1996.
3 72 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
373 Regulation 25(2) of the SE BI (Mutual Funds) Regulations, 1996.
196 Master Circular for Mutual Funds
the basis for taking individual scrip wise investment decision in
equity and debt securities shall be recorded. A detailed research
report analyzing various factors for each investment decision taken
for the first time shall be maintained and the reasons for subsequent
purchase and sales in the same scrip shall also be recorded. The
contents of the research reports may be decided by the AMC(s) and
the Trustees.
12.21.2 The Board of the AMC shall develop a mechanism to verify that due
diligence is being exercised while making investment decisions
especially in cases of investment in unlisted and privately placed
securities, unrated debt securities, securities classified as below
investment grade or default374, transactions where associates are
involved and instances where the performance of the scheme(s) is
poor.
12.21.3 AMC(s) shall report compliance with these requirements in their
periodical reports to the Trustees and the Trustees shall report the
same to the Board in the Half Yearly Trustee Reports375. Trustees
shall also check compliance with these Guidelines through
independent auditors or internal and/or statutory auditors or other
systems developed by them.
374 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019.
375 For Half Yearly Trustee Report please refer to the section on Formats
197 Master Circular for Mutual Funds
12.22 Norms for investment and disclosure by Mutual Funds in
derivatives376
12.22.1 Exposure Limits
12.22.1.1 The cumulative gross exposure through equity, debt and
derivative positions (including commodity derivatives)377should
not exceed 100% of the net assets of the scheme.
12.22.1.2 Mutual Funds shall not write options or purchase instruments
with embedded written options except for the covered call
strategy378.
12.22.1.3 The total exposure related to option premium paid must not
exceed 20% of the net assets of the scheme.
12.22.1.4 Cash or cash equivalents with residual maturity of less than 91
days may be treated as not creating any exposure.
12.22.1.5 Exposure due to hedging positions may not be included in the
above mentioned limits subject to the following:
a. Hedging positions are the derivative positions that reduce
possible losses on an existing position in securities and till the
existing position remains.
b. Hedging positions cannot be taken for existing derivative
positions. Exposure due to such positions shall have to be
added and treated under limits mentioned in Point12.22.1.1.
376 SEBI Circular No. Cir/ IMD/ DF/ 11/ 2010 dated August 18, 2010
377 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/65 dated May 21, 2019
378 Circular No.SEBI/HO/IMD/DF2/CIR/P/2019/17 dated January 16, 2019
198 Master Circular for Mutual Funds
c. Any derivative instrument used to hedge has the same
underlying security as the existing position being hedged.
d. The quantity of underlying associated with the derivative
position taken for hedging purposes does not exceed the
quantity of the existing position against which hedge has been
taken.
12.22.1.6 Mutual Funds may enter into plain vanilla interest rate swaps for
hedging purposes. The counter party in such transactions has to
be an entity recognized as a market maker by RBI. Further, the
value of the notional principal in such cases must not exceed the
value of respective existing assets being hedged by the scheme.
Exposure to a single counterparty in such transactions should not
exceed 10% of the net assets of the scheme.
12.22.1.7 Exposure due to derivative positions taken for hedging purposes
in excess of the underlying position against which the hedging
position has been taken, shall be treated under the limits
mentioned in point 12.22.1.1.
12.22.1.8 Writing of Covered Call Options by Mutual Fund Schemes379:
Mutual funds have been permitted to write call options under a
covered call strategy as prescribed below:
i. Mutual Fund schemes (except Index Funds and ETFs) may
write call options only under a covered call strategy for
constituent stocks of NIFTY 50 and BSE SENSEX subject to the
following:
a. The total notional value (taking into account strike price as
well as premium value) of call options written by a scheme
379 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/17 dated January 16, 2019
199 Master Circular for Mutual Funds
shall not exceed 15% of the total market value of equity
shares held in that scheme.
b. The total number of shares underlying the call options
written shall not exceed 30% of the unencumbered shares of
a particular company held in the scheme. The
unencumbered shares in a scheme shall mean shares that
are not part of Securities Lending and Borrowing Mechanism
(SLBM), margin or any other kind of encumbrances.
c. At all points of time the Mutual Fund scheme shall comply
with the provisions at paragraph 12.22.1.8(i)(a) and
12.22.1.8(i)(b) above. In case of any passive breach of the
requirement at paragraph 12.22.1.8(i)(a), the respective
scheme shall have 7 trading days to rebalance the portfolio.
During the rebalancing period, no additional call options can
be written in the said scheme.
d. In case a Mutual Fund scheme needs to sell securities on
which a call option is written under a covered call strategy, it
must ensure compliance with paragraphs 12.22.1.8(i)(a) and
12.22.1.8(i)(b) above while selling the securities.
e. In no case, a scheme shall write a call option without holding
the underlying equity shares. A call option can be written
only on shares which are not hedged using other derivative
contracts.
f. The premium received shall be within the requirements
prescribed in terms of paragraph 12.22.1.3 i.e. the total gross
exposure related to option premium paid and received must
not exceed 20% of the net assets of the scheme.
200 Master Circular for Mutual Funds
g. The exposure on account of the call option written under the
covered call strategy shall not be considered as exposure
under point 12.22.1.1.
h. The call option written shall be marked to market daily and
the respective gains or losses factored into the daily NAV of
the respective scheme(s) until the position is closed or
expired.
ii. For schemes intending to use covered call strategy, the risks
and benefit of the same, must be disclosed in the Scheme
Information Document.
iii. In terms of paragraphs 11 and 13 of SEBI Circular no.
Cir/IMD/DF/11/2010 dated August 18, 2010 call options
written shall be disclosed in the format380 prescribed.
iv. For existing schemes, writing of call options shall be permitted
subject to appropriate disclosure and compliance with
Regulation 18 (15A) of SEBI (Mutual Funds) Regulations, 1996.
v. All other provisions of the circular no. Cir/IMD/DF/11/2010
dated August 18, 2010 for investment and disclosure by Mutual
Funds in derivatives shall remain the same.
12.22.1.9 Hedging of Interest Rate Risk381
a. To reduce interest rate risk in a debt portfolio, mutual funds may
hedge the portfolio or part of the portfolio (including one or more
380 Please refer to the format section (SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/17 dated
January 16, 2019)
381 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2017/109 dated September 27, 2017
201 Master Circular for Mutual Funds
securities) on weighted average modified duration basis by using
Interest Rate Futures (IRFs).The maximum extent of short position
that may be taken in IRFs to hedge interest rate risk of the portfolio
or part of the portfolio, is as per the formula given below:
(Portfolio Modified Duration * Market Value of the Portfolio)
(Futures Modified Duration * Futures Price / PAR)
b. In case the IRF used for hedging the interest rate risk has
different underlying security(s) than the existing position being
hedged, it would result in imperfect hedging.
c. Imperfect hedging using IRFs may be considered to be exempted
from the gross exposure, upto maximum of 20% of the net assets
of the scheme, subject to the following:
i. Exposure to IRFs is created only for hedging the interest
rate risk based on the weighted average modified duration
of the bond portfolio or part of the portfolio.
ii. Mutual Funds are permitted to resort to imperfect hedging,
without it being considered under the gross exposure limits,
if and only if, the correlation between the portfolio or part
of the portfolio (excluding the hedged portions, if any)and the
IRF is at least 0.9 at the time of initiation of hedge. In case
of any subsequent deviation from the correlation criteria, the
same may be rebalanced within 5 working days and if not
rebalanced within the timeline, the derivative positions created
for hedging shall be considered under the gross exposure
computed in terms of Para 12.19.1.1. The correlation should be
calculated for a period of last 90 days.
202 Master Circular for Mutual Funds
Explanation: If the fund manager intends to do imperfect
hedging upto 15% of the portfolio using IRFs on weighted
average modified duration basis, either of the following
conditions need to be complied with:
(a) The correlation for past 90 days between the portfolio and
the IRF is at least 0.9 or
(b) The correlation for past 90 days between the part of
the portfolio(excluding the hedged portions, if any)i.e. at
least 15% of the net asset of the scheme(including one
or more securities)and the IRF is at least 0.9.
iii. At no point of time, the net modified duration of part of the
portfolio being hedged should be negative.
iv. The portion of imperfect hedging in excess of 20% of the net
assets of the scheme should be considered as creating exposure
and shall be included in the computation of gross exposure
in terms of paragraph12.22.1.1.
d. The basic characteristics of the scheme should not be affected
by hedging the portfolio or part of the portfolio (including one or
more securities)based on the weighted average modified duration.
Explanation: In case of long term bond fund, after hedging the
portfolio based on the modified duration of the portfolio, the net
modified duration should not be less than the minimum modified
duration of the portfolio as required to consider the fund as a long
term bond fund.
e. The interest rate hedging of the portfolio should be in the interest of
the investors.
203 Master Circular for Mutual Funds
f. Mutual Fund schemes may imperfectly hedge their portfolio or part
of their portfolio using IRFs, subject to the following conditions:
i. Prior to commencement of imperfect hedging, existing
schemes shall comply with the provisions of Regulation 18
(15A) of SEBI (Mutual Funds) Regulations, 1996 and all
unit holders shall be given a time-period of at least 30 days
to exercise the option to exit at prevailing NAV without charging
of exit load.
The risks associated with imperfect hedging shall be
disclosed and explained by suitable numerical examples in
the offer documents and also needs to be communicated to the
investors through public notice or any other form of
correspondence.
ii. In case of new schemes, the risks associated with imperfect
hedging shall be disclosed and explained by suitable
numerical examples in the offer documents.
12.22.2 Definition of Exposure in case of Derivative Positions
12.22.2.1 Each position taken in derivatives shall have an associated
exposure as defined under. Exposure is the maximum possible
loss that may occur on a position. However, certain derivative
positions may theoretically have unlimited possible loss.
Exposure in derivative positions shall be computed as follows:
Position Exposure
Long Future Futures Price * Lot Size * Number
of Contracts
204 Master Circular for Mutual Funds
Short Future Futures Price * Lot Size * Number
of Contracts
Option bought Option Premium Paid * Lot Size *
Number of Contracts.
12.22.2.2 The provisions shall be applicable for all new schemes launched
post the issue of the aforementioned guidelines. For all existing
schemes, compliance with the guidelines shall be effective from
October 01, 2010.
12.23 Participation of mutual funds in Exchange Traded
Commodity Derivatives (ETCDs) 382:
12.23.1 Mutual funds are permitted to participate in ETCDs in India,
except in commodity derivatives on ‘Sensitive Commodities’383.
12.23.2 ETCDs having gold as the underlying, shall also be considered as
‘gold related instrument’ for Gold Exchange Traded Funds (Gold
ETFs).
12.23.3 No Mutual fund schemes shall invest in physical goods except in
‘gold’ through Gold ETFs. Further, as mutual fund schemes
participating in ETCDs may hold the underlying goods in case of
physical settlement of contracts, in that case mutual funds shall
dispose of such goods from the books of the scheme, at the
earliest, not exceeding 30 days from the date of holding of the
physical goods.
12.23.4 No mutual fund scheme shall have net short positions in ETCDs
on any particular good, considering its positions in physical goods
as well as ETCDs, at any point of time.
382 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/65 dated May 21, 2019
383 SEBI circular no. SEBI/HO/CDMRD/DMP/CIR/P/2017/84 dated July 25, 2017
205 Master Circular for Mutual Funds
12.23.5 Mutual funds are permitted to participate in ETCDs through the
following schemes:
a. Hybrid schemes384 including multi asset scheme and
b. Gold ETFs.
12.23.6 In case of existing schemes, as mentioned in paragraph 12.23.5
above, prior to commencement of participation in ETCDs, the
scheme shall comply with the provisions of Regulation 18(15A) of
SEBI (Mutual Funds) Regulations, 1996, as this will lead to
change in fundamental attributes of the scheme and all
unitholders shall be given a time-period of at least 30 days to
exercise the option to exit at prevailing NAV without charging of
exit load, if any.
12.23.7 Prior to participation in ETCDs, the AMCs shall adhere to the
following:
a. Appoint a dedicated fund manager with requisite skill and
experience in commodities market (including commodity
derivatives market).
b. Appoint a custodian registered with the Board for custody of the
underlying goods, arising due to physical settlement of
contracts.
c. Have written down investment policy for participation in ETCDs
approved by the Board of the Asset Management Company and
the Board of Trustees.
d. Have written down valuation policies approved by the Board of
the AMC and the Board of Trustees for valuation of commodity
derivatives and the underlying goods, arising due to physical
settlement of contracts. The approved valuation policies should
384 SEBI Circular No.SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06, 2017
206 Master Circular for Mutual Funds
be subject to the principles of fair valuation of the assets of
mutual funds schemes.
12.23.8 Mutual fund schemes may participate in the ETCDs as ‘clients’
and shall be subject to all the rules, regulations and instructions,
position limit norms, etc. as may be applicable to clients, issued
by SEBI and Exchanges from time to time. The position limits at
mutual fund level be as applicable to ‘Trading Members’.
12.23.9 Schemes investing in ETCDs shall be benchmarked against an
appropriate benchmark.
12.23.10 AMCs shall not on board Foreign Portfolio Investors (FPIs) in
schemes investing in ETCDs until FPIs are permitted to
participate in ETCDs.
12.23.11 Investment Limits in ETCDs: Participation of mutual funds in
ETCDs shall be subject to the following investment limits:
a. Mutual fund schemes shall participate in ETCDs of a particular
goods (single), not exceeding 10% of net asset value of the scheme.
However, the limit of 10% is not applicable for investments
through Gold ETFs in ETCDs having gold as underlying.
b. In case of multi assets allocation schemes, the exposure to ETCDs
shall not be more than 30% of the net asset value of the scheme.
c. In case of other hybrid schemes excluding multi assets allocation
scheme, the participation in ETCDs shall not exceed 10% of net
asset value of the scheme.
12.23.12 In case of mutual fund schemes investing in ETCDs, the AMC
shall adhere to the following:
207 Master Circular for Mutual Funds
a. The NAVs of those schemes shall be updated on daily basis by the
AMCs on their website and on the website of AMFI by 09:00 a.m.
of the following calendar day.
b. The total exposure to ETCDs shall be disclosed as a line item in
the Monthly Cumulative Report (MCR) submitted by mutual
funds.
12.24 Interval Schemes/Plans385
12.24.1 Certain SIDs provide that the subscription to the scheme can be
made during a specific period (known as specified transaction
period) and the repurchase of units is permitted on all business
days subject to applicable loads (except for redemption during
specified transaction period when no load is charged). These
schemes are generally referred to as ‘interval schemes’.
12.24.2 For all interval schemes/plans386:
12.24.2.1 The units shall be mandatorily listed.
12.24.2.2 No redemption/repurchase of units shall be allowed except
during the specified transaction period (the period during which
both subscription and redemption may be made to and from the
scheme). The specified transaction period shall be of minimum
2 working days.
385 SEBI Circular No. CIR/IMD/DF /19/2010 dated November 26, 2010
386 Applicability:
The AMC shall ensure compliance with the requirements mentioned in Clause 12.16.2 from
the date of next specified transaction period or April 1, 2011 whichever is later. Schemes for
which observations (final) under Regulation 29 of SEBI (Mutual Funds) Regulations, 1996
have been issued but are yet to be launched would be required to carry out the changes in
Scheme Information Document and file the same with SEBI before the launch.
208 Master Circular for Mutual Funds
12.24.2.3 Minimum duration of an interval period in an interval
scheme/plan shall be 15 days.
12.24.2.4 Investments shall be permitted only in such securities which
mature on or before the opening of the immediately following
specified transaction period.
Explanation: In case of securities with put and call options the residual
time for exercising the put option of the securities shall not be beyond
the opening of the immediately following transaction period.
12.25 CDS – mutual funds as users (protection buyers)387
12.25.1 Mutual funds have been permitted to participate in CDS market,
as per the guidelines issued by RBI from time to time , subject to
the following conditions:
a. Mutual funds shall participate in CDS transactions only as
users (protection buyer). Thus, mutual funds are permitted
to buy credit protection only to hedge their credit risk on
corporate bonds they hold. They shall not be allowed to sell
protection and hence not permitted to enter into short
positions in the CDS contracts. However, they shall be
permitted to exit their bought CDS positions, subject to para
(d) below.
b. Mutual funds can participate as users in CDS for the eligible
securities as reference obligations, constituting from within
the portfolio of only Fixed Maturity Plans (FMP) schemes
having tenor exceeding one year.
387 SEBI Circular No. CIR/IMD/DF/23/2012 dated November 15, 2012.
209 Master Circular for Mutual Funds
c. Mutual funds shall buy CDS only from a market maker
approved by the RBI and enter into Master Agreement with
the counterparty as stipulated under RBI Guidelines.
Exposure to a single counterparty in CDS transactions shall
not exceed 10% of the net assets of the scheme.
d. The cumulative gross exposure through credit default swap
in corporate bonds along with equity, debt and derivative
positions shall not exceed 100% of the net assets of the
scheme.
e. The total exposure related to premium paid for all derivative
positions, including CDS, shall not exceed 20% of the net
assets of the scheme.
f. Before undertaking CDS transactions, mutual funds shall
put in place a written policy on participation in CDS approved
by the Board of the Asset Management Company and the
Trustees as per the guidelines specified by RBI and Securities
and Exchange Board of India (SEBI). The policy shall be
reviewed by mutual funds, at least once a year.
g. To enable the investors in the mutual funds schemes to take
an informed decision, the concerned Scheme Information
Document (SID) shall disclose the intention to participate in
CDS transaction in corporate debt securities in accordance
with directions issued by RBI and SEBI from time to time,
and related information as appropriate in this regard.
h. Mutual funds shall also disclose the details of CDS
transactions of the scheme in corporate debt securities in the
monthly portfolio statements as well as in the half yearly
210 Master Circular for Mutual Funds
trustee report, as per the format388. Further, mutual funds
shall disclose the scheme wise details of CDS transactions in
the notes to the accounts of annual report of the mutual fund
as per the format389 .
12.25.2 Mutual funds participating in CDS transactions, as users, shall
be required to comply with the guidelines issued by RBI, vide
notification no IDMD.PCD.No.5053/14.03.04/2010-11 dated
May 23, 2011 and subsequent guidelines issued by RBI and SEBI
from time to time.
388 Please refer to section on Formats for requisite formats
389 Please refer to section on Formats for requisite formats
211 Master Circular for Mutual Funds
CHAPTER 13
Investment by Foreign Investors in Mutual Fund Schemes390.
13.1 Foreign investors (termed as Qualified Foreign
Investors/ QFIs) who meet KYC requirement may invest
in equity and debt schemes of Mutual Funds (MF)
through the following two routes:
13.1.1 Direct route - Holding MF units in demat account through a SEBI
registered depository participant (DP).
13.1.2 Indirect route- Holding MF units via Unit Confirmation Receipt
(UCR).
13.2 The investment through the above mentioned routes
shall be subject to the following conditions:
13.2.1 Qualified Foreign Investor (QFI) shall mean a person resident in a
country that is compliant with Financial Action Task Force (FATF)
standards and that is a signatory to International Organization of
Securities Commission's (IOSCO’s) Multilateral Memorandum of
Understanding,
Provided that such person is not resident in India,
Provided further that such person is not registered with SEBI as
Foreign Institutional Investor or Sub-account.
390 SEBI Circular No.CIR/IMD/DF/14/2011 dated August 9, 2011
212 Master Circular for Mutual Funds
Explanation- For the purposes of this clause:
(1) the term "Person" shall carry the same meaning under Section
2(31) of the Income Tax Act, 1961
(2) the phrase “resident in India” shall carry the same meaning as in
the Income Tax Act, 1961
(3) “resident” in a country, other than India, shall mean resident as
per the direct tax laws of that country.
13.2.2 MF shall ensure that only QFIs who comply with para 13.2.1 are
allowed to invest under these routes.
13.2.3 MF shall ensure that QFIs meet the KYC requirements as per the
FATF standards, Prevention of Money Laundering Act, 2002
(PMLA) rules and regulations made thereunder, and SEBI circulars
issued in this regard before accepting subscriptions from QFIs.
13.2.4 The aggregate investments by QFIs under both the routes shall be
subject to a total overall ceiling of US $10 billion for equity schemes.
13.2.5 In addition to the above, the aggregate investments by QFIs under
both the routes for debt schemes which invest in infrastructure
(“Infrastructure” as defined under the extant ECB guidelines
issued by RBI) debt of minimum
residual maturity of 5 years, shall be subject to a total overall ceiling
of US $3 billion within the existing ceiling of US $25 billion for
FII investment in corporate bonds issued by infrastructure
companies.
13.2.6 MF can accept subscriptions from QFIs till such time the
investments by QFIs under both the routes reaches US $8 billion
in equity schemes and US $2.5 billion in debt schemes and the
213 Master Circular for Mutual Funds
remaining limit of US $2 billion in equity schemes and US $0.5
billion in debt schemes shall be auctioned by SEBI through bidding
process.
13.2.7 MF shall file with SEBI a report about the total subscription and
redemption by QFIs on a daily basis as per the format. MF shall
prepare such report on actual receipt and payment basis. SEBI will
disseminate on an aggregate basis the total amount of investments
by QFIs in equity and debt schemes of the MF on SEBI’s website.
When the total investment reaches US $8 billion in equity schemes
or US $2.5 billion in debt schemes, MF shall stop accepting fresh
investment from QFIs unless they get allotment of limits out of the
remaining limit of US $2 billion in equity schemes or US $0.5 billion
in debt schemes respectively in the auction process referred in para
13.2.6.
13.2.8 MF/ DP shall ensure that the units held by QFIs by way of
UCR/demat holding are non transferable and non tradable.
13.2.9 MF/ DP shall capture the bank account details of the QFIs
designated overseas bank account and shall ensure that all
subscriptions are received from that overseas account and
redemption proceeds are also transferred into the same overseas
account. MF/ DP shall also ensure that the overseas bank account
which QFIs has designated for the purpose is based in countries
which are compliant with FATF standards and are signatory to
MMOU of IOSCO.
13.2.10 In case of subscription, MF shall allot units based on the NAV of
the day on which funds are realized in the MF’s scheme bank
account in India and in case of redemption, units shall be
redeemed on the day on which transaction slip/instruction is
214 Master Circular for Mutual Funds
received and time stamped by MF, as per the applicable cut off
time. The Scheme information documents of the MF shall clearly
mention the applicable cut off time for QFIs and the other
requirements / applicable guidelines for QFIs.
13.2.11 MF shall ensure that Systematic Investments/ transfer/
withdrawals and switches are not available to the QFIs. QFIs can
only subscribe or redeem.
13.2.12 MF/ DP shall ensure that units/ UCRs held by QFIs are
free from all encumbrances i.e. pledge or lien cannot be created
for such units.
13.2.13 MF shall comply with all the requirements as per the PMLA, FATF
standards and SEBI circulars issued in this regard on an ongoing
basis.
13.2.14 MF shall ensure that all the investor related documents/ records
of the QFIs are available with them.
13.2.15 MF shall ensure compliance with laws (rules and
regulations) of the jurisdictions where the QFIs are based and
also ensure that the interest of existing unit holders of the MF
schemes are not adversely affected due to the issuance of UCRs/
demat units to the QFIs.
13.2.16 In case of any penalty, pending litigations or proceedings,
findings of Inspections or investigations for which action may
have been taken or is in the process of being taken by an overseas
regulator against MF/ AMC, it shall bring such information to
215 Master Circular for Mutual Funds
the attention of SEBI and unitholders of the concerned
scheme.
13.2.17 MF shall be responsible for the deduction of applicable tax at
source out of the redemption proceeds before making redemption
payments to QFIs.
13.2.18 MF/DP shall require QFIs to submit necessary information for the
purpose of obtaining PAN. MF/DP may use the combined PAN
cum KYC form to be notified by CBDT for QFIs. MF/ DP may take
any additional information/ documents from the QFIs other than
those mentioned in the common PAN cum KYC from to ensure
compliance with Para 13.2.3 above.
13.3 Other conditions for direct route (demat account).
13.3.1 There shall be 3 parties under this route - QFIs, qualified DP and
MF.
13.3.2 A QFIs can open only one demat account with any one of the
qualified DPs and shall subscribe and redeem through that DP
only. MF along with the DP shall have adequate systems to ensure
the compliance of the same.
13.3.3 To become a qualified DP, a SEBI registered DP shall fulfill the
following:
a. DP shall have paid up capital of Rs.50 Crore or more,
b. DP shall be either a clearing bank or clearing member of any
of the clearing corporations.
216 Master Circular for Mutual Funds
c. DP shall have appropriate arrangements for receipt and
remittance of money with a designated Authorised Dealer
(AD) Category - I bank
d. DP shall demonstrate that it has systems and procedures to
comply with the FATF Standards, PMLA and SEBI circulars
issued from time to time.
e. DP shall obtain prior approval of SEBI before commencing
the activities relating to accepting MF subscription from
QFIs.
13.3.4 The qualified DP shall open a demat account for the QFIs after
ensuring all the requirements as per the PMLA, FATF standards
and SEBI circulars issued in this regard.
13.3.5 For the purpose of account opening, MF can rely on the KYC done
by DPs. Further, MF shall obtain the relevant records of KYC/ other
documents from the DP and ensure compliance with para 13.2.14.
However, MF shall comply with PMLA, FATF standards and SEBI
circulars issued in this regard from time to time on an ongoing
basis.
13.3.6 The qualified DP shall open a separate single rupee pool bank
account with a designated AD Category -I bank, exclusively for the
purpose of investments by QFIs in India.
217 Master Circular for Mutual Funds
13.3.7 Process Flow
Subscription
a. The QFIs shall place a purchase/ subscription order
mentioning the name of the scheme/MF with its DP and
remit foreign inward remittances through normal banking
channel in any permitted currency (freely convertible)
directly to the single rupee pool bank account of the DP
maintained with a designated AD category - I bank.
b. DP in turn shall forward the purchase order to the concerned
MF and remits the money to the MF’s scheme account on the
same day as the receipt of funds from QFIs. In case of receipt
of money after business hours, DP shall remit the funds to MF
scheme account by next business day.
c. If for any reasons, the DP is not able to remit the money to the
MF scheme account within the stipulated timeframe as
mentioned in para-b, the DP shall immediately return the
money to the designated overseas bank account of the QFIs.
d. MF shall process the order and credit units into the demat
account of the QFIs.
e. If for any reasons the units are not allotted, MF / DP shall
ensure that the money is remitted back to the QFI’s designated
overseas bank account within 3 working days from the date of
receipt of subscription of money in the single rupee pool
bank account of the DP maintained with a designated AD
category I bank.
218 Master Circular for Mutual Funds
Redemption
f. QFIs can redeem, either through Delivery Instruction
(physical/ electronic) or any another mode prescribed by
the Depositories. On receipt of instruction from QFIs, DP
shall process the same and forward the redemption
instructions to the MF. Upon receipt of instruction from DP,
MF shall process the same and shall credit the single rupee
pool bank account of the DP with the redemption proceeds.
g. The DP can make fresh purchase of units of equity and debt
schemes of MF (if so instructed by the QFIs) out of the
redemption proceeds received provided that payment is made
towards such purchase is made within two working days of
receipt of money from MF in the pooled bank account. In case
no purchase is made within said period, the money shall be
remitted by the DPs to the designated bank overseas account
of the QFIs within two working days from the date of receipt of
money from the MF in the pooled bank account.
Dividend
h. In case of dividend payout, the MF shall credit the single rupee
pool bank account of the DP with the dividend amount. The
DP in turn shall remit the same to the designated bank
overseas account of the QFIs within two working days from the
date of receipt of money from the MF in the DP’s rupee pooled
bank account.
219 Master Circular for Mutual Funds
13.3.8 Disclosure of Performance of Schemes post-merger391 :
13.3.8.1 Disclosure of performance of schemes post-merger as given below
a. When two schemes, for example, Scheme A (Transferor Scheme)
& Scheme B (Transferee Scheme), having similar features, get
merged and the merged scheme i.e., surviving scheme also has
the same features, the weighted average performance of both the
schemes needs to be disclosed.
b. When Scheme A (Transferor Scheme) gets merged into Scheme
B (Transferee Scheme) and the features of Scheme B are
retained, the performance of the scheme whose features are
retained needs to be disclosed.
c. When Scheme A (Transferor Scheme) gets merged into Scheme
B (Transferee Scheme) and the features of Scheme A (Transferor
scheme) are retained, the performance of the scheme whose
features are retained needs to be disclosed.
d. When Scheme A (Transferor Scheme) gets merged with Scheme
B (Transferee Scheme) and a new scheme, Scheme C emerges
after such consolidation or merger of schemes, the past
performance need not be provided.
13.3.8.2 In addition to disclosing the performance of the scheme as
mentioned above, past performance of such scheme(s) whose
features are not retained post-merger may also be made available
on request with adequate disclaimer.
13.3.8.3 This Circular shall be applicable with effect from May 01, 2018.
391 SEBI Circular No- SEBI/HO/IMD/DF3/CIR/P/2018/69 dated April 12, 2018
220 Master Circular for Mutual Funds
13.4 Other conditions for Indirect route (Unit Confirmation
Receipts)
13.4.1 There shall be four parties involved - QFIs, UCR issuer (based
overseas), SEBI registered Custodian (based in India) and MF.
13.4.2 QFIs can subscribe / redeem only through the UCR Issuer.
13.4.3 MF shall appoint one or more UCR issuing agent overseas and one
SEBI registered custodian in India.
13.4.4 UCR issuer appointed by MF shall act as agent of the MF.
13.4.5 MF can appoint entities fulfilling the following conditions as UCR
issuer:
a. The entity is able to demonstrate that it has proven track record,
expertise and technology in the business of issuance of global
depository receipts/global custody agency
b. The entity is registered with an overseas securities market/
banking regulator.
13.4.6 MF shall seek no objection from SEBI before appointing any UCR
issuer and furnish the details and information sought by SEBI
about the UCR issuer. SEBI reserves the right to seek additional
information / clarification and direct action, including non
appointment/ revocation of appointment of that UCR Issuing
Agent.
221 Master Circular for Mutual Funds
13.4.7 MF shall comply with all the requirements as per the PMLA, FATF
standards and SEBI circulars issued in this regard on an ongoing
basis.
13.4.8 Custodians appointed by the MF shall comply with the SEBI
(Custodian of Securities) Regulations, 1996, circulars and
guidelines issued by SEBI.
13.4.9 The rupee denominated units of the MF would be held as
underlying by the custodian in India in demat mode against which
the UCR issuer would issue UCR to be held by QFIs.
13.4.10 MF shall ensure that for every UCR issued by UCR issuer,
Custodian in India shall hold corresponding number of units
against it i.e., there shall be one unit of MF scheme for every unit
of UCR.
13.4.11 MF shall receive money from UCR issuer either in foreign
country by opening bank account overseas (in accordance with
the relevant extant FEMA regulations) or in Indian rupees in the
respective MF scheme account held in India.
13.4.12 MF shall mandate the UCR issuer regarding the requirements
for KYC, Customer due diligence process and documents and
information to be collected from the QFIs in terms of the
requirements mentioned in para 13.2.13 above.
13.4.13 MF shall obtain the relevant records of KYC/ other documents
from the UCR issuer in order to comply with FATF standards, PMLA
and SEBI circulars issued in this regard and ensure compliance
with para 13.2.14.
222 Master Circular for Mutual Funds
13.4.14 Units purchased and redeemed through UCR issuer shall be
settled on gross basis and under no circumstances shall be netted
against other investors of UCR issuer
13.4.15 Process flow:
a. The QFIs places a purchase/ subscription order through the UCR
issuer.
In case of MF opening bank account overseas (in accordance with
the relevant extant FEMA regulations)
b. UCR issuer shall forward the order of QFIs to the MF/Custodian. Upon
receipt and transfer of funds to India; the MF shall issue units to the
custodian and custodian in turn confirm to the UCR Issuer to issue
UCR to the QFIs.
c. In case of redemption, UCR issuer shall confirm receipt of redemption
request to the MF and Custodian. Upon receipt of instruction, MF shall
process the same and shall transfer the redemption proceeds to the
MF overseas bank account for making payment to the designated
overseas bank account of the QFIs.
d. In case of dividend payout, the MF shall transfer the dividend amounts
to the MF overseas bank account for making payment to the
designated overseas bank account of the QFIs.
In case MF receives money in India from UCR issuer.
e. UCR issuer shall forward the purchase order to MF and Custodian,
and remit the funds into MF scheme account (in rupee terms). Upon
receipt of funds; the MF shall issue units to the custodian and
223 Master Circular for Mutual Funds
custodian shall in turn confirm to the UCR Issuer to issue UCR to the
QFIs.
f. In case of redemption, UCR issuer shall confirm receipt of redemption
request to the MF & Custodian. Upon receipt of instruction, MF shall
process and remit redemption proceeds to the UCR issuer which in
turn shall remit redemption proceeds to the designated bank account
of the QFIs.
g. In case of dividend payout, the MF shall remit the dividend
amount proceeds to the UCR issuer which in turn shall remit the
dividend amount to the designated bank account of the QFIs.
13.5 The investment by the QFIs in MF equity and debt schemes under this
scheme shall also be subject to the relevant and extant FEMA
regulations and guidelines issued by the Reserve Bank of India under
FEMA, 1999 from time to time.
224 Master Circular for Mutual Funds
CHAPTER 14
ADVERTISEMENTS392
14.1 Advertisement shall be in terms of Sixth Schedule393.
14.2 In addition to the provisions of the Sixth Schedule, mutual funds shall
comply with the following:394
14.2.1 While advertising pay out of dividends, all advertisements shall
disclose the dividends declared or paid in rupees per unit along with
the face value of each unit of that scheme and the prevailing NAV
at the time of declaration of the dividend.
14.2.2 Impact of Distribution Taxes: While advertising returns by
assuming reinvestment of dividends, if distribution taxes are
excluded while calculating the returns, this fact shall also be
disclosed.
14.2.3 Pay out of Dividend/ Bonus: While advertising pay outs, all
advertisements shall disclose, immediately below the pay out figure
(in percentage or in absolute terms) that the NAV of the scheme,
pursuant to pay out would fall to the extent of payout and statutory
levy (if applicable).
14.3 Disclosing performance related information in Mutual Fund
advertisements395
14.3.1 In performance advertisements of Mutual Fund schemes:
392SEBI Circular No.Cir/IMD/DF/13/2011 dated August 22, 2011 and SEBI Circular
No.Cir/IMD/DF/6/2012 dated February 28, 2012
393 Sixth Schedule of SEBI (Mutual Funds) Regulations, 1996 as amended via gazette notification
No. LAD-NRO/GN/2011-12/38/4290 dated February 21, 2012
394 SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
395 SEBI Circular No.Cir/IMD/DF/23/2017 dated March 15, 2017
225 Master Circular for Mutual Funds
14.3.1.1 Performance of the Mutual Fund scheme shall be advertised in
terms of CAGR for the past 1 year, 3 years, 5 years and since
inception.
14.3.1.2 In order to provide ease of understanding to retail investors,
point-to-point returns on a standard investment of Rs.10,000/-
shall also be provided in addition to CAGR of the scheme.
14.3.1.3 Performance advertisements of Mutual Fund schemes should
provide information based on period computed from the last day
of month-end preceding the date of advertisement.
14.3.1.4 It should be specifically mentioned whether performance so
disclosed, is of regular or direct plan of the Mutual Fund
scheme along-with a footnote mentioning that different plans
have a different expense structure.
14.3.1.5 If a Mutual Fund scheme has not been managed by the same fund
manager for the full period of the information being published in
the advertisement, the same should be disclosed in a footnote
14.3.2 When a scheme has been in existence for more than 1 year but less
than 3 years or 5 years, the same shall be mentioned as a
footnote in the performance advertisement of the Mutual Fund
scheme
14.3.3 Where the scheme has been in existence for less than one year, past
performance shall not be provided396.
14.3.4 In case of Money Market schemes or cash and liquid schemes397,
wherein investors have very short investment horizon, the
performance can be advertised by simple annualisation of yields if a
396 SEBI Circular No.Cir/IMD/DF/13/2011 dated August 22, 2011
397 SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
226 Master Circular for Mutual Funds
performance figure is available for at least 7 days, 15 days and 30
days provided it does not reflect an unrealistic or misleading picture
of the performance or future performance of the scheme.
14.3.5 For the sake of standardization, a similar return in INR and by way of
CAGR must be shown for the following apart from the scheme
benchmarks:
Scheme Type Benchmark
Equity Scheme Sensex or Nifty
Long term debt scheme 10 year dated GOI
security
Short term debt fund 1 year T-bill
These disclosures shall form a part of the Statement of Additional
Information and all advertisements of Mutual Funds.
14.3.6 Any disclosure regarding quarterly/ half yearly/ yearly performance
shall pertain to respective calendar quarterly/ half yearly/ yearly
only.
14.3.7 398When the performance of a particular Mutual Fund scheme
is advertised, the advertisement shall also include the
performance data of all the other schemes managed by the fund
manager/s of that particular scheme. Such performance data of the
other schemes managed by the fund manager shall be provided as
follows:
i. Performance of other schemes managed by the fund manager, along-
with their respective scheme’s benchmark, shall be provided in
terms of CAGR for a period of 1 year, 3 years and 5 years. The
period referred here shall be computed in the same manner as that
of the scheme being advertised.
398 SEBI Circular No.Cir/IMD/DF/23/2017 dated March 15, 2017
227 Master Circular for Mutual Funds
ii. In case the number of schemes managed by a fund manager is more
than six, then the AMC may disclose the total number of schemes
managed by that fund manager along with the performance data
of top 3 and bottom 3 schemes (in addition to the performance
data of the scheme for which the advertisement is being made)
managed by that fund manager in all performance related
advertisements. However, in such cases, AMCs shall ensure that
true and fair view of the performance of the fund manager is
communicated by providing additional disclosures, if required.
iii. If a Mutual Fund scheme has not been managed by the same fund
manager for the full period of information being published in the
advertisement, the same should be disclosed in a footnote.
iv. Further, for advertisement published in internet-enabled media,
Mutual Funds shall be permitted to provide an exact website link
to such summarized information of performance of other schemes
managed by the concerned fund manager.
v. An indicative format399 of disclosure of performance of other schemes
managed by the concerned fund manager is provided.
14.4 Filing of Advertisements400
14.4.1 Regulation 30 of SEBI (Mutual Funds) Regulations, 1996 (MF
Regulations) on Advertisement material, requires Mutual Funds to
submit to SEBI, the advertisements issued by them, within 7 days
from the date of issue.
14.4.2 In continuation to the various Go Green initiatives in Mutual Funds,
the Mutual Funds are advised to submit links to access the
advertisements to be filed under the MF Regulations by sending the
same through e-mail to SEBI at mf_advertisement@sebi.gov.in.
399 Please refer to section on Formats for requisite formats
400 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/34 dated March 08, 2019
228 Master Circular for Mutual Funds
However, advertisement materials like pamphlets may be submitted
as attachment along with e-mail, if the size of the attachment does
not exceed 250 KB.
14.4.3 Mutual Funds shall however, maintain copy of advertisements for
future references.
14.4.4 While sending the e-mail, the compliance officer of respective Mutual
Fund shall expressly confirm that the advertisement is in compliance
with the Advertisement code specified in the sixth schedule of the MF
Regulations.
14.5 Indicative portfolios and yields in mutual funds schemes401
14.5.1 Mutual Funds shall not offer any indicative portfolio and indicative
yield. No communication regarding the same in any manner
whatsoever shall be issued by any Mutual Fund or distributors of
its products. The compliance of the same shall be monitored by the
AMC and Trustees and reported in their respective reports to SEBI.
14.5.2 Indicative portfolio or yield in close ended debt oriented mutual
fund schemes402
Mutual Funds (MFs)/AMCs may make following additional
disclosures in the SID/SAI and KIM without indicating the portfolio
or yield, directly or indirectly:
14.5.2.1 MFs/AMCs shall disclose their credit evaluation policy for the
investments in debt securities.
401 SEBI Circular No. IMD/CIR No. 14/1510/2009 dated January 19, 2009
402 SEBI Circular No. CIR/IMD/DF/12/2011 dated August 01, 2011
229 Master Circular for Mutual Funds
14.5.2.2 MFs/AMCs shall also disclose the list of sectors they would not
be investing.
14.5.2.3 MFs shall disclose the type of instruments which the schemes
propose to invest viz. CPs, CDs, Treasury bills etc.
14.5.2.4 MFs shall disclose the floors and ceilings within a range of 5% of
the intended allocation (in %) against each sub asset class/credit
rating. For example, it may be disclosed that x-y %
would be in AAA rated bank CD as per the sample matrix below:
14.5.2.5 After the closure of NFO, the AMCs will report in the next
meeting of AMCs and Trustees the publicized percentage
allocation and the final portfolio. Variations between indicative
portfolio allocation and final portfolio will not be permissible.
230 Master Circular for Mutual Funds
CHAPTER 15
INVESTOR RIGHTS & OBLIGATIONS
PART I – INVESTOR RIGHTS
15.1 Payment of interest for delay in dispatch of redemption
and/or repurchase proceeds and/or dividend403
15.1.1 In the event of failure to dispatch:
a. Redemption or repurchase proceeds within 10 working days from
the date of receipt of such requests and/ or
b. Dividend within the stipulated 30 day period404,
15.1.2 The AMC(s) shall be liable to pay interest @ 15 per cent per annum
to the unit holders.405 AMC(s) must ensure that the interest amount
due for the period of delay in dispatch of repurchase or redemption
and/or dividend is added to the proceeds when such payments are
made to the investors. Such interest shall be borne by the AMC(s).
15.1.3 Details of such payments shall be sent to the Board along with the
CTR(s).406 Investors shall also be informed about the rate and
amount of interest paid to them. Non-compliance with these
directions may invite action under the Mutual Funds Regulations.
403 SEBI Circular No. SEBI/MFD/CIR/2/266/2000 dated May 19, 2000.
,4 04 SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
, 4 05Regulation 53(c) of the SEBI (Mutual Fund) Regulations, 1996.
406 For CTR format please refer to section on Formats
231 Master Circular for Mutual Funds
15.2 Unclaimed Redemption and Dividend Amount407
15.2.1 The unclaimed redemption and dividend amounts, that were earlier
allowed to be deployed only in call money market or money market
instruments, shall also be allowed to be invested in a separate plan
of Liquid scheme / Money Market Mutual Fund scheme floated by
Mutual Funds specifically for deployment of the unclaimed
amounts.
15.2.2 AMCs shall not be permitted to charge any exit load in this plan and
TER (Total Expense Ratio) of such plan shall be capped at 50 bps.
15.2.3 Further, for the Unclaimed redemption and dividend amounts
deployed by Mutual Funds in Call Money Market or Money Market
instruments, the investment management and advisory fee charged
by the AMC for managing unclaimed amounts shall not exceed 50
basis points.
15.2.4 Investors who claim the unclaimed amounts during a period of three
years from the due date shall be paid initial unclaimed amount
along-with the income earned on its deployment. Investors, who
claim these amounts after 3 years, shall be paid initial unclaimed
amount along-with the income earned on its deployment till the end
of the third year. After the third year, the income earned on such
unclaimed amounts shall be used for the purpose of investor
education.
15.2.5 The AMC shall make a continuous effort to remind the investors
through letters to take their unclaimed amounts.
407SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000 &
SEBI/HO/IMD/DF2/CIR/P/2016/37 dated February 25, 2016
232 Master Circular for Mutual Funds
15.2.6 Further, to ensure Mutual Funds play a pro-active role in tracing
the rightful owner of the unclaimed amounts:
a. Mutual Funds shall be required to provide on their website,
the list of names and addresses of investors in whose folios
there are unclaimed amounts.
b. AMFI shall also provide on its website, the consolidated list
of investors across Mutual Fund industry, in whose folios
there are unclaimed amounts. The information provided
herein shall contain name of investor, address of investor
and name of Mutual Fund/s with whom unclaimed amount
lies.
c. Information at point (a) & (b) above may be obtained by
investor only upon providing his proper credentials (like PAN,
date of birth, etc.) along-with adequate security control
measures being put in place by Mutual Fund / AMFI.
d. The website of Mutual Funds and AMFI shall also provide
information on the process of claiming the unclaimed
amount and the necessary forms / documents required for
the same.
e. Further, the information on unclaimed amount along-with
its prevailing value (based on income earned on deployment
of such unclaimed amount), shall be separately disclosed to
investors through the periodic statement of accounts /
Consolidated Account Statement sent to the investors.
15.2.7 Disclosures on above provisions shall be made in the SAI /SID.
Disclosure on the unclaimed amounts and the number of such
233 Master Circular for Mutual Funds
investors for each scheme shall be made in the Annual Report
also.408
15.3 Dispatch of Statement of Accounts409
15.3.1 AMCs shall allot the units to the applicant whose application has
been accepted and also send confirmation specifying the number of
units allotted to the applicant by way of email and/or SMS’s to the
applicant’s registered email address and/or mobile number as soon
as possible but not later than five working days from the date of
closure of the initial subscription list and/or from the date of receipt
of the request from the unitholders.
15.3.2 Consolidated Account Statement410
15.3.2.1 As per regulation411, AMCs shall issue consolidated account
statement for each calendar month to the investors in whose folios
transaction(s) has/have taken place during that month.
15.3.2.2 Pursuant to the Interim Budget announcement in 2014 to create
one record for all financial assets of every individual, it has been
further decided that AMCs/ RTAs shall share the requisite
information with the Depositories on monthly basis to enable
generation of CAS412.
15.3.2.3 The depositories and the Asset Management Companies (AMCs)/
MF-RTAs shall put in place systems to facilitate generation and
dispatch of single Consolidated Account Statements (CAS) for
408 Please refer to Schedule XI of SEBI (Mutual Funds) Regulations, 1996
409SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000, SEBI Circular No.
IMD/CIR/12/80083/2006 dated November 20, 2006 and SEBI Circular
No.Cir/IMD/DF/16/2011 dated September 08, 2011
410 SEBI Circular No.Cir/IMD/DF/16/2011 dated September 08, 2011
411 Regulation 36(4) of SEBI (Mutual Funds) Regulations, 1996
412 SEBI Circular No CIR/MRD/ DP/ 31/2014 dated November 12, 2014
234 Master Circular for Mutual Funds
investors having MF investments and holding demat accounts.
AMCs/ RTAs shall share the requisite information with the
Depositories on monthly basis to enable generation of CAS.
15.3.2.4 Consolidation of account statement shall be done on the basis
of PAN. In case of multiple holding, it shall be PAN of the first
holder and pattern of holding. Based on the PANs provided by the
AMCs/MF-RTAs, the Depositories shall match their PAN
database to determine the common PANs and allocate the PANs
among themselves for the purpose of sending CAS. For PANs
which are common between depositories and AMCs, the
Depositories shall send the CAS. In other cases (i.e. PANs with
no demat account and only MF units holding), the AMCs/ MF-
RTAs shall continue to send the CAS to their unit holders as is
being done presently in compliance with the Regulation 36(4) of
the SEBI (Mutual Funds) Regulations.
15.3.2.5 In case investors have multiple accounts across the two
depositories, the depository having the demat account which has
been opened earlier shall be the default depository which will
consolidate details across depositories and MF investments and
dispatch the CAS to the investor. However, option shall be given
to the demat account holder by the default depository to choose
the depository through which the investor wishes to receive the
CAS.
15.3.2.6 The CAS shall be generated on a monthly basis. The AMCs /MF-
RTAs shall provide the data with respect to the common PANs to
the depositories within three days from the month end. The
235 Master Circular for Mutual Funds
depositories shall then consolidate and dispatch the CAS within
ten days from the month end.
15.3.2.7 Where statements are presently being dispatched by email either
by the Mutual Funds or by the Depositories, CAS shall be sent
through email. However, where an investor does not wish to
receive CAS through email, option shall be given to the investor
to receive the CAS in physical form at the address registered in
the Depository system.
15.3.2.8 A proper grievance redressal mechanism shall be put in place by
the depositories and the AMCs/MF-RTAs which shall also be
communicated to the investors through CAS. AMCs/MF-RTAs
would be accountable for the authenticity of the information
provided through CAS in respect of MF investments and timely
sharing of such information with Depositories. The Depositories
would be responsible for the timely dispatch of CAS to the
investors serviced by them and the demat account information.
15.3.2.9 The depositories and the AMCs/ MF-RTAs shall ensure data
integrity and confidentiality in respect of the shared information.
The depositories shall utilize the shared data only for the purpose
of providing CAS and shall not share the same with their
Depository participants. Where Depositories are required to
share such information with unregulated entities like third party
printers, the depositories shall enter into necessary data
confidentiality agreements with them.
15.3.2.10 The CAS shall be implemented from the month of March 2015
with respect to the transactions carried out during the month of
February 2015.
236 Master Circular for Mutual Funds
15.3.2.11 If an investor does not wish to receive CAS, an option shall be
given to the investor to indicate negative consent. Depositories
shall accordingly inform investors in their statements from the
month of January 2015 about the facility of CAS and give them
information on how to opt out of the facility if they do not wish to
avail it.
15.3.2.12 Where such an option is exercised, the concerned depository
shall inform the AMC/MF-RTA accordingly and the data with
respect to the said investor shall not be shared by the AMC/MF-
RTA with the depository.
15.3.2.13 If there is any transaction in any of the demat accounts of the
investor or in any of his mutual fund folios, then CAS shall be
sent to that investor on monthly basis. In case there is no
transaction in any of the mutual fund folios and demat accounts
then CAS with holding details shall be sent to the investor on half
yearly basis. However, in case of demat accounts with nil balance
and no transactions in securities and in mutual fund folios, the
requirement to send physical statement shall be applicable as
specified in SEBI circular no. CIR/MRD/DP/21/2014 issued on
July 01, 2014.
15.3.2.14 Further, the holding statement dispatched by the DPs to their
BOs with respect to the dormant demat accounts with balances
shall also be dispatched half-yearly in partial modification of
clauses 5(b) and 6(c) of the circular no. CIR/MRD/DP/22/2012
dated August 27, 2012.
15.3.2.15 The dispatch of CAS by the depositories to BOs would constitute
compliance by the Depository Participants with requirement
under Regulation 43 of SEBI (Depositories and Participants)
237 Master Circular for Mutual Funds
Regulations, to provide statements of account to the BOs as also
compliance by the MFs with the requirement under Regulation
36(4) of SEBI (Mutual Funds) Regulations.
15.3.2.16 Further, in order to increase transparency of information to
investors, it has been decided that413
a. Each CAS issued to the investors shall also provide the total
purchase value / cost of investment in each scheme.
b. Further, CAS issued for the half-year (ended September/
March) shall also provide.
i. The amount of actual commission paid by
AMCs/Mutual Funds (MFs) to distributors (in absolute
terms) during the half-year period against the concerned
investor’s total investments in each MF scheme. The
term ‘commission’ here refers to all direct monetary
payments and other payments made in the form of gifts
/ rewards, trips, event sponsorships etc. by
AMCs/MFs to distributors. Further, a mention may
be made in such CAS indicating that the commission
disclosed is gross commission and does not
exclude costs incurred by distributors such as service
tax (wherever applicable, as per existing rates),
operating expenses, etc.
ii. The scheme’s average Total Expense Ratio414 (in
percentage terms) along with the break up between
Investment and Advisory fees, Commission paid to the
distributor and Other expenses for the period for each
413 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/42 dated March 18, 2016 and
SEBI/HO/IMD/DF2/CIR/P/2016/89 dated September 20, 2016
414 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/137 dated October 22, 2018
238 Master Circular for Mutual Funds
scheme’s applicable plan (regular or direct or both)
where the concerned investor has actually invested in.”
iii. Trustees and AMCs shall ensure compliance of the
provisions mentioned above at 15.3.2.16(b)(ii) and
trustees shall confirm the same to SEBI in the half yearly
trustee report.
c. Such half-yearly CAS shall be issued to all MF investors,
excluding those investors who do not have any holdings in
MF schemes and where no commission against their
investment has been paid to distributors, during the
concerned half-year period.
d. Further, an indicative format415 providing guidance on
the key components which shall be reflected in half-yearly
CAS may be referred.
15.3.3 Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP)
or Systematic Withdrawal Plan (SWP) 416
a. Mutual Funds may dispatch the Statement of Accounts to the
unit holders under SIP or STP or SWP, once every quarter ending
March, June, September and December within 10 working days
of the end of the respective quarter. The first Statement of
Accounts shall however be issued within 10 working days of the
initial transaction.
b. Mutual funds shall also provide Statement of Accounts to unit
holders within 5 working days, without any charges, if specific
requests are received from the investors. Further, if so mandated,
415 Please refer to section on Formats for requisite formats
416 SEBI Circular No. IMD/CIR/12/80083/2006 dated November 20, 2006
239 Master Circular for Mutual Funds
a soft copy of the Statement of Accounts shall be e-mailed to the
unit holders on a monthly basis.
15.3.4 Dormant Accountholders
a. Mutual Funds shall also provide Statement of Accounts to those
unit holders who have not transacted during the last six months
prior to the date of generation of the Statement of Accounts. In
such cases, the Statement of Accounts may be issued along with
the scheme’s Portfolio Statement or Annual Report and should
reflect the last closing balance and value of the units prior to the
date of generation of the Statement of Accounts. Further, if so
mandated, a soft copy of the Statement of Accounts shall be e-
mailed to the unit holders instead of a physical statement.
15.4 AMC’s Annual Reports for unitholders417
15.4.1 The annual report containing accounts of the AMCs should be
displayed on the website of Mutual Fund. It should also be
mentioned in the Annual Report of Mutual Funds schemes that the
unitholders, if they so desire may request for the Annual Report of
the AMC.
15.5 Treatment and disposal of illiquid securities or
securities classified as default at the time of maturity
/ closure of schemes418 419
15.5.1 In case of close-ended schemes, some of the investments made by
Mutual Funds may become default at the time of maturity of
417 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000
418 SEBI Circular No. SEBI/HO/IMD/DF4/CIR/P/2019/102 dated September 24, 2019
419 SEBI Circular No. MFD/CIR/05/432/2002 dated June 20, 2002.
2, 40 Master Circular for Mutual Funds
schemes. Further, at the time of winding up of a scheme, some of
the investments made by Mutual Funds may become default or
illiquid. In due course of time i.e. after the maturity or winding up
of the schemes, such investments may be realised by the Mutual
Funds. It is advised to distribute such amount, if it is substantial,
to the concerned investors. In case the amount is not substantial, it
may be used for the purpose of investor education. The decision as
to the determination of substantial amount shall be taken by the
Trustees of Mutual Funds after considering the relevant factors
including number of investors, amount recovered, cost of
transferring funds to investors; among others.
15.6 Change of Mutual Fund Distributor
15.6.1 In case an investor wishes to change his distributor or wishes to go
direct, Mutual Funds/AMC’s shall ensure compliance with the
instruction of the investor informing his desire to change his
distributor and / or go direct, without compelling that investor to
obtain a ‘No Objection Certificate’ from the existing distributor.420
15.7 Additional mode of payment through Applications
Supported by Blocked Amount (hereinafter referred to as
“ASBA”) in Mutual Funds421
15.7.1 ASBA facility which investors have been enjoying for subscription to
public issue of equity capital of companies has been extended to the
investors subscribing to New Fund Offers (NFOs) of mutual fund
420 SEBI Circular No -SEBI/IMD/CIR No./ 13/187052 /2009 December 11, 2009
421 SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
241 Master Circular for Mutual Funds
schemes. It shall co-exist with the current process, wherein cheques/
demand drafts are used as a mode of payment.
15.7.2 The banks which are in SEBI’s list shall extend the same facility in
case of NFOs of mutual fund schemes to all eligible investors in
Mutual Fund units.
15.7.3 Mutual Funds shall ensure that adequate arrangements are made by
Registrar and Transfer Agents for the implementation of ASBA.
Mutual Funds/AMCs shall make all relevant disclosures in this
regard in the SAI.
15.7.4 SEBI circulars422 related to ASBA shall be followed to the extent
applicable.
15.7.5 The Mutual Funds/AMCs have to compulsorily provide ASBA facility
to the investors for all NFOs launched on or after October 1, 2010.
15.8 Instant Access Facility and use of e-wallet for investment
in Mutual Funds423
15.8.1 Instant Access Facility (IAF)
1. IAF facilitates credit of redemption proceeds in the bank account of the
investor on the same day of redemption request. In order to further
enhance the reach of Mutual Funds (MFs) towards the retail
422 SEBI Circular No. SEBI/CFD/DIL/DIP/31/2008/30/7 dated July 30, 2008,
SEBI/CFD/DIL/2008/25/09dated September 25, 2008,
SEBI/CFD/DIL/MB/IS/5/2009/05/08 dated August 5, 2009 and
SEBI/CFD/DIL/ASBA/1/2009/30/12 dated December 30, 2009 and CIR/CFD/DIL/7/2010
dated July 13, 2010
423 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2017/39 dated May 08, 2017
242 Master Circular for Mutual Funds
investors, it has been decided to issue guidelines for extending
IAF. MFs/AMCs may offer IAF subject to the following conditions:
a. Eligibility -IAF shall be allowed through online mechanism and
only for resident individual investors.
b. Applicability
i. NAV: While observing the extant cut-off timings with respect to
repurchase (i.e. Redemption), under IAF the following NAVs shall be
applied:
 where the IAF application is received up to 3.00pm–the lower of (i)
NAV of previous calendar day and (ii) NAV of calendar day on
which application is received;
 where the IAF application is received after 3.00 pm –the lower of
(i) NAV of calendar day on which such application is received, and
(ii) NAV of the next calendar day.
ii. Scheme–MFs/ AMCs can offer IAF only in Liquid schemes of the MF.
iii. Monetary Limit-The monetary limit under IAF shall be INR
50,000/-or 90% of latest value of investment in the scheme,
whichever is lower. This limit shall be applicable per day per scheme
per investor.
c. Liquidity
i. Liquidity for IAF has to be provided out of the available funds with the
scheme and MFs/ AMCs should put in place a mechanism so that
adequate balance is available in the bank account of the scheme
to meet liquidity/ redemption requirements under IAF. Such
mechanism may be based on historical trends of instant access. For
example, AMCs offering IAF may set aside in cash at least 3 times of –
243 Master Circular for Mutual Funds
the higher of, last one month’s or three month’s daily average of
redemptions under instant access on a rolling day basis. AMCs should
also lay down robust processes for continuous monitoring and for
funding the redemptions under the IAF.
ii. MFs/ AMCs cannot borrow to meet the redemption requirements
under IAF.
d. Disclosures
i. AMCs shall make appropriate disclosures in the scheme related
documents about IAF and ensure that no mis-selling is done on the
pretext of instant availability of funds to the investors.
ii. Appropriate disclosures shall be made to the investors mentioning the
scenarios under which IAF may be suspended and that IAF request
would be processed as a normal redemption request in such
circumstances.
e. Approvals and Controls
i. MFs/ AMCs shall offer IAF only after obtaining approvals from
the AMC Board and the Trustees and keep in place adequate
safeguards in the system to implement this facility.
ii. IAF shall also be considered while carrying out stress testing of the
schemes.
15.8.2 Use of e-wallet for investment in MFs
15.8.2.1 With an objective to promote digitalization, MFs/AMCs can accept
investment by an investor through e-wallets (Prepaid Payment
Instruments (PPIs)) subject to the following:
a. MFs/ AMCs shall ensure that extant regulations such as cut-off
timings, time stamping, etc., are complied with for
investment in MFs using e-wallets.
244 Master Circular for Mutual Funds
b. MFs/ AMCs shall enter into an agreement / arrangement with
issuers of PPIs for facilitating payment from e-wallets to MF
schemes.
c. Redemption proceeds should be made only to the bank
account of the investor/ unit holder as required under SEBI
Circular MFD/CIR/15/19133/2002 dated September 30, 2002.
d. MFs/ AMCs shall ensure that total subscription through e-
wallets for an investor is restricted to INR 50,000/-per MF per
financial year. Further, in partial modification to the Circular
CIR/IMD/DF/10/2014 dated May 22, 2014, the limit of INR
50,000/-would be an umbrella limit for investments by an
investor through both e-wallet and/or cash, per MF per
financial year.
e. MFs/ AMCs shall ensure that e-wallet issuers shall not offer
any incentives such as cashback, vouchers, etc., directly or
indirectly for investing in MF schemes.
f. MFs/ AMCs shall ensure that only amounts loaded into e-wallet
through cash or debit card or net banking, can be used for
subscription to MF schemes.
g. MFs/ AMCs shall ensure that amount loaded into e-wallet
through credit card, cash back, promotional scheme etc. should
not be allowed for subscription to MF schemes.
h. MFs/ AMCs shall also comply with the requirement of no third
party payment norm for investment made using e-wallets.
245 Master Circular for Mutual Funds
PART II – INVESTOR’S OBLIGATIONS
15.9 Mandatory mentioning of PAN Number424
15.9.1 For, the requirement of mentioning PAN Number by investors of
mutual fund schemes, the applicable SEBI guidelines may be
referred425
15.10 Mandatory mentioning of Bank Account by
Investors426
15.10.1 It shall be mandatory for the investors of the Mutual Funds schemes
to mention their bank account numbers in their
applications/request for redemption. For this purposes Mutual
Funds shall provide space in applications and redemption request
forms.
424 SEBI Circular No. MRD/DoP/Cir-05/2007 dated April 27, 2007, SEBI Circular No.
MRD/DoP/Cir-08/2007 dated June 25, 2007, SEBI Circular No. MRD/DoP/MF/Cir-08/2008
dated April 3, 2008
, 4 ,, 25 SEBI Circular No. MRD/DoP/MF/Cir-08/2008 dated April 3, 2008
< 4 , 26 SEBI Circular No. IIMARP/MF/CIR/07/826/98 dated April 15, 1998
246 Master Circular for Mutual Funds
PART III– INVESTOR EDUCATION
15.11 SEBI Investors Education Programme – Investments
in Mutual Funds
427
15.11.1 Board has prepared a brochure in question-answer format explaining
the fundamental issues pertaining to mutual funds. The same is
enclosed at Annexure 5. The same is also available at our website
www.sebi.gov.in under the "Mutual Funds" section.
15.11.2 AMCs are advised to circulate copies of the brochure among their
distributors and agents (including brokers, banks, post offices) and
the investors.
15.11.3 AMCs may publish the same as small booklets. In such a case, while
the booklets must bear SEBI name and logo, AMC may give their
name as publisher. This may also be displayed prominently on their
web sites
15.11.4 AMFI may consider including the brochure as a part of study
material for their training programmes for investors and for their
certification programme conducted for agents and distributors.
15.11.5 Board may be kept informed about the steps taken by the AMCs in
this regard from time to time.
427 SEBI Cir No. MFD/CIR NO -13/370/02 dated January 16,2002
247 Master Circular for Mutual Funds
15.12 Financial Inclusion:
15.12.1 In context of Mutual Funds, financial inclusion implies that the
concept of Mutual Fund products is understood by all and are
accessible to anyone who wishes to make an investment in them.
Also, investors should be capable of figuring out which Mutual
Fund scheme is appropriate for their financial objectives. Towards
this, it has been decided that:
a. Mutual Funds shall mandatorily also make available printed
literature on mutual funds in regional languages for investor
awareness and education.
b. Mutual Funds to introduce Investor awareness campaign in
regional languages both in print and electronic media
248 Master Circular for Mutual Funds
CHAPTER 16
CERTIFICATION AND REGISTRATION OF INTERMEDIARIES 428, 429
16.1 No Mutual Fund shall deal with any intermediary (i.e. distributors,
agents, brokers, sub brokers or called by any other name, whether
individuals or belonging to any other organization structure) in relation
to selling and marketing of Mutual Fund units unless they have cleared
the certification examination.
16.2 No Mutual Fund shall engage/employ employee(s) interacting with
investors (i.e. those working in investors relations, call centers, employees
engaged in sales and marketing etc. ) unless they have cleared the
certification examination.
16.3 Further, such intermediaries and employees shall also adhere to the
Guidelines specified by the Board and AMFI.430
16.4 Distributors of Mutual Fund products431
16.4.1 The AMCs shall regulate the distributors by putting in place a due
diligence process as follows:
16.4.1.1 The due diligence of distributors is solely the responsibility of
mutual funds/AMCs. This responsibility shall not be delegated to
428 SEBI Circular No. MFD/CIR No.10/310/01 dated September 25, 2001, SEBI Circular No.
MFD/CIR/20/23230/2002 dated November 28, 2002, SEBI Circular No. SEBI/MFD/CIR
No.01/6693/03 dated April 3, 2003, SEBI Circular No. SEBI/IMD/CIR No.2/254/04 dated
February 4, 2004, SEBI Circular No. MFD/CIR/06/210/2002 dated June 26, 2002.
<4 29 Exemption for Senior Citizens: Senior citizens with experience in distributing Mutual Funds
units are exempt from the mandatory certification examination if they have completed 50
years of age and have experience of at least 5 years as on September 30, 2003. They are
also required to follow the guidelines prescribed by the Board and AMFI. They had to
attend a mutual fund training programme and a certificate to that effect endorsed by a
mutual fund should be submitted to AMFI.
<
4
<
30 SEBI Circular No. MFD/CIR No.10/310/01 dated September 25, 2001, SEBI Circular No.
MFD/CIR/20/23230/2002 dated November 28, 2002.
431 SEBI Circular No. CIR/IMD/DF/13/2011 dated August 22, 2011.
249 Master Circular for Mutual Funds
any agency. However, mutual funds/AMCs may take assistance of
an agency of repute while carrying out due diligence process of
distributors.432
16.4.1.2 The due diligence process shall be initially applicable for
distributors satisfying one or more of the following criteria:
a. Multiple point presence (More than 20 locations)
b. AUM raised over Rs.100 Crore across industry in the non-
institutional category but including high net worth individuals
(HNIs)
c. Commission received of over Rs.1 Crore p.a. across industry
d. Commission received of over Rs.50 Lakh from a single Mutual Fund
16.4.1.3 At the time of empanelling distributors and during the period i.e.
review process, Mutual Funds/AMCs shall undertake a due
diligence process to satisfy ‘fit and proper’ criteria that incorporate,
amongst others, the following factors:
a. Business model, experience and proficiency in the business.
b. Record of regulatory / statutory levies, fines and penalties,
legal suits, customer compensations made; causes for these and
resultant corrective actions taken.
c. Review of associates and subsidiaries on above factors.
d. Organizational controls to ensure that the following processes are
delinked from sales and relationship management processes and
personnel:
1. Customer risk / investment objective evaluation.
2. MF scheme evaluation and defining its
appropriateness to various customer risk categories.
432 SEBI Circular No. Cir/IMD/DF/7/2012 dated February 28, 2012
250 Master Circular for Mutual Funds
16.4.1.4 In this respect, customer relationship and transactions shall be
categorized as:
a. Advisory - where a distributor represents to offer advice while
distributing the product, it will be subject to the principle of
‘appropriateness’ of products to that customer category.
Appropriateness is defined as selling only that product
categorization that is identified as best suited for investors within
a defined upper ceiling of risk appetite. No exception shall be made.
b. Execution Only - in case of transactions that are not booked as
‘advisory’, it shall still require:
i. The distributor has information to believe that the
transaction is not appropriate for the customer, a written
communication be made to the investor regarding the
unsuitability of the product. The communication shall
have to be duly acknowledged and accepted by investor.
ii. A customer confirmation to the effect that the transaction is
‘execution only notwithstanding the advice of in-
appropriateness from that distributor be obtained prior to the
execution of the transaction.
iii. That on all such ‘execution only’ transactions, the
customer is not required to pay the distributor anything
other than the standard flat transaction charge.
c. There shall be no third categorization of customer relationship /
transaction.
d. While selling Mutual Fund products of the
distributors’ group/affiliate/associates, the distributor shall
make disclosure to the customer regarding the conflict of interest
arising from the distributor selling of such products.
251 Master Circular for Mutual Funds
16.4.1.5 Compliance and risk management functions of the distributor
shall include review of defined management processes for:
a. The criteria to be used in review of products and the
periodicity of such review.
b. The factors to be included in determining the risk appetite of the
customer and the investment categorization and periodicity of
such review.
c. Review of transactions, exceptions identification, escalation and
resolution process by internal audit.
d. Recruitment, training, certification and performance review of all
personnel engaged in this business.
e. Customer on boarding and relationship management process,
servicing standards, enquiry / grievance handling mechanism.
f. Internal/ external audit processes, their comments / observations
as it relates to MF distribution business.
g. Findings of ongoing review from sample survey of investors.
16.4.1.6 Mutual Funds/AMCs may implement additional measures as
deemed appropriate to help achieve greater investor protection.
16.5 Code of Conduct:
16.5.1 Mutual Funds are required to monitor the activities of their
distributors, agents, brokers to ensure that they do not indulge in
any malpractice or unethical practice while selling or marketing
Mutual Funds units. Any non compliance with the Mutual Funds
Regulations and Guidelines pertaining to Mutual Funds especially
guidelines on advertisements and/ or sales literature and/or Code of
Conduct shall be reported in the periodic meetings of the Board of
the AMC and the Trustee(s) and shall also be reported to the Board
252 Master Circular for Mutual Funds
by the AMC(s) in their CTR(s) and by the Trustees in their Half Yearly
Reports.
16.5.2 AMFI has prescribed a Code of Conduct for Mutual Fund
intermediaries enclosed herewith as Annexure 1433. All
intermediaries shall follow the Code of Conduct strictly and not
indulge in any practice contravening it directly or indirectly.
16.5.3 Non compliance with the Code of Conduct shall be reported by the
Mutual Funds to the Board and AMFI. Further, no Mutual Fund shall
deal with intermediaries contravening the prescribed Code of
Conduct.
16.6 Empanelment of Intermediaries by Mutual Funds
16.6.1 Empanelment of intermediaries by Mutual Funds, payment of
commissions, brokerage and/or sub-brokerage etc. shall be in
accordance with parameters and guidelines specified by the Board
and AMFI from time to time. Mutual Funds shall monitor the
compliance of these guidelines and Code of Conduct by their
intermediaries in terms of business done across all Mutual Funds.
In case of non-compliance, Mutual Funds shall suspend further
business and payment of commissions, etc. until full compliance by
the empanelled intermediary.
16.7 Certification Programme for sale and/ or distribution of
mutual fund products434
16.7.1 With effect from June 01, 2010, the certification examination for
distributors, agents or any other persons employed or engaged or to
433 Refer Annexure and Reports for details on Code of Conduct
434 SEBI Circular No. Cir/IMD/DF/5/2010 dated June 24, 2010
253 Master Circular for Mutual Funds
be employed or engaged in the sale and/or distribution of mutual
fund products, would be conducted by the National Institute of
Securities Markets (NISM)435. The text of notification in this regard is
enclosed herewith as Annexure 6.
16.7.2 Under the existing instructions, the agent/ distributor was exempted
from the AMFI certification examination if he had completed fifty
years of age and had at least five years of experience in distribution
of mutual fund units. As per regulation 4(3) of the Certification
Regulations, persons who have attained the age of fifty years or who
have at least ten years’ experience in the securities markets in the
sale and/ or distribution of mutual fund products as on May 31,
2010, will be given the option of obtaining the certification either by
passing the NISM certification examination or qualifying for
Continuing Professional Education (CPE) by obtaining such
classroom credits as may be specified by NISM from time to time.
16.7.3 The Certification Regulations require the persons referred to in
paragraph 16.7.1 above to comply with the requirements for CPE as
specified by NISM within the validity period of the certificate obtained
by passing the certification examination. However, to facilitate the
transition process from AMFI to NISM, it has been decided that a
person holding a valid AMFI certification whose validity expires
between June 01, 2010 and December 31, 2010, would be required
to comply with the CPE requirements as laid down by NISM under
435 For Notification under regulation 3 of the Securities and Exchange Board of India
(Certification of Associated Persons in the Securities Markets) Regulations, 2007 please refer to
section on Annexures
254 Master Circular for Mutual Funds
the relevant clauses of the Certification Regulations, by December
31, 2010.
16.7.4 An associated person holding a valid AMFI/NISM certification whose
validity expires any time after December 31, 2010, would be required
to comply with the CPE requirements as laid down by NISM under
the relevant clauses of the Certification Regulations, prior to the
expiry of the validity of the certification.
16.7.5 The requirement of obtaining registration from AMFI after obtaining
certification, as per the Circular dated November 28, 2002, would
continue.
16.8 New cadre of distributors436
16.8.1 A new cadre of distributors, such as postal agents, retired
government and semi-government officials (class III and above or
equivalent) with a service of at least 10 years, retired teachers with
a service of at least 10 years, retired bank officers with a
service of at least 10 years, and other similar persons (such as
Bank correspondents) as may be notified by AMFI/AMC from time to
time, shall be allowed to sell units of simple and performing
mutual fund schemes.
16.8.2 Simple and performing mutual fund schemes shall comprise of
diversified equity schemes, fixed maturity plans (FMPs), index
schemes, Retirement benefit schemes having tax benefits and Liquid
schemes/ Money Market Mutual Fund schemes437 and should have
436 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
437 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2016/37 February 25, 2016.
255 Master Circular for Mutual Funds
returns equal to or better than their scheme benchmark returns
during each of the last three years.
16.8.3 These new cadre of distributors would require a simplified form
of NISM certification and AMFI Registration.
16.9 Developing alternative distribution channels438
16.9.1 In order to increase penetration of Mutual Fund products and
to energise the distribution network while protecting the interest of
investors, SEBI had permitted additional expense ratio of 30 bps
for garnering funds from B-30 cities. This development would
lead to setting up of distribution infrastructure by AMCs.
However, in order to achieve participation from all parts of the
country in Mutual Funds there is greater need for developing
additional distribution channels. Therefore, it has been decided
that:
a. Distribution through PSU banks: PSU banks which have wide
bank branches network and have distribution reach in the nook
and corner of the country, could play a key role in Mutual Funds
distribution. In order to leverage the PSU banks infrastructure,
Mutual Funds/ AMCs need to develop a system for active
support to PSU banks to distribute Mutual Fund products
through them. Such active support would also encourage PSU
banks to distribute products of all Mutual Funds.
b. Online distribution: Online distribution not only increases
customer convenience, but also significantly improves distributor
economics. The online phenomenon is increasing rapidly and it is
observed that more and more people especially younger generation
prefers online transactions. Therefore, it has been decided that all
438 SEBI Circular No. CIR/IMD/DF/05/2014 dated March 24, 2014
256 Master Circular for Mutual Funds
Mutual Funds should enhance the online investment facility and
tap the internet savvy users to invest in Mutual Funds by
providing an online investment facility on their websites. Mutual
Funds also need to tap the burgeoning mobile-only internet users
for direct distribution of Mutual Fund products.
16.10 Unique Identity Number
16.10.1 AMFI shall create a unique identity number of the employee/
relationship manager/ sales person of the distributor interacting
with the investor for the sale of mutual fund products, in
addition to the AMFI Registration Number (ARN) of the distributor.
16.10.2 The application form for mutual fund schemes shall have
provision for disclosing the unique identity number of such sales
personnel along with the ARN of distributor.
257 Master Circular for Mutual Funds
CHAPTER 17
TRANSACTION IN MUTUAL FUNDS UNITS
17.1 Maintenance of documents439
17.1.1 As per the requirements specified by Board in respect of “Anti Money
Laundering (AML) Standards/Combating Financing of Terrorism
(CFT) / Obligations of Securities Market Intermediaries under
Prevention of Money Laundering Act, 2002 and Rules framed there-
under”440, maintenance of all documentation pertaining to the
unitholders/ investors is the responsibility of the AMC.
17.1.2 Accordingly, vide SEBI Circular No - SEBI/IMD/CIR No.12 /186868
/2009 dated December 11, 2009, AMCs were advised to confirm
whether all the investor related documents were maintained/
available with the AMC. If not, and to the extent of and relating to
such investor accounts/folios where investor related documentation
was incomplete/inadequate/not available or was stated to be
maintained by the distributors, then the Trustees were advised to
ensure the following:
17.1.2.1 No further payment of any commissions, fees and / or payments
in any other mode should be made to such distributors till full
compliance/ completion of the steps enumerated herein.
17.1.2.2 Take immediate steps to obtain all investor/ unit holders
documents in terms of the AML/ CFT, including KYC documents/
PoA as applicable.
439 SEBI Circular No - SEBI/IMD/CIR No.12 /186868 /2009 dated December 11,2009
440 SEBI Circular No ISD/AML/CIR-1/2008 dated December 19, 2008
258 Master Circular for Mutual Funds
17.1.2.3 Take immediate steps to obtain all supporting documents in respect
of the past transactions.
17.1.2.4 On a one time basis, send statement of holdings and all transactions
since inception of that folio in duplicate to the investor and seek
confirmation from the unit holders on the duplicate copy.
17.1.2.5 Set up a separate customer services mechanism to handle/ address
queries and grievance of the above mentioned unitholders.
17.1.3 Pending completion of documentation, exercise great care and be
satisfied of investor bonafides before authorizing any transaction,
including redemption, on such accounts/ folios.
17.1.4 The Trustees were required forthwith to confirm to Board that the
steps had been taken to address the above and also send a status to
the Board as and when process was completed to their satisfaction.
17.1.5 All mutual funds/ AMCs are directed that441:
17.1.5.1 All new folios/ accounts shall be opened only after ensuring that
all investor related documents including account opening
documents, PAN, KYC, PoA (if applicable), specimen signature are
available with AMCs/RTAs and not just with the distributor.
17.1.5.2 For existing folios, AMCs shall be responsible for updation of the
investor related documents including account opening
documents, PAN, KYC, PoA (if applicable), specimen signature by
November 15, 2010.
441 SEBI Circular No Cir /IMD/DF/9 / 2010 dated August 12, 2010
259 Master Circular for Mutual Funds
17.1.5.3 The trustees shall submit a confirmation after they receive
certification from an Independent auditor on completion of the
said process latest by November 22, 2010.
17.2 Facilitating transactions in Mutual Fund schemes
through the Stock Exchange infrastructure442
17.2.1 Stock Exchange terminals can be used for facilitating transactions in
mutual fund schemes. The Stock Exchange mechanism would also
extend the present convenience available to secondary market
investors to mutual fund investors.
17.2.2 Units of mutual fund schemes may be permitted to be transacted
through registered stock brokers of recognized stock exchanges and
such stock brokers will be eligible to be considered as official points
of acceptance443.
17.2.3 The respective stock exchange would provide detailed operating
guidelines to facilitate the same.
17.2.4 In this regard, Mutual Funds/AMC are advised that:
17.2.4.1 Empanelment and monitoring of Code of Conduct for brokers
acting as mutual fund intermediaries-
a. The stock brokers intending to extend the transaction in Mutual
Funds through stock exchange mechanism shall be required to
comply with the requirements of passing the AMFI certification
examination444.All such stock brokers would then be considered
as empanelled distributors with mutual fund/AMC.
442 SEBI Circular No - SEBI /IMD / CIR No.11/183204/ 2009 dated November 13,2009
443 SEBI Circular No. SEBI/IMD/CIR No.11/78450/06 dated October 11, 2006
444 Please refer Chapter 16 on Certification and Registration of Mutual Funds intermediaries
260 Master Circular for Mutual Funds
b. These stock brokers shall also comply with Code of Conduct445
for intermediaries of Mutual Funds, and applicable SEBI
guidelines446, applicable to intermediaries engaged in selling and
marketing of mutual fund units.
c. It is clarified that, stock exchanges shall monitor the compliance
of the code of conduct specified regarding empanelment of
intermediaries by mutual funds447.
17.2.4.2 Time stamping
a. Time stamping as evidenced by confirmation slip given by stock
exchange mechanism to be considered sufficient compliance
with clause for cut–off timing for liquid scheme and plans, cut-
off timing for other schemes and plans and time stamping
provisions mandated by Board448.
17.2.4.3 Statement of Account
a. Where investor desires to hold units in dematerialised form,
demat statement given by depository participant would be deemed
to be adequate compliance with requirements for account
statement prescribed by SEBI 449.
17.2.4.4 Investor grievance mechanism
a. Stock exchanges shall provide for investor grievance handling
mechanism to the extent they relate to disputes between brokers
and their client.
445 For Code of Conduct, please refer to Annexure I
446 Please refer Chapter 16 on Certification and Registration of Mutual Funds intermediaries
447Please refer Chapter 16 on Certification and Registration of Mutual Funds intermediaries
, 4 , 48 Please refer to Chapter 8 – Net Asset Value for details on cut off timing provisions
449 For details on dispatch of statement of accounts. refer to Chapter 15- Investor Rights and
services
261 Master Circular for Mutual Funds
17.2.4.5 Dematerialization of existing units held by investors
a. In case investors desire to convert their existing physical units
(represented by statement of account) into dematerialized form,
mutual funds / AMCs shall take such steps in coordination with
Registrar and Transfer Agents, Depositories and Depository
participants (DPs) to facilitate the same.
17.2.4.6 Option to hold units in demat form450
a. Mutual Funds/AMCs are advised to invariably provide an option
to the investors to mention demat account details in the
subscription form, in case they desire to hold units in demat
form while subscribing to any scheme (open ended/close
ended/Interval).
b. Mutual Funds/AMCs shall ensure that above mentioned option
is provided to the investors in all their schemes (existing and
new).
c. Mutual Funds/AMCs are advised to obtain ISIN for each option
of the scheme and quote the respective ISIN along with the
name of the scheme, in all Statement of Account/Common
Account Statement (CAS) issued to the investors.
17.2.4.7 Know your client (KYC)
a. Where investor desires to hold units in dematerialised form, the
KYC performed by DP in terms of SEBI requirements451 would be
450 SEBI circular no.CIR/IMD/DF/9/2011, dated May 19, 2011
451 SEBI Circular No - MRD/DoP/Dep/Cir-29/2004 dated August 24, 2004 and
SEBI/IMD/CIR No.11/183204/2009 dated November 13, 2009
262 Master Circular for Mutual Funds
considered compliance with applicable requirements specified in
this regard452 by Mutual Funds/AMCs.
b. The Mutual Funds/AMC shall take necessary steps to do KYC
requirements of all investors as per the prescribed guidelines453.
17.2.4.8 Stock exchanges and mutual funds/AMCs, based on the
experience gained may improve the mechanism in the interest of
investors.
17.2.4.9 In addition to the existing facilities of purchasing and redeeming
directly with the Mutual Funds and Stock Brokers, the following
be noted454:
a. Units of mutual funds schemes may be permitted to be
transacted through clearing members of the registered Stock
Exchanges.
b. Permit Depository participants of registered Depositories to
process only redemption request of units held in demat form.
17.2.4.10 The following be noted with respect to investors having demat
account and purchasing and redeeming mutual funds units
through stock brokers and clearing members:
a. Investors shall receive redemption amount (if units are
redeemed) and units (if units are purchased) through
broker/clearing member’s pool account. Mutual Funds(MF)/
Asset management Companies(AMC) would pay proceeds to
the broker/clearing member (in case of redemption) and
452 SEBI Circular No - ISD/AML/CIR-1/2008 dated December 19, 2008
453 SEBI Circular No. MIRSD/SE/Cir-21/2011, dated October 5, 2011, SEBI Circular
No.MIRSD/Cir-23/2011 dated December 2, 2011 and SEBI Circular No.MIRSD/Cir- 26 /2011
dated December 23, 2011
454 SEBI Circular No CIR/IMD/DF/17/2010 dated November 9, 2010
263 Master Circular for Mutual Funds
broker/clearing member in turn to the respective investor and
similarly units shall be credited by MF/AMC into
broker/clearing member’s pool account (in case of purchase)
and broker/clearing member in turn to the respective
investor.
b. Payment of redemption proceeds to the broker/clearing
members by MF/AMC shall discharge MF/AMC of its
obligation of payment to individual investor. Similarly, in case
of purchase of units, crediting units into broker/clearing
member pool account shall discharge MF/AMC of its
obligation to allot units to individual investor.
17.2.4.11 The following may be noted in this regard:
a. Clearing members and Depository participants will be eligible
to be considered as official points of acceptance455 and
conditions stipulated456 Viz. AMFI /NISM certification, code of
conduct prescribed by SEBI for Intermediaries of Mutual Fund,
shall be applicable for such Clearing members and Depository
participants as well.
b. Stock exchanges and Depositories shall provide investor
grievance handling mechanism to the extent they relate to
disputes between their respective regulated entity and their
client and shall also monitor the compliance of code of conduct
specified457 regarding empanelment and code of conduct for
intermediaries of Mutual Funds.
455 SEBI Circular No. SEBI/IMD/CIR No.11/78450/06 dated October 11, 2006
456 SEBI Circular dated November 13, 2009 for stock brokers
457SEBI Circulars MFD/CIR/20/23230/02 dated November 28, 2002 and
SEBI/IMD/08/174648/2009 dated August 27, 2009
264 Master Circular for Mutual Funds
17.2.4.12 The respective stock exchanges and Depositories would
provide detailed operating guidelines to facilitate the above and
ensure that timelines prescribed458 shall be adhered to with
regard to allotment of units and receipt of redemption proceeds
at the investor’s level.
17.2.4.13 Transferability of Mutual Fund units459
a. Regulations460 states that “a unit unless otherwise restricted
or prohibited under the scheme, shall be freely
transferable by act of parties or by operation of law.” The
spirit and intention of this regulation is not to prohibit
transferability of units as a general rule or practice.
b. All AMCs shall clarify by way of an addendum that units of
all mutual fund schemes held in demat form shall be freely
transferable from the date of the issue of said addendum
which shall be not later than October 1, 2010. However,
restrictions on transfer of units of ELSS schemes during
the lock-in period shall continue to be applicable as per
the ELSS Guidelines.
17.2.5 Stock exchanges and mutual funds/AMCs, based on the experience
gained may further improve the mechanism in the interest of
investors. Necessary clarifications, if any, would be issued at
appropriate time by SEBI in this regard.
17.2.6 461SEBI Registered Investment Advisors (RIAs) has been allowed
to use infrastructure of the recognised stock exchanges to
purchase and redeem mutual fund units directly from Mutual
458 SEBI (Mutual Funds) Regulations, 1996
459 SEBI Circular No - CIR/IMD/DF/10/2010 dated August 18, 2010
460 Regulation 37(1) of SEBI (Mutual Fund) Regulations, 1996
461 SEBI Circular No. SEBI/HO/MRD/DSA/CIR/P/2016/113 dated October 19, 2016
265 Master Circular for Mutual Funds
Fund/Assets Management Companies on behalf of their clients,
including direct plans.
The other provisions of circular no. CIR/MRD/DSA/32/2013 dated
October 04, 2013 remain unchanged.
17.3 Cash Investments in mutual funds462
17.3.1 In order to help enhance the reach of mutual fund products
amongst small investors, who may not be tax payers and may
not have PAN/bank accounts, such as farmers, small
traders/businessmen/workers, cash transactions in mutual funds to
the extent of 50,000/-463 per investor, per mutual fund, per financial
year shall be allowed subject to (i) compliance with Prevention of
Money Laundering Act, 2002 and Rules framed there under; the
SEBI Circular(s) on Anti Money Laundering (AML) and other
applicable AML rules, regulations and guidelines and (ii) sufficient
systems and procedures in place.
17.3.2 Repayment in the form of redemptions, dividend, etc. with respect
to aforementioned investments shall be paid only through banking
channel.
462 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
463 SEBI Circular No. CIR/IMD/DF/10/2014 dated May 22, 2014
266 Master Circular for Mutual Funds
CHAPTER 18
MISCELLANEOUS
18.1 Online Registration Mechanism for Mutual Funds464
18.1.1 It has been decided to operationalize SEBI Intermediary Portal
(https://siportal.sebi.gov.in) for the entities to submit the mutual
funds registration applications online. For registration of mutual
funds the SEBI Intermediary Portal shall include online application
for registration, processing of application, grant of in-principle
approval, grant of final registration etc. Link for SEBI Intermediary
Portal is also available on SEBI website - www.sebi.gov.in.
18.1.2 SEBI Intermediary Portal for application of registration of Mutual
Funds shall be made operational from June 01, 2017. Thereafter, all
applications for registration of Mutual Fund shall be made through
SEBI Intermediary Portal only.
18.1.3 The applicants will be separately required to submit relevant
documents viz. declarations/ undertakings required as a part of
application form prescribed in relevant regulations, in physical form
only for records, without impacting the online processing of
applications for registration.
464 SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2017/52 dated June 01, 2017
267 Master Circular for Mutual Funds
18.1.4 In case of any queries and clarifications with regard to the SEBI
Intermediary Portal, intermediaries may contact on 022-26449364 or
may write at portalhelp@sebi.gov.in.
18.2 Clarification465 to Regulation 24466
18.2.1 The amended Regulation mandates that AMCs shall appoint
separate fund manager for each separate fund managed by it unless
the investment objectives and assets allocations are the same and
the portfolio is replicated across all the funds managed by the fund
manager.
18.2.2 The replication of minimum 70% of portfolio value shall be
considered as adequate for the purpose of said compliance,
provided that AMC has in place a written policy for trade allocation
and it ensures at all points of time that the fund manager shall not
take directionally opposite positions in the schemes managed by
him.
18.2.3 Wherein a fund manager is common across mutual fund schemes
and schemes/products under other permissible activities of AMC,
then the AMC shall:
18.2.4 Disclose on their websites, the returns provided by the said
manager for all the schemes (mutual fund, pension funds, offshore
funds etc. ) on a monthly basis.
18.2.5 In case of any performance advertisement is issued by the AMC for
any scheme, then the details of returns of all the schemes (mutual
465 SEBI Circular No.Cir/IMD/DF/7/2012 dated February 28, 2012
466 Of SEBI (Mutual Funds) Regulations, 1996
268 Master Circular for Mutual Funds
fund, pension funds, offshore funds etc.) managed by that fund
manager shall be provided.
18.2.6 In case the difference between the annual returns provided by the
schemes managed by the same fund manager is more than 10%
then the same shall be reported to the trustee and explanation for
the same shall be disclosed on the website of the AMC.
18.3 Management and advisory services by AMCs to Foreign
Portfolio Investors467
i. AMCs may provide management and advisory services in terms of
Regulation 24(b) of MF Regulations to FPIs falling under the following
categories of FPIs as specified in FPI Regulations:
a. Government and Government related investors such as central
banks, sovereign wealth funds, international or multilateral
organizations or agencies including entities controlled or at least
75% directly or indirectly owned by such Government and
Government related investor(s);
b. Appropriately regulated entities such as pension funds, insurance
or reinsurance entities, banks and mutual funds;
c. Appropriately regulated FPIs wherein (a) or (b) above hold more
than 50% of shares/ units.
ii. The proviso to clause (vi) of regulation 24(b) of MF Regulations shall be
applicable for the categories of FPIs as mentioned under paragraph (i)
above.
467 SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/155 dated December 16, 2019
269 Master Circular for Mutual Funds
18.4 Product Labeling in Mutual Funds468
18.4.1 All the mutual funds shall ‘Label’ their schemes on the parameters
as mentioned under:
a. Nature of scheme such as to create wealth or provide regular income
in an indicative time horizon (short/ medium/ long term).
b. A brief about the investment objective (in a single line sentence)
followed by kind of product in which investor is investing
(Equity/Debt).
c. Level of risk in mutual fund schemes shall be increased to five as
under469
i. Low - principal at low risk
ii. Moderately Low - principal at moderately low risk
iii. Moderate - principal at moderate risk
iv. Moderately High -- principal at moderately high risk
v. High - principal at high risk.
The depiction of risk using colour codes would be replaced by pictorial
meter named "Riskometer" and this meter would appropriately depict
the level of risk in any specific scheme. For enumeration, a scheme
having moderate risk would be depicted as under:
468 SEBI Circular No. CIR/IMD/DF/5/2013 dated March 18, 2013
469 SEBI Circular No. CIR/IMD/DF/4/2013 dated April 30, 2015
270 Master Circular for Mutual Funds
“Investors understand that their principal will be at moderate risk”
Mutual Funds may 'product label' their schemes on the basis of the
best practice guidelines issued by Association of Mutual Funds in
India (AMFI) in this regard.
d. A disclaimer that investors should consult their financial advisers if
they are not clear about the suitability of the product.
18.4.2 Product label shall be disclosed in:
a. Front page of initial offering application forms, Key Information
Memorandum (KIM) and Scheme Information Documents (SIDs).
b. Common application form – along with the information about the
scheme.
The product label with respect to (a) & (b) shall be placed in proximity
to the caption of the scheme and shall be prominently visible.
c. Scheme advertisements-placed in manner so as to be prominently
visible to investors.
271 Master Circular for Mutual Funds
18.5 Investment in units of Mutual Funds in the name of minor
through guardian and ease of process for transmission of
units470
18.5.1 Process for Investments made in the name of a Minor through a
Guardian
a. Payment for investment by means of Cheque, Demand Draft or any
other mode shall be accepted from the bank account of the minor
or from a joint account of the minor with the guardian only. For
existing folios, the AMCs shall insist upon a Change of Pay-out
Bank mandate before redemption is processed.
b. Upon the minor attaining the status of major, the minor in whose
name the investment was made, shall be required to provide all the
KYC details, updated bank account details including cancelled
original cheque leaf of the new account. No further transactions
shall be allowed till the status of the minor is changed to major.
c. AMCs shall build a system control at the account set up stage of
Systematic Investment Plan (SIP), Systematic Transfer Plan (STP)
and Systematic Withdrawal Plan (SWP) on the basis of which, the
standing instruction is suspended when the minor attains
majority, till the status is changed to major.
18.5.2 Process for transmission of Units
a. In order to improve the processing turnaround time for transmission
requests, AMCs shall implement image based processing wherever the
claimant is a nominee or a joint holder in the investor folio.
470 SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2019/166 dated December 24,2019
272 Master Circular for Mutual Funds
b. AMCs shall have a dedicated, Central Help Desk and a webpage
carrying relevant information and instructions in order to provide
assistance on the transmission process.
c. AMCs shall adopt a common Transmission Request Form (common
fields) and NOC form. All such forms and formats shall be made
available on the website of the AMCs, RTAs and AMFI.
d. AMCs shall implement a common set of document requirements for
transmission of units to claimant who are nominees or joint holders in
the investor account.
e. AMCs shall implement a uniform process for treatment of unclaimed
funds to be transferred to the claimant including the unclaimed
dividends.
f. AMCs shall not accept requests for redemption from a claimant
pending completion of the transmission of units in his / her favour.
g. The Stamp duty payable by the claimant with respect to the indemnity
bond and affidavit, shall be in accordance with the stamp duty
prescribed by law.
AMCs and AMFI shall promote the importance of nomination as a part
of its investor education and awareness programmes.
18.5.3 To ensure uniformity across the industry, AMFI is advised to prescribe
the forms and formats referred in point 18.5.2 (c), common set of
documents referred in point 18.5.2 (d) and uniform process for
treatment of unclaimed funds referred in point 18.5.2 (e), and shall
mandatorily be followed by all Mutual Funds/AMCs.
273 Master Circular for Mutual Funds