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Securities and Exchange Board of India
MASTER CIRCULAR
CIR / IMD / DF / 14 / 2013 September 11, 2013
All Mutual Funds, Asset Management Companies (AMCs)
and 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 as on March 31, 2013.
This Master Circular shall supersede the previous Master Circular
SEBI/IMD/MC No.3/10554/2012 dated May 11, 2012.
Yours faithfully,
Rajesh Gujjar
Deputy General Manager
rajeshg@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, 2013.
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 issued to Mutual
Funds. Efforts have been made to incorporate certain applicable provisions
of existing circulars (as on March 31, 2013) 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 .................................................................................. 19
CONVERSION AND CONSOLIDATION OF SCHEMES AND LAUNCH OF
ADDITIONAL PLAN ........................................................................ 19
CHAPTER 3 .................................................................................. 26
NEW PRODUCTS ........................................................................... 26
CHAPTER 4 .................................................................................. 33
RISK MANAGEMENT SYSTEM ....................................................... 33
CHAPTER 5 .................................................................................. 35
DISCLOSURES & REPORTING NORMS ........................................... 35
CHAPTER 6 .................................................................................. 48
GOVERNANCE NORMS .................................................................. 48
CHAPTER 7 .................................................................................. 69
SECONDARY MARKET ISSUES ...................................................... 69
CHAPTER 8 .................................................................................. 73
NET ASSET VALUE........................................................................ 73
CHAPTER 9 .................................................................................. 85
VALUATION .................................................................................. 85
CHAPTER 10 ...............................................................................106
LOADS, FEES AND EXPENSES .....................................................106
CHAPTER 11 ...............................................................................116
DIVIDEND DISTRIBUTION PROCEDURE ......................................116
CHAPTER 12 ...............................................................................119
INVESTMENT BY SCHEMES .........................................................119
CHAPTER 13 ...............................................................................142
ADVERTISEMENTS ......................................................................142
3 Master Circular for Mutual Funds
CHAPTER 14 ...............................................................................147
INVESTOR RIGHTS & OBLIGATIONS ............................................147
CHAPTER 15 ...............................................................................155
CERTIFICATION AND REGISTRATION OF INTERMEDIARIES .......156
CHAPTER 16 ...............................................................................164
TRANSACTION IN MUTUAL FUNDS UNITS ....................................164
CHAPTER 17 ........................................................................... 16472
MISCELLANEOUS .........................................................................172
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
Fixed Maturity Plans FMP(s)
Global Depository Receipt GDR
Gold Exchange Traded Fund GETF
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
Multilateral Memorandum of Understanding MMOU
National Stock Exchange NSE
Net Asset Value NAV
New Fund Offer NFO
Non Performing Assets NPA(s)
Permanent Account Number PAN
5 Master Circular for Mutual Funds
Prevention of Money Laundering Act PMLA
Qualified Foreign Investor QFI
Regulation Reg.
Rajiv Gandhi Equity Savings Scheme RGESS
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
Uniform Client Code UCC
Unit Confirmation Receipt UCR
6 Master Circular for Mutual Funds
CHAPTER 1
OFFER DOCUMENT FOR SCHEMES
1.1 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:
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/2009-10/11/167759
on SEBI (Payment of Fees) (Amendment) Regulations, 2009 dated 29 June, 2009, The revised
filing fee was applicable to those scheme(s) whose scheme information document(s) had been
filed with SEBI on or after July 1, 2009.- SEBI Circular No - SEBI / IMD / CIR No. 5 /
169030 / 2009 dated July 8,2009
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
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 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 alongwith printed copy of the same9, upload the
SAI on its website and on AMFI website.
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
8 Master Circular for Mutual Funds
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 two working days prior to the
launch of 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 10. Failure to
submit the printed SID to the Board before it is issued for
circulation shall invite penalties under the Mutual Funds
Regulations11.
b. In case of any difference, in nature of material alteration of
the suggestions made by the Board12 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 Board13.
10 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
11 SEBI Circular No. IIMARP/MF/CIR/07/844/97 dated May 5, 1997.
,1 2Regulation 29(2) of the SEBI (Mutual Funds) Regulations, 1996
13
The 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
1.2 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, 2013 the SID shall be updated by June
30, 2014 and for a scheme launched in December 2013,
the SID shall be updated by June 30, 2015) 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
Regulation14, 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
14 Regulation 18 (15A) of SEBI (Mutual Funds) Regulation, 1996
10 Master Circular for Mutual Funds
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 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 SID15.
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
15 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
11 Master Circular for Mutual Funds
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 SAI16.
1.3 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 1.4 Undertaking from Trustees for new Scheme17
1.4.1 In the certificate submitted by Trustees with regard to
compliance of AMC with Regulations,18the 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.”
16 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
17SEBI Cir No IMD/CIR No.5/70559/06 dated June 30,2006
18Regulation 18 (4) of SEBI ( Mutual Funds) Regulations, 1996.
12 Master Circular for Mutual Funds
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.
1.5 1.5 Standard Observations
1.5.1 Standard Observations have been prescribed to ensure minimum
level of disclosures in the SID and SAI19.
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.
1.5.3 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 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 format20.
The contents of KIM shall follow the same sequence as
prescribed in the format.
1.6.3 Frequency of updation
19For Standard Observations, please refer to the section on Formats
20 For format of KIM please refer to the section on Formats
13 Master Circular for Mutual Funds
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 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 1.7 Product Labeling in Mutual Funds21
1.7.1 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, depicted by colour code boxes as
under:
• Blue – principal at low risk.
• Yellow – principal at medium risk.
• Brown – principal at high risk.
21 SEBI Circular No. CIR/IMD/DF/5/2013 dated March 18, 2013
14 Master Circular for Mutual Funds
The colour codes shall also be described in text beside the colour
code box.
d. A disclaimer that investors should consult their financial advisers
if they are not clear about the suitability of the product.
1.7.2 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.
1.8 1.8 Easy Availability of Offer Document
1.8.1 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.
1.9 1.9 Selection of Benchmarks22
1.9.1 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.
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.
15 Master Circular for Mutual Funds
1.9.2 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.
1.9.3 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.
1.9.4 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.
1.9.5 Examples of benchmarks are illustrated below25:
1.9.5.1 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.
1.9.5.2 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.
1.9.5.3 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.
23SEBI Circular No. MFD/CIR/01/071/02 dated April 15, 2002.
, 2 4SEBI 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
16 Master Circular for Mutual Funds
1.9.5.4 Money Market funds or liquid plans can be compared
against a suitable Money Market Instrument or a
combination of such instruments.
1.101.10 New Fund Offer (NFO) Period26
1.10.1 In case of open ended and close ended schemes (except ELSS
schemes), the NFO should be open for upto 15 days (from 30
days in case of open ended schemes and 45 days of close ended
scheme).
1.10.2 The NFO period in case of ELSS schemes shall continue to be
governed by guidelines issued by Government of India.
1.10.3 The maximum period of initial offering of Mutual Fund scheme
eligible under RGESS shall be for thirty days27.
1.10.4 Mutual Funds/AMCs shall make investment out of the NFO
proceeds only on or after the closure of the NFO period.
1.10.5 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,
RGESS) shall be available for ongoing repurchase/sale/trading
within five business days of allotment”. However, for Mutual
Fund scheme eligible under RGESS, the period within which
Mutual Fund/ AMC should allocate the units, refund money and
issue statements of accounts, shall be fifteen days from the
closure of the initial subscription28.
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. CIR/IMD/DF/02/2013 dated February 6, 2013
28 SEBI Circular No. CIR/IMD/DF/02/2013 dated February 6, 2013
17 Master Circular for Mutual Funds
1.111.11 Discontinuation of the nomenclature – ‘Liquid
Plus Scheme(s)’29
1.11.1 The nomenclature “Liquid Plus Scheme(s)” has been discontinued
from January 2009 since it gives a wrong impression of added
liquidity.
1.121.12 Fundamental Attributes30
1.12.1 The words "fundamental attributes"31 are elaborated below:
1.12.1.1 Type of a scheme
a. Open ended/Close ended/Interval scheme
b. Sectoral Fund/Equity Fund/Balance Fund/Income
Fund/Debt Fund/Index Fund/Any other type of Fund
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.
29
SEBI/IMD/CIR No.13/150975 / 09 dated January 19, 2009
30 SEBI Circular No- IIMARP/MF/CIR/01/294/98 dated February 4, 1998
31 Clause (d) of sub-regulation (15) of Regulation 18 of SEBI (Mutual Funds) Regulations,
1996
18 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)32
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 Regulations33, 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 Board34 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 format35
b. Details of the financial performance of the scheme(s) since
inception in the format prescribed in SID36 along with
comparisons with appropriate benchmark(s)37.
32 SEBI Circular No. MFD/CIR No.22/2311/03 dated January 30, 2003.
,3, 3 Regulation 33(3) of the SEBI (Mutual Funds), Regulations, 1996.
,3, 4 SEBI Circular No. SEBI/IMD/Cir No 5/126096/08 dated May 23, 2008
35 Refer to format of half yearly portfolio disclosure under section on formats.
,3 6 Please refer to format of SID under section on Formats.
19 Master Circular for Mutual Funds
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.
37 For examples of Benchmarks, refer to chapter on SID
20 Master Circular for Mutual Funds
<,
PART II – CONSOLIDATION OF SCHEMES
2.2 Consolidation of Schemes38
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 regard39.
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.
b. The letter addressed to the unit holders, giving them the
option to exit at prevailing NAV without charging exit load,
38 SEBI Circular No. SEBI/MFD/CIR No.5/12031/03 dated June 23, 2003.
, 3 9 Regulation 18(15A) of the Mutual Funds Regulations.
21 Master Circular for Mutual Funds
shall disclose all relevant information enabling them to take
well informed decisions. This information will include, inter
alia:
1. Latest portfolio of the concerned schemes40.
2. Details of the financial performance of the concerned schemes
since inception in the format prescribed in SID41 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 NPAs and percentage of total illiquid assets
to net assets of each individual scheme(s) as well the
consolidated scheme.
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 scheme42.
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
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
40 Refer format of half yearly portfolio disclosure under section on Formats
< 4 1 Please refer to SID Format under section on Formats
42 Please refer to SID chapter for further details
22 Master Circular for Mutual Funds
filed with the Board within 21 days from the date of closure of
the exit option43.
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 met44:
a. Fundamental attributes45 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 unitholders 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 prescribed46.
d. The letter to unitholders 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.
43
SEBI Circular No- SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
44 SEBI Circular No- Cir / IMD / DF / 15/ 2010 dated October 22, 2010
45 SEBI Circular No-IIMARP/MF/CIR/01/294/98 dated February 4, 1998
46 Regulation 29(3) of SEBI (Mutual Funds) Regulations, 1996
23 Master Circular for Mutual Funds
PART III – LAUNCH OF ADDITIONAL PLANS47
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).
2.4 Single Plan48
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.
47 SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15, 2009
48 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012
24 Master Circular for Mutual Funds
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 Plan49
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.
49 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
25 Master Circular for Mutual Funds
CHAPTER 3
NEW PRODUCTS
3.1 Fund of Funds Scheme50
3.1.1 The SID and the advertisements pertaining to Fund of Funds
Scheme51 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
account52.
3.1.3 Fund of funds mutual fund schemes shall adopt either of the
total expense structures laid out in Regulations53, which Asset
Management Companies shall clearly indicate in the SIDs.
3.1.4 Fund of Fund schemes54, shall, with the approval of trustees,
adopt either of the total expense structures laid out in
Regulation55 and change the total expense structure after giving
the unit holders an option to exit in accordance with
Regulation56.
50 SEBI Circular No. MFD/CIR. No.04/11488/2003 dated June 12, 2003.
51 Regulation 2(ma) of the Mutual Funds Regulations introduced vide Gazette Notification No.
S.O 632(E) dated May 29, 2003.
52 SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
53 Regulation 52(6)(a) of SEBI (Mutual Funds) Regulations, 1996
54 existing as on July 29, 2010, Cir/IMD/DF/8/2010 dated August 6, 2010
55 Regulation 52 (6)(a) of SEBI (Mutual Funds) Regulations, 1996
56 Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996
26 Master Circular for Mutual Funds
3.2 Gold Exchange Traded Fund Scheme57
3.2.1 A Gold Exchange Traded Fund (GETF) Scheme58 shall invest
primarily in:
3.2.1.1 Gold and
3.2.1.2 Gold related instruments59. However investments in gold
related instruments shall be done only after such instruments
are specified by the Board60
3.2.1.3 Gold Deposit Scheme (GDS)61 of banks have been designated
as one such gold related instrument. Investment in GDS of
banks by Gold ETFs of mutual funds will be subject to
following conditions:
a. The total Investment in GDS will not exceed 20% of total
asset under management of such schemes.
b. Before investing in GDS of banks, mutual funds shall put
in place a written policy with regard to investment in GDS
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 funds to obtain
prior approval of their trustees for each investment proposal
in GDS of any Bank. The policy shall be reviewed by mutual
funds, at least once a year.
57 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.
58 Regulation 2(mb) of the SEBI (Mutual Funds) Regulations, 1996 introduced vide Gazette
Notification No. S.O. 38(E) dated January 12, 2006.
59 Regulations 2(mc) of the Mutual Funds Regulations introduced vide Gazette Notification
N o. S.O. 38(E) dated January 12, 2006.
60 SEBI Ci rcular No. SEBI/IMD/CIR No. 4/58422/06 dated January 24, 2006.
61 SEBI Circular No.CIR/IMD/DF/04/2013 dated February 15, 2013
27 Master Circular for Mutual Funds
c. Gold certificates issued by Banks in respect of investments
made by Gold ETFs in GDS shall be held by the mutual funds
only in dematerialized form.
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
Regulations62.
3.2.3 Determination of Net Asset Value63
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 ` terms) = __________________________________________________________
Number of Units outstanding under Scheme on the
Valuation Date
3.2.4 Recurring Expenses64
3.2.4.1 The recurring expenses limits applicable to equity schemes65
shall be applicable to GETF Scheme(s).
3.2.5 Benchmarks for GETF Scheme66
3.2.5.1 GETF Scheme(s) shall be benchmarked against the price of
gold.
62 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.
63 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
64 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
65 Regulation 52(6) of the SEBI (Mutual Funds) Regulations, 1996.
66 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
28 Master Circular for Mutual Funds
3.2.6 Half yearly report by Trustees67
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 report68 by trustees to SEBI.
3.3 Capital Protection Oriented Scheme69
3.3.1 The SID, KIM and advertisements pertaining to Capital
Protection Oriented Scheme70 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 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 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
Reports71 to the Board. The AMC(s) shall also report on the
same in its bimonthly (CTR(s)72to the Board.
67 SEBI Circular No. Cir/IMD/DF/20/2010 dated December 06, 2010
68 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.
6 9 SEBI Circular No. SEBI/IMD/CIR No.9/74364/06 dated August 14, 2006.
70 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.
71 For format of Half Yearly Trustee Report please refer section on Formats
<7 2 For format of bimonthly CTR please refer section on Formats
29 Master Circular for Mutual Funds
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 Funds73:
3.4.1 A real estate mutual fund scheme74 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 foresaid categories taken from the said website is attached
for ready reference at Annexure 4.
3.5 Rajiv Gandhi Equity Savings Scheme75, 2012
3.5.1 As announced in the Union Budget 2012-13, the Finance
Act 2012 has introduced a new section 80CCG on
‘Deduction in respect of investment made under an equity
savings scheme’ to give tax benefits to new investors who
invest up to Rs. 50,000 and whose gross total annual income
is less than or equal to Rs. 10 lakhs. The objective of the
scheme is to encourage flow of savings in the financial
instruments and improve the depth of the domestic capital
market.
3.5.2 Vide notification 51/2012 dated November 23, 2012, the
scheme has been notified by the Department of Revenue,
Ministry of Finance (MoF). The notification is available on the
website of Income Tax Department under section
“Notifications”.
73 SEBI Circular No - SEBI/IMD/CIR No.4/124477/08 May 2,2008
74Regulation 49 A(a)(i) of SEBI (Mutual Fund) Regulations, 1996
75 SEBI Circular No. CIR/MRD/DP/32/2012 dated December 6, 2012
30 Master Circular for Mutual Funds
3.5.3 AMCs / Trustees shall ensure that RGESS eligible Exchange
Traded Funds (ETFs) and Mutual Funds (MFs) schemes are
in compliance with the aforementioned notification.
3.5.4 With regard to implementation of the MoF notification, the
following is clarified:
a. For RGESS eligible close-ended Mutual Funds schemes,
advice given by AMCs to the depository for extinguishment of
units of close-ended schemes considered as settled through
depository mechanism and therefore RGESS compliant.
b. AMCs shall disclose that the concerned RGESS eligible
Exchange Traded Funds and Mutual Fund schemes is in
compliance with the provisions of RGESS guidelines notified
by Ministry of Finance vide notification no. 51/2012 F. No.
142/35/2012-TPL dated November 23, 2012, in Scheme
Information Document (SID), in case of new fund offer, or
by way of addendum, in case of existing RGESS eligible
Exchange Traded Funds and Mutual Fund schemes.
c. Para 6(c) of the notification states that the eligible
securities brought into the demat account will automatically be
subject to lock-in during the first year, unless the new investor
specifies otherwise and for such specifications, the new
retail investors shall submit a declaration indicating that
such securities are not to be included within the above
limit of investment. It is clarified that such declaration shall
be submitted by an investor to its Depository Participant
within a period of one month from the date of transaction.
d. For transactions undertaken by investors through their
RGESS designated demat account, Depositories may seek
31 Master Circular for Mutual Funds
necessary transactional details from stock exchanges viz.
Actual Trade value, Trading date, Settlement number, etc,
for the purpose of enforcing lock-in and for generating
reports mandated vide MoF notification on RGESS. On receipt
of such request from depositories, stock exchanges shall
provide the details to depositories on an immediate basis. It
shall also be ensured that a uniform file structure is used by
stock exchanges and depositories for such intimation of
transaction details.
e. With regard to the securities held in the RGESS designated
account, treatment of the corporate actions shall be given in the
prescribed format76.
3.5.5 Mutual Funds / AMCs shall communicate list of RGESS eligible
MF schemes / ETFs to the stock exchanges.
3.5.6 Mutual Funds / AMCs are directed to create wide publicity of
the scheme among the investors, including displaying details on
their website.
76 Please refer to section on Formats for requisite formats
32 Master Circular for Mutual Funds
CHAPTER 4
RISK MANAGEMENT SYSTEM77
4.1 An Operating Manual78 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 Risk Management
function that shall be assigned to Compliance Officer or Internal
Risk Management Committee or to an external agency:
a. Disaster Recovery and Business Contingency plans, and
b. Insurance cover against certain risks.
77 SEBI Circular No. MFD/CIR/15/19133/2002 dated September 30, 2002.
78 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.
33 Master Circular for Mutual Funds
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 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.
34 Master Circular for Mutual Funds
CHAPTER 5
DISCLOSURES & REPORTING NORMS
PART I – DISCLOSURES
5.1 Monthly Portfolio Disclosures79
5.1.1 Mutual funds/AMCs shall disclose portfolio (along with ISIN) as on
the last day of the month for all their schemes on their respective
website on or before the tenth day of the succeeding month in a
user-friendly and downloadable format (preferably in a
spreadsheet).
5.1.2 The format for monthly portfolio disclosure80 shall be same as that
of half yearly portfolio disclosures.
5.1.3 Mutual funds/AMCs may disclose additional information (such as
ratios, etc.) subject to compliance with the Advertisement Code.
5.2 Half Yearly disclosure of Portfolios81
5.2.1 Mutual Funds shall send a complete statement of Scheme Portfolio
to the unit holders before the expiry of one month from the closure
of each Half Year (i.e. March 31 and September 30), if such
statement is not published by way of advertisement82.
5.2.2 The Scheme Portfolio(s)83 shall also be disclosed on the Mutual
Funds’ web sites before the expiry of one month from the closure of
each Half Year (i.e. March 31 and September 30) and a copy of the
79 SEBI Cirular No. CIR/IMD/DF/21/2012 dated September 13, 2012
80 Please refer to section on Formats for requisite Formats
81
SEBI Circular No. MFD/CIR No.010/024/00 dated January 17, 2000, 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
82Regulation 59A of the Mutual Funds Regulations & SEBI Circular No. MFD/CIR
No.010/024/00 dated January 17, 2000.
83 For format of half yearly portfolio, please refer to the section on formats
35 Master Circular for Mutual Funds
same shall be filed with the Board along with the Half Yearly
Results84.
5.2.3 Disclosure of derivatives in Half Yearly Portfolios85
5.2.3.1 A format86 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.
5.2.3.2 Further, while listing net assets, the margin amounts paid
should be reported separately under cash or bank balances.
5.3 Unaudited Half Yearly Financials 87
5.3.1 The publication of the unaudited half-yearly results shall be made
in line with provisions of the Regulations88, in the format
prescribed in Twelfth Schedule.
5.3.2 The half yearly disclosures89 of the unaudited financial results
on respective website should be made in a user-friendly and
downloadable format (preferably in a spreadsheet).
5.4 Mailing of Schemewise Annual Report or Abridged
Summary90
5.4.1 Mailing of Schemewise Annual Reports91 or abridged summary
thereof shall be subject to the following:
5.4.1.1 In case of unitholders whose email addresses are available
with the Mutual Fund, the AMCs shall communicate to them
84
SEBI Circular No. MFD/CIR No.10/310/01 dated September 25, 2001.
85 SEBI Circular Cir/ IMD/ DF/ 11/ 2010 dated August 18, 2010.
86
For formats on disclosure of derivatives, please refer to the section on Formats
87 SEBI Circular MFD/CIR/1/200/2001 dated April 20, 2001 & SEBI Circular No. IMD/CIR
No.8/132968/2008 dated July 24, 2008
88 Regulation 59 of SEBI (Mutual Funds) Regulations, 1996
89 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012
90 SEBI Circular No. IMD/CIR No.8/132968/2008 dated July 24, 2008 and Circular
No.Cir/IMD/DF/16/2011 dated September 8, 2011
91 For format of abridged schemewise report, please refer the section on formats
36 Master Circular for Mutual Funds
stating that henceforth, the scheme annual reports or
abridged summary would only be sent by email.
5.4.1.2 In case of unitholders whose email addresses are not available
with the Mutual Fund, the AMCs shall communicate to the
unitholders to obtain their email addresses for registration of
the same in their database.
5.4.1.3 The communication in both the above cases shall clearly
mention that the scheme annual accounts or abridged
summary would henceforth be sent to these email addresses
and not as physical copies and the communication shall also
have an option for the investors stating that those who still
wish to receive the reports as physical copies may indicate as
such.
5.4.1.4 In case of any request from these unitholders as detailed
above for physical copies notwithstanding their registration of
email addresses, AMCs shall provide the same without demur.
5.4.1.5 For the rest of the investors, i.e. whose email addresses are
not available with the mutual fund, the AMCs shall continue
to send physical copies of scheme annual reports or abridged
summary.
5.4.1.6 The AMCs shall display the link of the scheme annual reports
or abridged summary prominently on their websites and
make the physical copies available to the investors at their
registered offices at all times. 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
place92. However, as per the Regulations93, a copy of Scheme
92 SEBI Cir No – MFD/CIR/15/041/2002 dated March 14,2002
37 Master Circular for Mutual Funds
wise Annual Report shall be also made available to
unitholder(s) on payment of nominal fees.
5.5 Disclosure of large unit holdings94
5.5.1 The number of investors holding over 25 % of the NAV95 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 Results96.
5.6 Asset Under Management (AUM) disclosure97
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.
5.7 Commission disclosure98
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)
93 Regulation 56(1) & 56(3) of SEBI (Mutual Funds) Regulations, 1996
94
SEBI Circular No. MFD/CIR No.3/211/2001 dated April 30, 2001.
,9 5 For further details, refer Section II – Scheme Governance in the Chapter on Governance
Norms
,9 6 Please refer the section on Formats for requisite formats
97 SEBI Circular No.Cir/IMD/DF/13/2011 dated August 22, 2011
98 SEBI Circular No.Cir/IMD/DF/13/2011 dated August 22, 2011
38 Master Circular for Mutual Funds
5.7.1.2 AUM raised over `100 crore across industry in the non
institutional category but including high networth individuals
(HNIs).
5.7.1.3 Commission received of over `1 crore p.a. across industry
5.7.1.4 Commission received of over `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 disclosures99
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 5.6.1 and 5.7.2 to AMFI and the consolidated data in this regard
shall be disclosed on AMFI website.
5.8 Annual report of the AMC 100
5.8.1 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 unitholders, if they so desire, may
99 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
39 Master Circular for Mutual Funds
request for a copy of the annual report of the asset management
company.
5.9 Submission of bio data of key personnel101
5.9.1 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 AMC102.
5.10Disclosure of investor complaints with respect to
Mutual Funds103
5.10.1 Mutual Funds shall disclose104 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 be vetted and signed off by the Trustees of the concerned
Mutual Fund.
5.10.2 The Mutual Funds are advised to:
5.10.2.1 Upload the report for the financial year within 2 months of the
close of the financial year.
5.10.2.2 Include the report in their annual reports, as part of the Report
of the Trustees.
100 MFD/CIR/9/120/2000 dated November 24, 2000
101 IIMARP/CIR /08/845/97 dated May 7,1997,IIMARP/MF/CIR/05/788/97 date April 28,1997
102 For format of bio-data of key personnel, please refer the section on Formats
103 SEBI Circular No. Cir /IMD/DF/2/2010 dated May 13, 2010
104 For disclosure format please refer to section on Formats.
40 Master Circular for Mutual Funds
5.11Brokerage and commission paid to associates105
5.11.1 Regulations106 govern payment of brokerage or commission if any,
to the sponsor or any of its associates, employees or their relatives.
5.11.2 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 prescribed107.
105 SEBI Circular No. SEBI/IMD/CIR No 18/198647/2010 dated March 15, 2010
106 Regulation 25 (8) of SEBI (Mutual Funds) Regulations, 1996
107 Please refer to the section on Formats
41 Master Circular for Mutual Funds
PART II – REPORTS
5.12Monthly Cumulative Report (MCR)108
5.12.1 Date and Mode of Submission:
5.12.1.1 MCR109 shall be submitted to the Board by 3rd of each month by
way of an email. Hard copy should also be sent by hand
delivery/courier.
5.12.2 Other Guidelines:
5.12.2.1 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 reported in the MCR for the month of
August that will reach SEBI by 3rd of September.
5.12.2.2 Further, additional report on overseas investment110 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.
5.12.2.3 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.
108 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.
109 For format of MCR please refer to section on Formats.
110 SEBI Circular No. SEBI/IMD/CIR NO 15/87045/07 dated February 22,2007
42 Master Circular for Mutual Funds
5.13 New Scheme Report (NSR)111
5.13.1 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 format112.
5.14 Bi–monthly Compliance Test Reports113
5.14.1 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
report. This exception report shall also be placed before the
Trustee(s).
5.14.2 The CTRs114 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.
111 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,
112 For details on format of NSR please refer the section on Formats.
113 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,
114For CTR format, please refer the section on Formats.
43 Master Circular for Mutual Funds
5.15Annual Statistical Report (ASR)115
5.15.1 AMC should submit the annual statistical report to SEBI in the
prescribed format by 30th of April each year116.
5.16Daily Transaction Report117
5.16.1 All Mutual Funds shall submit details of transactions in secondary
market on daily basis in the prescribed format118. 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.
5.16.2 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).
5.17Responsibilities of AMC(s) and Trustees119
5.17.1 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.
115 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,
116 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
117 SEBI Circular No.MFD/CIR/07/384/99 dated December 17, 1999 and
MFD/CIR/08/23026/99 dated December 23, 1999
118 For format of daily transaction report, please refer the section on formats
119 SEBI Circular No. MFD/CIR/09/014/2000 dated January 5, 2000, SEBI Circular No.
SEBI/MFD/CIR/10/039/2001 dated February 9, 2001.
44 Master Circular for Mutual Funds
5.17.2 The Trustee(s) shall also review all information and documents
received from the AMC(s) as required under the compliance
process.
5.17.3 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 Trustees120.
5.17.4 The half-yearly report on the activities of the mutual fund to be
submitted by the trustees to the Board under the Mutual Funds
Regulations121 shall cover all issues mentioned in the prescribed
format as well as any other issue relevant to the operation of the
Mutual Fund122. 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 the Trustees have satisfied themselves about the adequacy of
compliance systems in the Mutual Fund.
5.17.5 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.
120 Please refer the formats section for format for reporting by AMC to Trustees
121 Regulation 18(23)(a) of SEBI (MF) Regulations, 1996
122 For format of Trustee Report, please refer to the formats section.
<<
45 Master Circular for Mutual Funds
5.18Filing of Annual Information Return by Mutual
Funds123
5.18.1 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).
5.18.2 Some common errors in these returns have been pointed out by
the Directorate of Income Tax (Systems) as:
5.18.2.1 Not mentioning PAN or mentioning invalid PAN.
5.18.2.2 Entering incomprehensible/ incomplete names of transacting
parties, e.g. names of 2 or 3 letters.
5.18.2.3 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.
5.18.2.4 Incorrect district and state codes.
5.18.2.5 Incorrect transaction codes.
123
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 and ensure that all the columns are correctly filled-
in and submit a ‘Supplementary Information Report’, if need be, to the Income Tax Department.
46 Master Circular for Mutual Funds
5.18.2.6 Wrongly showing transaction as of ‘Govt.’ party.
5.18.3 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.
47 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 AMC124
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 Transactions125
6.2.1 Reporting of transactions
6.2.1.1 Transaction(s) by directors of the AMC
a. Directors of the AMC shall file with the trustees on a quarterly
basis details of transactions in securities exceeding `1 lac126.
124 SEBI Circular No. MFD/CIR No.010/024/2000 dated January 17, 2000.
<1 25 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.
48 Master Circular for Mutual Funds
6.2.1.2 Trustee(s) Directors
a. Trustees are required to report to Mutual Funds only those
transactions in securities that exceed `1 lac in value127.
6.2.2 Review of transactions
6.2.2.1 Trustees shall review all transactions of the Mutual Fund with
the associates on a regular basis and ensure that Regulations are
complied with128.
6.3 Role of Independent Director on the Board of the AMC
and Independent Trustees129
6.3.1 An Independent Trustee shall not be associated in any manner
with the Sponsor(s)130. 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 trustees131.
6.3.2 An ‘associate’ shall be defined as:
6.3.2.1 Relatives132 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,
126 SEBI Circular No. SEBI/MFD/CIR/10/039/2001 dated February 9, 2001.
1 27 Regulation 18(11) of SEBI (MF) Regulations, 1996 and SEBI Circular No.
MFD/CIR/09/014/2000 dated January 5, 2000.
128 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, 29 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.
130 Regulation 16(5) of the SEBI (Mutual Funds) Regulations, 1996.
131 Regulation 21(d) of the SEBI (Mutual Funds) Regulations, 1996.
132 As defined under Section 6 of the Companies Act 1956.
49 Master Circular for Mutual Funds
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”133 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 respectively134. 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
limit, they shall report to the Board explaining the reasons for the
same. Mutual Funds may maintain a panel of eligible persons who
can be appointed as Independent Directors135 as and when
required. They may also consider appointing more than the
required minimum number of Independent Directors to enhance
133 Regulation 2(c) of the SEBI (Mutual Funds) Regulations, 1996.
< 1 34 Regulation 21(d) and Regulation 16(5) of the SEBI (Mutual Funds) Regulations, 1996.
135 For biodata of directors (AMC and Trustee), please refer to section on Formats
50 Master Circular for Mutual Funds
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-
data136 shall be filed with the Board for information or approval
respectively.
6.4 Investment and/or for / Trading in Securities by the
employees of the AMC(s) and Trustee(s)137
6.4.1 The Board of the AMC and Trustees shall ensure compliance with
these Guidelines on a continuous basis and shall report any
violations and remedial action taken by them in the periodical
reports submitted to the Board138.
6.4.2 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.
6.4.3 Guidelines for Investment and/or Trading in Securities by
Employees of AMC(s) and Trustees:
6.4.3.1 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.
136 For biodata of directors (AMC and Trustee), please refer to section on Formats
137 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.
138 Regulation 25(9) & 23(b) of SEBI (MF) Regulations, 1996
51 Master Circular for Mutual Funds
b. These Guidelines shall cover transactions for sale or
purchase of securities made in the employees’ name, either
individually or jointly, and in the name of the employees’
spouse and/or dependent children and transactions as a
member of HUF.
6.4.3.2 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.
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.
52 Master Circular for Mutual Funds
6.4.4 General
6.4.4.1 Investments Covered:
a. These Guidelines cover transactions for purchase or sale of
any securities such as shares, debentures, bonds,
warrants, derivatives and units of Mutual Fund schemes.
b. These Guidelines do not apply to the following investments
by the employees:
1. Investments in Fixed Deposits with banks and/or
Financial Institutions and/or companies, Life
Insurance Policies, Provident Funds (including Public
Provident Fund) 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.,139 where there is no likely conflict between the
Mutual Fund’s interest and the employees’ interest.
3. Investments in government securities, Money Market
instruments and Money Market Mutual Fund
schemes.
139 Real Estate has been deleted pursuant to the amendment to the Mutual Funds Regulations
launching the Real Estate Mutual Funds Schemes wherein guidelines have been prescribed
for employee investment in Real Estate.
53 Master Circular for Mutual Funds
6.4.4.2 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.
6.4.4.3 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."
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 seven calendar days
from the date of approval140.
140 SEBI Circular No. SEBI/IMD/CIR No.7/13391/03 dated July 11, 2003.
54 Master Circular for Mutual Funds
e. If a transaction approved by Compliance Officer has not
been effected within seven141 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
transaction142. 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.
6.4.5 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.
6.4.5.1 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.
141 SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
142 SEBI Circular No. SEBI/IMD/CIR No.7/13391/03 dated July 11, 2003.
55 Master Circular for Mutual Funds
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 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.
6.4.5.2 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
56 Master Circular for Mutual Funds
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;
2. If such 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.
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 should track whether the Mutual Fund has transacted in
57 Master Circular for Mutual Funds
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.
58 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.
6.4.6 Investments in units of Mutual Fund Schemes
6.4.6.1 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 shall be reported by them to the Compliance
Officer within 7 calendar days from the date of transaction.
6.4.6.2 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.
6.4.6.3 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 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;
c. The concerned Mutual Fund Scheme is contemplating to
issue dividend to the unit holders and this has not been
communicated to the investors;
59 Master Circular for Mutual Funds
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.
6.4.7 Periodic Disclosures
6.4.7.1 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.
6.4.7.2 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
60 Master Circular for Mutual Funds
issues within 7 calendar days in tandem with SEBI
(Prohibition of Insider Trading) Regulations, 1992.
b. A statement of holding in securities as on March 31
within 30 calendar days (in tandem with SEBI
(Prohibition of Insider Trading) Regulations,1992, 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 6.4.5.2. (f) and 6.4.5.2. (g)
regarding Front Running and Self Dealing.
6.5 Applicability of Insider Trading Regulations143
6.5.1 Securities and Exchange Board of India (Prohibition of Insider
Trading) (Amendment) Regulations, 2002 shall be followed strictly
by the trustee companies, asset management companies and their
employees and directors.
6.5.2 Review by the Board of Directors of AMC and the Trustee(s)
6.5.2.1 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.
143 SEBI Cir MFD/CIR/05/432/2002 June 20, 2002
61 Master Circular for Mutual Funds
6.6 Responsibilities of AMC & Trustees144
6.6.1 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.
144 MFD/CIR/09/014/2000 dated January 5, 2000
62 Master Circular for Mutual Funds
PART II -SCHEME GOVERNANCE
6.7 Minimum Number of investors145
6.7.1 Applicability for an open-ended scheme
6.7.1.1 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).
6.7.1.2 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.
6.7.1.3 In case the Scheme / Plan(s) does not have a minimum of 20
investors in the stipulated period, the provisions of
Regulation146 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.
6.7.1.4 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 automatic redemption by the Mutual Fund on
145 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.
<<,
63 Master Circular for Mutual Funds
the applicable Net Asset Value on the 15th day of the notice
period.
6.7.1.5 The two conditions mentioned above shall also be complied
within each subsequent calendar quarter thereafter, on an
average basis, as specified by SEBI.
6.7.1.6 The Fund shall adhere to the requirements prescribed by SEBI
from time to time in this regard.
6.7.2 Applicability for a Close ended scheme/Interval scheme
6.7.2.1 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).
6.7.2.2 These conditions will be complied with immediately after the
close of the NFO itself i.e. at the time of allotment.
6.7.2.3 In case of non-fulfillment with the condition of minimum 20
investors, the Scheme(s)/Plan(s) shall be wound up in
accordance with Regulation147 automatically without any
reference from SEBI.
6.7.2.4 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 exposure over 25% limits will lead to
146 Regulation 39(2)(c) of the SEBI (MF) Regulations, 1996
147 Reg. 39 (2) (c) of SEBI (MF) Regulations, 1996
64 Master Circular for Mutual Funds
refund within 6 weeks of the date of closure of the New Fund
Offer.
6.7.2.5 For interval scheme the aforesaid provision will be applicable
at the end of NFO and each specified transaction period.
6.7.2.6 Requisite disclosure in this regard shall be made in the SID.
6.7.3 Determination of breach:
6.7.3.1 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.
6.7.3.2 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.
6.7.4 Applicability
6.7.4.1 These Guidelines are applicable at the Portfolio level.
6.7.4.2 These Guidelines are not applicable to Exchange Traded
Funds (ETFs).
6.7.5 Redemptions
6.7.5.1 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).
6.7.6 Reporting to the Board
65 Master Circular for Mutual Funds
6.7.6.1 Compliance with these Guidelines shall be reported in
Compliance Test Reports (CTRs) and Half Yearly Trustee
Reports.
6.8 Scheme Performance Review
6.8.1 AMCs and Trustees shall review the performance of their schemes
on periodic basis148. 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).
148 SEBI Circular No. dated July 27, 2000 & SEBI Cir 16/400/02 dated March 26, 2002.
66 Master Circular for Mutual Funds
PART III -SYSTEMS AUDIT OF MUTUAL FUNDS149
6.9 Mutual funds shall have a systems audit conducted by an
independent CISA/CISM qualified or equivalent auditor.
6.10 The systems audit should be comprehensive 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.
6.11 Mutual Funds/ AMCs should get the above systems audit conducted
once in two years.
6.12 The Systems Audit Report and compliance status should be placed
before the Trustees of the mutual fund.
6.13 The systems audit report/findings along with trustee comments
should be communicated to SEBI.
6.14 For the financial years April 2013 – March 2014, the systems audit
should be completed by September 30, 2014.
149 SEBI Circular No SEBI/IMD/CIR No. 9/176988/2009 dated September 16, 2009
67 Master Circular for Mutual Funds
PART IV – ROLE OF MUTUAL FUNDS IN CORPORATE
GOVERNANCE OF PUBLIC LISTED COMPANIES150
6.15 MFs should play an active role in ensuring better corporate
governance of listed companies.
6.16 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.
6.17 AMCs are required to disclose on the website of the respective AMC
as well as in the annual report distributed to the unit holders, the
actual exercise of their proxy votes in the AGMs/EGMs of the
investee companies in respect of the following matters:-
6.17.1 Corporate governance matters, including changes in the state of
incorporation, merger and other corporate restructuring, and anti
takeover provisions
6.17.2 Changes to capital structure, including increases and decreases of
capital and preferred stock issuances.
6.17.3 Stock option plans and other management compensation issues;
6.17.4 Social and corporate responsibility issues.
6.17.5 Appointment and Removal of Directors.
6.17.6 Any other issue that may affect the interest of the shareholders in
general and interest of the unit-holders in particular.
6.18 The format151 for disclosure of voting by mutual funds in general
meetings of listed companies is provided.
150 SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
151 For disclosure of voting by mutual funds in general meetings of listed companies, please
refer to the section on formats
68 Master Circular for Mutual Funds
CHAPTER 7
SECONDARY MARKET ISSUES
7.1 Non Applicability of Listing Deposit152
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 Margins153
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 Codes154
7.3.1 Mutual Funds are not permitted to operate in the securities market
without furnishing a valid Unique Client Code (UCC).155 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 launched156. Such UCC should be obtained before
152 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 53 SEBI Circular No. MFD/CIR/9/230/2001 dated August 14, 2001
154 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
155 SEBI Circular No. SMDRP/Policy/Cir-39/2001 dated July 18, 2001.
156 SEBI Circular No. SEBI/IMD/CIR No.01/1756/04 dated January 27, 2004.
69 Master Circular for Mutual Funds
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.157 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 Contracts158
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.159
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 the Mutual Funds in derivatives and the risk factors, which
should be explained by suitable numerical examples.
157 SEBI Circular No. MRD/DoP/SE/Cir-35/2004 dated October 26, 2004.
158 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.
159 SEBI Circular No. DNPD/Cir-29/2005 dated September 14, 2005.
70 Master Circular for Mutual Funds
7.4.1.4 The participation of existing schemes of the Mutual Funds in the
derivatives market shall be subject to the following conditions:
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. Positive consent shall be obtained from majority of the unit
holders.
d. An exit option shall be provided to the dissenting unit
holders. Such option shall be kept open for a period of one
month prior to the scheme commencing trading in
derivatives.
e. No exit load shall be charged to the unit holders exercising
such exit options.
7.4.1.5 Positions limits as specified by SEBI for Mutual Funds and its
schemes from time to time shall be applicable160.
7.5 Trading in Interest Rate Derivatives161
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 Guidelines162, mutual funds can also
trade in interest rate derivatives through the Stock Exchanges
subject to requisite disclosures in the SID163.
160 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.
161 SEBI Circular No. SEBI/MFD/CIR No.03/158/03 dated June 10, 2003.
162 RBI Circular dated November 1, 1999.
163 SEBI Circular No. SEBI/MFD/CIR No.03/158/03 dated June 10, 2003.
71 Master Circular for Mutual Funds
7.6 Transactions of mutual funds in Government Securities
in dematerialised form164
7.6.1 According to Regulation165, the Mutual Funds having an aggregate of
securities worth `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.
164 SEBI Circular No. MFD/CIR/05/432/2002 dated June 20, 2002
165 Regulation 44(1A) of SEBI (Mutual Funds) Regulations, 1996
72 Master Circular for Mutual Funds
CHAPTER 8
NET ASSET VALUE166
8.1 Disclosure of Net Asset Value167
8.1.1 The NAV of schemes shall be published on a daily basis by the
Mutual Funds at least in two daily newspapers168.
8.1.2 NAV and sale/repurchase price of all Mutual Fund schemes except
for Fund of Fund Schemes shall be updated on AMFI’s website and
the Mutual Funds’ websites by 9 p.m. of the same day169.
8.1.3 Fund of Fund Schemes shall have an extended time up to 10 a.m.
the following business day in this regard170 and the NAVs shall be
published in newspapers with an asterisk to indicate the one day
time lag/or the actual time lag.
8.1.4 Delay beyond 10 a.m. of the following business day in case of Fund
of Fund schemes and 9 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)171 in terms of number of days of non
adherence 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 disclosed172.
166 Regulation 48(1) of SEBI (Mutual Funds) Regulations, 1996
167 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
<1 68 Regulation 48(2) of SEBI (Mutual Funds) Regulations, 1996
169 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
170 SEBI Circular No. SEBI/IMD/CIR No.5/96576/2007 dated June 25, 2007.
171 For format of CTR, please refer to section on formats
,1,, 72 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
,,
73 Master Circular for Mutual Funds
8.1.5 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 NAVs173.
8.2 Rounding off NAVs174
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
desire175. Relevant disclosure in this regard shall be made in the
SID/SAI176.
8.3 Uniform Cut off Timings for applicability of Net Asset
Value of Mutual Fund scheme(s) and/ or plan(s)177
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
173 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
, 1 74 SEBI Circular No. MFD/CIR/08/514/2002 dated July 22, 2002, SEBI Circular No.
MFD/CIR/11/16159/2002 dated August 22, 2002.
,1, 75 SEBI Circular No. MFD/CIR/11/16159/2002 dated August 22, 2002.
,1 76 SEBI Circular No. MFD/CIR/08/514/2002 dated July 22, 2002.
177 SEBI Circular No. SEBI/IMD/CIR No. 11/78450/06 dated October 11, 2006.
,
74 Master Circular for Mutual Funds
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 guidelines178 issued by
SEBI in this regard179.
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
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.
178 Please refer to the Section on liquid schemes
179 SEBI Circular No.SEBI/IMD/CIR No.13/150975/09 dated January 19, 2009
75 Master Circular for Mutual Funds
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 NAV180:
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 upto 2.00 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;
b. where the application is received after 2.00 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.
180 SEBI Circular No SEBI/IMD/DF/15/2010 dated November 26, 2010
76 Master Circular for Mutual Funds
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.
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.
77 Master Circular for Mutual Funds
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 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
78 Master Circular for Mutual Funds
for application amount equal to or more than Rs. 2 lakh,
irrespective of the time of receipt of such application181.
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 that182:
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).
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.
181 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
182 SEBI Circular No SEBI/IMD/DF/15/2010 dated November 26, 2010
79 Master Circular for Mutual Funds
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.
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.
80 Master Circular for Mutual Funds
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)183 of the AMC(s) and the Half Yearly
Trustee Reports184.
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 property185
Regulations186 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.
183 for CTR format, please refer to the section on formats
,1,,,, 84 For Trustee report, please refer to the section on formats
,1 85 SEBI Circular No SEBI/IMD/DF/15/2010 dated November 26, 2010
186 Fourth Schedule of Securities and Exchange Board of India (Mutual Funds) Regulations, 1996
81 Master Circular for Mutual Funds
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 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
82 Master Circular for Mutual Funds
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 years187 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 price188
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 units189,
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:
187 Regulation 50(2) of SEBI (Mutual Funds) Regulations, 1996
188 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
,1, 89 Regulation 49(3) of the SEBI (Mutual Funds) Regulations, 1996.
83 Master Circular for Mutual Funds
8.5.3.1 Sale Price = Applicable NAV
8.5.3.2 Repurchase Price = Applicable NAV *(1 – Exit Load, if any)
84 Master Circular for Mutual Funds
CHAPTER 9
VALUATION
9.1 Definitions190
9.1.1 Non Traded Securities191
9.1.1.1 When a security (other than Government 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.
9.1.2 Thinly Traded Securities
9.1.2.1 Thinly traded equity/ equity related securities:192
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 `5 lacs and the total volume is less
than 50,000 shares, the security shall be considered as
thinly traded security and valued accordingly.
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
`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 `6,
00,000, the shares do not qualify as thinly traded.
190 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000, SEBI Circular No.
MFD/CIR/14/088/2001 dated March 28, 2001 and SEBI Circular No.
MFD/CIR/14/442/2002 dated February 20, 2002.
191<, SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
,1 92 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001.
85 Master Circular for Mutual Funds
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 Thinly traded Debt Securities193
9.1.3.1 A debt security (other than Government Securities) shall be
considered as a thinly traded security if, on the valuation date,
there are no individual trades in that security in marketable lots
(currently applicable) on the principal Stock Exchange or any
other Stock Exchange.
9.2 Valuation of Securities
9.2.1 Traded Securities:194
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.
9.2.1.2 When a debt security (other than Government Securities) is not
traded on any Stock Exchange on any particular valuation day,
193 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
, 1 94 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
86 Master Circular for Mutual Funds
the value at which it was traded on the principal Stock Exchange
or any other Stock Exchange, as the case may be, on the earliest
previous day may be used provided such date is not more than
fifteen days prior to valuation date. When a debt security (other
than Government Securities) is purchased by way of private
placement, the value at which it was bought may be used for a
period of fifteen days beginning from the date of purchase.
9.2.2 Non-Traded /and/or Thinly Traded Securities:195
9.2.2.1 AMCs shall value non traded and/or thinly traded securities “in
good faith” based on the Valuation norms prescribed below:
9.2.3 Non-traded/ and/or thinly traded equity securities:
9.2.3.1 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.
195 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
87 Master Circular for Mutual Funds
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
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 valuation196.
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.
9.2.4 Non traded/thinly Traded Debt security
196 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001
88 Master Circular for Mutual Funds
9.2.4.1 A thinly traded debt security as defined above shall be valued as
per the norms for non traded debt security.
a. Valuation197 of money market and debt securities with residual
maturity of upto 60198 days:
1. All money market and debt securities, including floating rate
securities, with residual maturity of upto 60 days shall be
valued at the weighted average price at which they are traded
on the particular valuation day. When such securities are not
traded on a particular valuation day they shall be valued on
amortization basis. It is further clarified that in case of
floating rate securities with floor and caps on coupon rate
and residual maturity of upto 60 days then those shall be
valued on amortization basis taking the coupon rate as floor.
b. Valuation of money market and debt securities with residual
maturity of over 60199 days:
1. All money market and debt securities, including floating rate
securities, with residual maturity of over 60 days shall be
valued at weighted average price at which they are traded on
the particular valuation day. When such securities are not
traded on a particular valuation day they shall be valued at
benchmark yield/ matrix of spread over risk free benchmark
yield obtained from agency(ies) entrusted for the said purpose
by AMFI.
2. The approach in valuation of non traded debt securities is
based on the concept of using spreads over the benchmark
rate to arrive at the yields for pricing the non traded security.
197 SEBI Circular No. SEBI/IMD/CIR No.16/ 193388/2010 dated February 02, 2010
198 SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
199 SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
89 Master Circular for Mutual Funds
3. The Yields for pricing the non traded debt security would be
arrived at using the process as defined below.
Step 1: A Risk Free Benchmark Yield is built using the
government securities as the base. Government securities are
used as the benchmarks as they are traded regularly; free of
credit risk; and traded across different maturity spectrums
every week.
Step 2: A Matrix of spreads (based on the credit risk) are built
for marking up the benchmark yields. The matrix is built
based on traded corporate paper on the wholesale debt
segment of an appropriate stock exchange and the primary
market issuances. The matrix is restricted only to investment
grade corporate paper.
Step 3: The yields as calculated above are Marked-
up/Marked-down for ill-liquidity risk
Step 4: The Yields so arrived are used to price the portfolio.
9.3 Methodology:
9.3.1 Construction of Risk Free Benchmark200
9.3.1.1 Using Government of India dated securities; the Benchmark shall
be constructed as below:
a. Government of India dated securities will be grouped into various
duration buckets such as 0.164-0.25 yrs201, 0.25- 0.5 yrs202, 0.5-
1 year, 1-2 years, 2-3 years, 4-5 years, 5-6 years and 6 years and
the volume weighted yield would be computed for each bucket.
200 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
201,, SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
202 SEBI/IMD/CIR No.16/ 193388/2010 dated February 02, 2010
90 Master Circular for Mutual Funds
These duration buckets may be changed to reflect the market
value more closely by any agency suggested by AMFI giving
benchmark yield/ matrix of spreads over benchmark yield.
b. The benchmark as calculated above will be set at least weekly,
and in the event of any significant movement in prices of
Government Securities on account of any event impacting interest
rated on any day such as a change in the Reserve Bank of India
(RBI) policies, the benchmark will be reset to reflect any change
in the market conditions.
9.3.2 Building a Matrix of Spreads for Marking-up the Benchmark Yield203
9.3.2.1 Mark up for credit risk over the risk free benchmark YTM as
calculated in 9.3.1 above, will be determined using the trades of
corporate debentures/bonds of different ratings. All trades on
appropriate stock exchange during the fortnight prior to the
benchmark date will be used in building the corporate YTM and
spread matrices. Initially these matrices will be built only for
corporate securities of investment grade. The matrices are
dynamic and the spreads will be computed every week. The matrix
will be built for all duration buckets for which the benchmark GOI
matrix is built to effectively link the corporate matrix with the GOI
securities matrix. Accordingly:
a. All traded paper (with minimum traded value of `1 crore) will be
classified by their ratings and grouped into 7 duration buckets; for
rated securities, the most conservative publicly available rating will
be used;
b. For each rating category, average volume weighted yield will be
obtained both from trades on the appropriate stock exchange and
from the primary market issuances;
203 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
91 Master Circular for Mutual Funds
c. Where there are no secondary trades on the appropriate stock
exchange in a particular rating category and no primary market
issuances during the fortnight under consideration, then trades on
appropriate stock exchange during the 30 day period prior to the
benchmark date will be considered for computing the average YTM
for such rating category;
d. If the matrix cannot be populated using any or all of the above
steps, then credit spreads from trades on appropriate stock
exchange of the relevant rating category over the AAA trades will be
used to populate the matrix;
e. In each rating category, all outliers will be removed for smoothening
the YTM matrix;
f. Spreads will be obtained by deducting the YTM in each duration
category from the respective YTM of the GOI securities;
g. In the event of lack of trades in the secondary market and the
primary market the gaps in the matrix would be filled by
extrapolation. If the spreads cannot be extrapolated for the reason
of practicality, the gaps in the matrix will be filled by carrying the
spreads from the last matrix.
h. Accordingly, 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. Submission of
data would help in daily matrix generation, would improve
uniformity and accuracy of valuation in the Mutual Funds
industry204.
9.3.3 Mark-up/Mark-down Yield
9.3.3.1 The Yields calculated would be marked-up/marked-down to
account for the illiquidity risk, promoter background, finance
company risk and the issuer class risk. As the level of illiquidity
204 SEBI Circular No. MFD/CIR.No 23 / 066 /2003 dated March 7,2003
92 Master Circular for Mutual Funds
risk would be higher for non rated securities the marking process
for rated and non rated securities would be differentiated as
follows:
a. Adjustments for Securities rated by external rating agencies205
Category Discretionary mark
up/mark down
+ -
Rated instruments with 100 bps 50 bps
duration upto 2 years
Rated instruments with 75 bps 25 bps
duration over 2 years
1. The rationale for the above discount structure is to take
cognizance of the differential interest rate risk of the securities.
This structure will be reviewed periodically.
b. Adjustments for Internally Rated Securities206
1. To value an un-rated security, the fund manager shall assign
an internal credit rating, which will be used for valuation.
Since un-rated instruments tend to be more illiquid than rated
securities, the yields would be marked up by adding
discretionary discount as under:
Category Discretionary discount
Unrated instruments Discretionary discount of upto
with duration upto 2 +50 bps over and above
years mandatory discount of +50 bps
Unrated instruments Discretionary discount of upto
with duration over 2 +50 bps over and above
years mandatory discount of +25 bps
205 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
206 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
,,,,,
93 Master Circular for Mutual Funds
2. The benchmark yield/ matrix of spreads over risk free
benchmark yield obtained from any agency suggested by
AMFI, must be applied for valuation of securities on the day of
release of such bench mark yield/ matrix of spreads by the
aforesaid agency.207
9.3.3.2 Chief Executive Officer (whatever his designation may be) of the
AMC shall give prior approval to the use of discretionary mark up
or down limit.
9.4 Valuation of securities with Put/Call Options:208
9.4.1 The option embedded securities would be valued as follows:
9.4.1.1 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.
9.4.1.2 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.
207 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
,2 08 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
94 Master Circular for Mutual Funds
9.4.1.3 Securities with both Put and Call option on the same day
a. The securities with both Put and Call option on the same day
would be deemed to mature on the Put/Call day and would be
valued accordingly.
9.5 Valuation of Government Securities
9.5.1 Government securities will be valued at prices for government
securities released by an agency suggested by AMFI to ensure
uniformity in calculation of NAVs209.
9.6 Illiquid Securities210
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 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
209 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
<2,, 10 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
95 Master Circular for Mutual Funds
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 Guidelines for Identification and Provisioning for Non
Performing Assets (Debt Securities)211
9.7.1 Definition of a Non Performing Asset (NPA)
9.7.1.1 An ‘asset’ shall be classified as NPA if the interest and/or
principal amount have not been received or remained outstanding
for one quarter from the day such income and/or installment was
due.
9.7.2 Effective date for classification and provisioning of NPAs
9.7.2.1 The definition of NPA may be applied after a quarter past due date
of the interest.
9.7.3 Treatment of income accrued on the NPA and further accruals
9.7.3.1 After the expiry of the 1st quarter from the date the income has
fallen due, there will be no further interest accrual on the asset.
In short, from the beginning of the 2nd quarter there will be no
further accrual on income.
9.7.3.2 On classification of the asset as NPA from a quarter past due date
of interest, all interest accrued and recognized in the books of
accounts of the Mutual Fund till the date shall be provided for.
211 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
96 Master Circular for Mutual Funds
9.7.4 Provision for NPAs – Debt Securities
9.7.4.1 Both secured and unsecured investments, once they are
recognized as NPAs, call for provisioning in the same manner
and where these are related to close ended schemes, the phasing
would be such that to ensure full provisioning prior to the closure
of the scheme or the scheduled phasing which ever is earlier.
9.7.4.2 The value of the asset shall be provided in the following manner or
earlier at the discretion of the Mutual Fund. Mutual Funds will
not have discretion to extend the period of provisioning. The
provisioning against the principal amount or installments shall be
made at the following rates irrespective of whether the principal is
due for repayment or not.
a. 10 percent of the book value of the asset shall be provided for
after 6 months past due date of interest i.e. 3 months form the
date of classification of the asset as NPA.
b. 20 percent of the book value of the asset should be provided for
after 9 months past due date of interest i.e. 6 months from the
date of classification of the asset as NPA.
c. Another 20 percent of the book value of the assets shall be
provided for after 12 months past due date of interest i.e. 9
months from the date of classification of the asset as NPA.
d. Another 25 percent of the book value of the assets shall be
provided for after 15 months past due date of interest i.e. 12
months from the date of classification of the asset as NPA.
e. The balance 25 percent of the book value of the asset shall be
provided for after 18 months past due date of the interest i.e. 15
months from the date of classification of the assets as NPA.
97 Master Circular for Mutual Funds
9.7.4.3 Book value for the purpose of provisioning for NPAs shall be taken
as a value determined as per the prescribed valuation method.
9.7.4.4 This can be explained by an illustration:
a. Let us consider that interest income is due on a half yearly basis
and the due date falls on 30.06.2000 and the interest is not
received till 1st quarter after due date i.e. 30.09.2000. The
provisioning will be done in the following phased manner:
10% provision 01.01.2001 6 months past due date of
interest i.e. 3 months from the
date of classification of asset
as NPA (01.10.2000)
20% provision 01.04.2001
20% provision 01.07.2001
25% provision 01.10.2001
25% provision 01.01.2002
b. Thus, one and half years past the due date of income or one year
and three months from the date of classification of the ‘asset’ as
an NPA, the ‘asset’ will be fully provided for. If any installment is
fallen due, during the period of interest default, the amount of
provision shall be the installment amount or above provision
amount, whichever is higher.
9.7.5 Reclassification of assets
9.7.5.1 Upon reclassification of assets as ‘performing assets’:
a. In case a company has fully cleared all the arrears of interest, the
interest provisions can be written back in full.
b. The asset will be reclassified as performing on clearance of all
interest arrears and if the debt is regularly serviced over the next
two quarters.
c. In case the company has fully cleared all the arrears of interest,
the interest not credited on accrual basis shall be credited at the
time of receipt.
98 Master Circular for Mutual Funds
d. The provision made for the principal amount can be written back
in the following manner
1. 100% of the asset provided for in the books will be written
back at the end of the 2nd quarter where the provision of
principal was made due to the interest defaults only.
2. 50% of the asset provided for in the books will be written
back at the end of the 2nd quarter and 25% after every
subsequent quarter where both installments and interest
payment were in default earlier.
3. Explanation: The words “2nd quarter” wherever appear, shall
mean 2nd calendar quarter.212
e. An asset is reclassified as 'standard asset' only when both, the
overdue interest and overdue installments are paid in full and
there is satisfactory performance for a subsequent period of 6
months.
9.7.6 Receipt of past dues:
9.7.6.1 When the Mutual Fund has received income/ principal amount
after their classifications as NPAs:
a. For the next 2 quarters, income shall be recognized on cash basis
and thereafter on accrual basis. The asset will be continued to be
classified as NPA for these two quarters.
b. During this period of two quarters although the asset is classified
as NPA no provision needs to be made for the principal if the same
is not due and outstanding.
c. If part payment is received towards principal, the asset continues
to be classified as NPA and provisions are continued as per the
norms set at 9.7.4 above any excess provision will be written
back.
212 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001.
99 Master Circular for Mutual Funds
9.7.7 Classification of Deep Discount Bonds as NPAs
9.7.7.1 Investments in Deep Discount Bonds can be classified as NPAs, if
any two of the following conditions are satisfied:
a. If the rating of the Bond comes down to Grade ‘BB’ (or its
equivalent) or below
b. If the company is defaulting in their commitments in respect of
other assets, if available.
c. Full Net worth erosion.
9.7.7.2 Provision should be made as per the norms set at 9.7.4 above as
soon as the asset is classified as NPA.
9.7.7.3 Full provision can be made if the rating comes down to Grade ‘D’
(or its equivalent).
9.7.8 Reschedulement of an asset
9.7.8.1 In case a company defaults in payment of either interest or
principal amount and the Mutual Fund has accepted a
rescheduling of the schedule of payments, then the following
practice shall be adhered to:
a. In case it is a first reschedulement and only payment of interest
is in default, the classification of the asset as NPA shall be
continued and existing provisions shall not be written back. This
practice shall be continued for two quarters of regular servicing of
the debt. Thereafter, this be classified as ‘performing asset’ and
the interest provided can be written back.
b. If the reschedulement is done due to default in interest and
principal amount, the asset shall continue as NPA for a period of
4 quarters, even though the asset is continued to be serviced
during these 4 quarters regularly. Thereafter, the asset can be
classified as ‘performing asset’ and all the interest provided till
such date shall be written back.
100 Master Circular for Mutual Funds
c. If the reschedulement is done for a second/ third time or
thereafter, the characteristics of NPA should be continued for
eight quarters of regular servicing of the debt. The provision shall
be written back only after the asset is reclassified as ‘performing
asset’.
9.7.9 Disclosure in the Half Yearly Portfolio Reports
9.7.9.1 Mutual Funds shall make scrip wise disclosures of NPAs on Half
Yearly basis along with the Half Yearly Portfolio Disclosure in the
format prescribed213.
9.7.9.2 The total amount of provisions made against the NPAs shall be
disclosed in addition to the total quantum of NPAs and their
proportion to the assets of the Mutual Fund scheme. In the list of
investments and asterisk mark shall be given against such
investments which are recognized as NPAs. Where the date of
redemption of an investment has lapsed, the amount not
redeemed shall be shown as ‘Sundry Debtors’ and not investment,
provided, that where an investment is redeemable by installments,
that will be shown as an investment until all installments have
become overdue.
9.8 Investment in Unlisted Equity Shares214
9.8.1 To ensure uniformity in calculation of NAV the following guidelines
are issued:
213 For formats of Half yearly disclosure, please refer to the section on Formats
214 SEBI Circular No. MFD/CIR/03/526/2002 dated May 9, 2002.
101 Master Circular for Mutual Funds
9.8.1.1 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 (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
102 Master Circular for Mutual Funds
discounted by 15 per cent for illiquidity so as to arrive at the fair
value per share.
9.8.1.2 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.
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.
9.8.2 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.
9.8.3 Due Diligence
9.8.3.1 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
103 Master Circular for Mutual Funds
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.
9.8.3.2 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 meetings215.
9.8.4 Reporting of Compliance
9.8.4.1 Comments on compliance of these Guidelines shall be indicated
by the AMCs and Trustees in their CTRs216 and Half Yearly
Reports217 filed with the Board.
9.9 Valuation of securities not covered under the current
valuation policy218:
9.9.1 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.
9.9.2 AMFI has been advised that the valuation agencies should ensure
that the valuation of such securities gets covered in the valuation
215 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
216 For CTR format please refer to the section on formats
217 For Half Yearly Reports, please refer to the section on formats
104 Master Circular for Mutual Funds
framework within six weeks from the date of receipt of such
intimation from mutual fund.
9.9.3 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.
9.10 Dissemination of information:
9.10.1 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
data219 would help in daily matrix generation and would improve
uniformity and accuracy of valuation in the mutual funds industry.
9.10.2 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 consolidation and dissemination as per format220. These
disclosures shall be made settlement date wise on daily basis with a
time lag of 30 days221.
9.11 Consistency
9.11.1 All AMC’s shall ensure that similar securities held under its various
schemes shall be valued consistently.
218 SEBI/IMD/CIR No.16/193388/2010 dated February 02, 2010 and Cir/IMD/DF/4/2010
dated June 21, 2010
219 SEBI Circular No.MFD/CIR/23 /066 / 2003 dated March 7, 2003. For disclosure of
transaction details, please refer to the section on Formats
220 For format please refer to the section on formats
221 SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
105 Master Circular for Mutual Funds
CHAPTER 10
LOADS, FEES, CHARGES AND EXPENSES
10.1 Limits on fees and expenses charged to schemes222
10.1.1 Mutual Funds may charge certain expenses to a scheme, as
specified under Regulations.223 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).224
10.1.2 Additional TER225 can be charged up to 30 basis points on daily net
assets of the scheme as per Regulation 52226, if the new inflows
from beyond top 15 cities 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.
In case inflows from beyond top 15 cities 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 beyond top 15 cities
365* X Higher of (a) or (b) above
* 366, wherever applicable.
222 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.
223 Regulation 52(4) of the Mutual Funds Regulations,1996
224 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
225 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
226 Regulation 52 of the Mutual Funds Regulations,1996
106 Master Circular for Mutual Funds
The top 15 cities shall mean top 15 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 15 cities
so charged shall be clawed back in case the same is redeemed
within a period of 1 year from the date of investment.
10.1.4 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 15 cities.
10.1.5 Brokerage and transaction cost227 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 52228. Any
expenditure in excess of the said prescribed limit (including
brokerage and transaction cost, if any) shall be borne by the AMC
or by the trustee or sponsors.
227 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012 & SEBI Circular No. CIR/IMD/DF/24/2012
dated November 19, 2012.
228 Regulation 52 of the SEBI (Mutual Funds) Regulations, 1996
107 Master Circular for Mutual Funds
10.1.6 Investor Education and Awareness229:
10.1.6.1 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.
10.1.7 The following expenses cannot be charged to the schemes of Mutual
Funds:
10.1.7.1 Penalties and fines for infraction of laws.
10.1.7.2 Interest on delayed payment to the unit holders.
10.1.7.3 Legal, marketing, publication and other general expenses not
attributable to any scheme(s).
10.1.7.4 Fund Accounting Fees.
10.1.7.5 Expenses on investment management/general management.
10.1.7.6 Expenses on general administration, corporate advertising and
infrastructure costs.
10.1.7.7 Depreciation on fixed assets and software development
expenses.
10.1.7.8 Such other costs as may be prohibited by the Board.
10.1.8 The expenditure and/or fee payable by Mutual Funds to the
Depositories may either be capitalized or included as part of
229 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012
108 Master Circular for Mutual Funds
recurring expenditure within the limits prescribed under Regulation
52(6) of the Mutual Funds Regulations230.
10.1.9 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 schemes231.
10.1.10 Provision of charging of additional management fees by the Asset
Management Companies in case of schemes launched on no load
basis232.
10.1.10.1 AMC shall not collect any additional management fees referred
to in Regulation233.
10.1.10.2 Mutual Fund Schemes to be launched including those for which
observation letter have been issued under Regulation234 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 commission235
10.2.1 In case of investments made by the Sponsor(s), no brokerage or
commission shall be paid.
10.3 Restriction on charging Service Tax236
10.3.1 AMC(s) can charge Service Tax, as per applicable Taxation Laws, to
the scheme(s) within the limits prescribed under Regulations237
230 SEBI Circular No. IIMARP/MF/CIR/07/826/98 dated April 15, 1998.
,2,, 31 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
232 SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
233 Regulation 52(3) of SEBI Mutual Funds Regulation, 1996 and SEBI Circular No.
SEBI/IMD/CIR No. 4/ 168230/09 dated June 30, 2009
234 Regulation 29 of SEBI (Mutual Funds) Regulations, 1996
235 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.
236 SEBI Circular No. MFD/CIR/04/430/2002 dated June 19, 2002, SEBI Circular No.
CIR/IMD/DF/21/2012 dated September 13, 2012.
237 Reg.52(6) of the SEBI (Mutual Funds) Regulations, 1996.
109 Master Circular for Mutual Funds
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 52238.
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 52239.
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 cost240 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 structure241
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:
10.4.1.1 There shall be no entry load242 for all Mutual Fund schemes.
10.4.1.2 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
238 Regulation 52 of SEBI (Mutual Funds) Regulations, 1996
239 Regulation 52 of SEBI (Mutual Funds) Regulations, 1996
240 SEBI Circular No. CIR/ IMD/ DF/ 24/2012 dated November 19, 2012
241, 219 SEBI Circular No SEBI/IMD/CIR No. 4/ 168230/09 dated June 30, 2009
242 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.
110 Master Circular for Mutual Funds
assessment of various factors including the service rendered by
the distributor.
10.4.1.3 The load balances are maintained as ‘liabilities’ in the books of
the scheme and are not included in the net asset value (NAV).
The usage243 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. The exit load charged244, if any,
after the commencement of SEBI (Mutual Funds) (Second
Amendment) Regulations, 2012, shall be credited to the
scheme.
10.4.1.4 The exit load charged245, if any, after the commencement of
SEBI (Mutual Funds) (Second Amendment) Regulations, 2012,
shall be credited to the scheme.
10.4.1.5 The distributors should disclose all the commissions (in the form
of trail commission or any other mode) payable to them for the
243 SEBI Circular No.CIR/IMD/DF/4/2011 dated March 9, 2011
244 Regulation 51A of SEBI (Mutual Funds) Regulations, 1996.
245 Regulation 51A of SEBI (Mutual Funds) Regulations, 1996.
111 Master Circular for Mutual Funds
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:
10.4.2.1 Investments in mutual fund schemes (including additional
purchases and switch-in to a scheme from other schemes) w.e.f
August 1, 2009
10.4.2.2 Redemptions from mutual fund schemes (including switch-out
from other schemes) w.e.f August 1, 2009
10.4.2.3 New mutual fund schemes launched on or after August 1, 2009
10.4.2.4 Systematic Investment Plans (SIP) registered on or after August
1, 2009246.
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 Charges247
10.5.1 A transaction charge per subscription of `10,000/- and above be
allowed to be paid to the distributors of the Mutual Fund products.
However, there shall be no transaction charges on direct
investments. The transaction charge shall be subject to the
following:
10.5.1.1 For existing investors in a Mutual Fund, the distributor may
be paid `100/- as transaction charge per subscription of
`10,000/- and above.
247 SEBI Circular no. CIR/IMD/DF/13/2011 dated August 22, 2011
112 Master Circular for Mutual Funds
10.5.1.2 As an incentive to attract new investors, the distributor may
be paid `150/- as transaction charge for a first time investor in
Mutual Funds.
10.5.1.3 The terms and conditions relating to transaction charge shall
be part of the application form in bold print.
10.5.1.4 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.
10.5.1.5 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.
10.5.1.6 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 opt out of levying transaction charge based on
type of the product248.
10.5.1.7 The AMCs shall be responsible for any malpractice/mis-selling
by the distributor while charging transaction costs.
10.5.1.8 There shall be no transaction charge on subscription below
`10,000/-
10.5.1.9 In case of SIPs, the transaction charge shall be applicable
only if the total commitment through SIPs amounts to
`10,000/- and above. In such cases the transaction charge
shall be recovered in 3-4 installments.
248 SEBI Circurlar No. CIR/IMD/DF/21/2012 dated September 13, 2012
113 Master Circular for Mutual Funds
10.5.1.10 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 Dividend249
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 Board250
10.7 Exit load parity
10.7.1 While charging exit loads, no distinction among unit holders
should be made based on the amount of subscription251. While
complying with the same, Mutual Funds should ensure that “any
imposition or enhancement in the load shall be applicable on
prospective investments only.252
10.7.2 Further, the parity among all classes of unit holders in terms of
charging exit load shall be made applicable at the portfolio level.253
249 ,231 SEBI Circular No. SEBI/IMD/CIR No. 14/120784/08 dated March 18, 2008
251 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
252 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)
253 SEBI Circular No - SEBI / IMD / CIR No. 7 /173650 / 2009 dated August 17,2009
114 Master Circular for Mutual Funds
10.8 Filing fees 254
10.8.1 Revised filing fee255 as per the SEBI (Payment of Fees) Amendment
Regulations 2009 would be applicable to those scheme(s) whose
SID has been filed with SEBI on or after July 01, 2009.
254 SEBI Cir No. SEBI / IMD / CIR No. 5 / 169030 / 2009 dated July 8, 2009
255 Gazettee Notification No. LAD-NRO/GN/2009-10/11/167759 on SEBI (Payment of Fees)
(Amendment) Regulations, 2009 dated 29 June, 2009
115 Master Circular for Mutual Funds
CHAPTER 11
DIVIDEND DISTRIBUTION PROCEDURE256, 257
11.1 Regulations258 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.259
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 meeting260. 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 calender 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
record date. The record date shall be five calendar days from the
issue of public notice.
256 SEBI Circular No. SEBI/IMD/CIR No.1/64057/06 dated April 4, 2006.
257 For details on advertisement on dividend please refer to Chapter on ‘Advertisements’
258 Regulation 53(a) of the SEBI (Mutual Funds) Regulations, 1996
259 SEBI Circular No SEBI/IMD/CIR No. 3/65370/06 dated April 21,2006
260 Clause 20 of Third Schedule of SEBI (Mutual Funds) Regulations, 1996
116 Master Circular for Mutual Funds
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.
11.3 Non availability of Unit Premium Reserve for dividend distribution261
11.3.1 Regulations262 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.
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:-
261 SEBI circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
262 Ninth and Eleventh Schedule of SEBI (Mutual Funds) Regulations, 1996
117 Master Circular for Mutual Funds
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 unrealised 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 Regulations263.
263 Paragraph 2(a) (ix) of Eleventh Schedule of SEBI (Mutual Funds) Regulations, 1996
118 Master Circular for Mutual Funds
12
CHAPTER 12
INVESTMENT BY SCHEMES264
12.1 Investments by Index Funds:265
12.1.1 Investments by index funds shall be in accordance with the
weightage of the scrips in the specific index as disclosed in the
SID266 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.
12.2 Investments by Liquid Schemes and plans267
12.2.1 The ‘liquid fund schemes and plans’ shall make investment in
/purchase debt and money market securities with maturity of upto 91
days only 268. This shall also be applicable in case of inter scheme
transfer of securities 269
12.2.1.1 Explanation:
264
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.
<2< 65
SEBI Circular No - MFD/CIR/09/014/2000 dated January 5, 2000
266 See Clause 10, Seventh Schedule of Mutual Funds Regulations.
<2 67 SEBI Circular No - SEBI/IMD/CIR No.13/150975 / 09 dated January 19, 2009
268 With effect from February 01, 2009 make investment in /purchase debt and money
market securities with maturity of upto182 days only.
269
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.
<
119 Master Circular for Mutual Funds
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
days270
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.
12.2.2 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.
12.3 Investments by close ended debt schemes:
12.3.1Close ended debt schemes shall invest only in such securities
which mature on or before the date of the maturity of the
scheme271
12.4 Prudential limits and disclosures on portfolio
concentration risk in debt oriented mutual fund
schemes272
12.4.1 Mutual Funds/AMCs shall ensure that total exposure of debt
schemes of mutual funds in a particular sector (excluding
270 w.e.f May 01, 2009.
271 SEBI Circular No IMD/CIR No 12/147132/08 dated December 11, 2008.
272 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
120 Master Circular for Mutual Funds
investments in Bank CDs, CBLO, G-Secs, T-Bills and AAA rated
securities issued by Public Financial Institutions and Public
Sector Banks) shall not exceed 30% of the net assets of the scheme;
Provided that an additional exposure to financial services sector
(over and above the limit of 30%) not exceeding 10% of the net
assets of the scheme shall be allowed by way of increase in
exposure to Housing Finance Companies (HFCs) only;
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 30% of the net
assets of the scheme."
12.4.2 Appropriate disclosures shall be made in Scheme Information
Document (SID) and Key Information Memorandum (KIM) of debt
schemes.
12.5 Stock Lending Scheme273
12.5.1 The following guidelines are issued to facilitate lending of securities
by Mutual Funds in accordance with the Stock Lending &
Borrowing Scheme.274
12.5.2 Disclosure Requirements
12.5.2.1 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
273 SEBI Circular No MFD/CIR/01/047/99 dated February 10, 1999.
,2 74 Regulation 44(4) of the SEBI (Mutual Funds) Regulations, 1996.
121 Master Circular for Mutual Funds
securities lending and borrowing scheme issued by SEBI
from time to time.275
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.
12.5.3 Reporting Requirement
12.5.3.1 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.
12.5.3.2 The Trustees shall periodically review the securities lending
contract and take reasonable steps to ensure that the same is
not, in any way, detrimental to the interests of the unit holders of
the scheme.
12.5.3.3 The Trustees shall offer their comments on the above aspects in
the Half Yearly Trustee Report filed with the Board.276
12.5.4 Existing schemes
12.5.4.1 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.
275 SEBI Circular No - SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
276 Regulation 18(23)(a) of the Mutual Funds Regulations. Further, for format of Half Yearly
Trustee Report please refer to section on Formats.
122 Master Circular for Mutual Funds
12.6 Approval for Investment in Unrated Debt Instruments277
12.6.1 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.
12.7 Investment limit in Units of Venture Capital Funds278
12.7.1 Mutual Fund schemes can invest in listed or unlisted securities or
units of Venture Capital Funds within the prescribed investment
limits as applicable279
12.8 Investment limits for Government guaranteed debt
securities280
12.8.1 Prudential investment norms as per Regulations stipulating limits
for investments in debt securities281 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.
277 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
278 SEBI Circular No. MFD/CIR/9/230/2001 dated August 14, 2001
279 Clauses 10 and 11, Seventh Schedule of SEBI (Mutual Funds) Regulations, 1996
280 SEBI Circular No. SEBI/IMD/CIR No.8/18944/03 dated October 6, 2003.
,2 81 Clauses 1 and 1A, Seventh Schedule of SEBI (Mutual Funds), Regulations, 1996.
,,
123 Master Circular for Mutual Funds
12.9 Investment Restrictions for Securitised Debt282
12.9.1 For investments made in Securitised Debt (mortgage backed
securities and asset backed securities), restrictions as per Clause 1
of Seventh Schedule283 shall not apply at the originator level.
12.10 Investments in Short Term Deposits of Scheduled
Commercial Banks284
12.10.1 The guidelines for deployment of funds in short term deposits of
commercial banks for schemes are as under:
12.10.1.1 “Short Term” for parking of funds by Mutual Funds shall be
treated as a period not exceeding 91 days.285
12.10.1.2 Such deposits shall be held in the name of the concerned
scheme.
12.10.1.3 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.
12.10.1.4 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.
282 SEBI Circular No. SEBI/IMD/CIR No.6/63715/06 dated March 29, 2006.
283 Clause I of Schedule VII of SEBI (Mutual Fund), Regulations, 1996
284 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.
, 2 ,, 85 SEBI Circular No. SEBI/IMD/Cir No.1/91171/07 dated April 16, 2007.
124 Master Circular for Mutual Funds
12.10.1.5 Trustees shall ensure that funds of a particular scheme are not
parked in short term deposit of a bank which has invested in
that scheme.
12.10.1.6 In case of liquid and debt oriented schemes, AMC(s) shall not
charge any investment management and advisory fees for
parking of funds in short term deposits of scheduled
commercial banks.
12.10.1.7 Half 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.
12.10.1.8 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).
12.10.1.9 Investments made in short term deposits pending deployment of
funds286 shall be recorded287 and reported to the Trustees
including the reasons for the investment especially comparisons
with interest rates offered by other scheduled commercial
banks.288
12.10.1.10 Except for clause (12.9.1.7) the above guidelines shall not apply
to term deposits placed as margins for trading in cash and
derivatives market289. However, duration of such term deposits
shall be disclosed in the Half Yearly Portfolio290.
286 Clause 8, Schedule Seven, SEBI (Mutual Funds), Regulations, 1996.
,2,,,,, 87 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
, 2 , 88 SEBI Circular No. SEBI/IMD/CIR No.9/20306/03 da ted November 12, 2003.
,289 SEBI Circular No. SEBI/IMD/Cir No.7/129592/08 dated June 23, 2008.
290 SEBI Circular No. SEBI/IMD/Cir No.7/129592/08 dated June 23, 2008
125 Master Circular for Mutual Funds
12.11 Reconciliation Procedure for Investment in Government
Securities291
12.11.1 According to the RBI guidelines292 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.
12.11.2 Mutual Funds shall reconcile the balances reported in the monthly
statements furnished by RBI with the transactions undertaken by
them.
12.11.3 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.
291 SEBI Circular No. MFD/CIR/19/22474/2002 dated November 20, 2002.
,2, 92 RBI Circular No.P.D.O.SGL.CIRR/1945/2002-2003 dated November 1, 2002.
126 Master Circular for Mutual Funds
12.12 Participation of mutual funds in repo in corporate debt
securities293
12.12.1 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:
12.12.1.1 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.
12.12.1.2 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.
12.12.1.3 Mutual funds shall participate in repo transactions only in
AA294 and above rated corporate debt securities.
12.12.1.4 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.
12.12.1.5 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
c. Tenor of collateral
293 SEBI Circular No. CIR/IMD/DF/19/2011 dated November 11, 2011
294 SEBI Circular No. CIR/IMD/DF/23/2012 dated November 15, 2012
127 Master Circular for Mutual Funds
d. Applicable haircuts
12.12.1.6 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.
12.12.1.7 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.
12.12.1.8 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
128 Master Circular for Mutual Funds
12.13 Overseas Investment295
12.13.1 Applicable limits:
12.13.1.1 Aggregate ceiling for overseas investments is US $ 7 billion296
and within this overall limit, Mutual Funds can make overseas
investments subject to a maximum of US $ 300 million per
Mutual Fund.
12.13.1.2 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.
12.13.2 Permissible investments:
12.13.2.1 ADR(s) and/or GDR(s) issued by Indian or foreign companies.
12.13.2.2 Equity of overseas companies listed on recognized Stock
Exchanges overseas.
12.13.2.3 Initial and Follow on Public Offerings for listing at recognized
Stock Exchanges overseas.
12.13.2.4 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.
12.13.2.5 Money Market Instruments rated not below investment grade.
295 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.
296 SEBI Circular No. SEBI/IMD/CIR No.2/122577/08 dated April 8, 2008.
129 Master Circular for Mutual Funds
12.13.2.6 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.
12.13.2.7 Government securities where the countries are rated not below
investment grade.
12.13.2.8 Derivatives traded on recognized stock exchanges overseas only
for hedging and portfolio balancing with underlying as
securities.
12.13.2.9 Short term deposits with banks overseas where the issuer is
rated not below investment grade.
12.13.2.10 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
12.13.3 Other Conditions: Funds Regulations and guidelines issued from
time to time, Mutual Funds shall adhere to the following
specific guidelines while making overseas investments:
12.13.3.1 Appointment of a Dedicated Fund Manager:
a. A dedicated fund manager shall be appointed for making the
above overseas investments.
130 Master Circular for Mutual Funds
12.13.3.2 Due Diligence:
a. The Board of the AMC and Trustees shall exercise due diligence
in making investment decisions and record the same.297 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.
12.13.3.3 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 scheme(s).
297 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
131 Master Circular for Mutual Funds
b. Mutual Funds shall disclose the name of the Dedicated Fund
Manager for making overseas investments.
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
format298 as a footnote.
12.13.3.4 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 12.12.3.2. 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 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
298 For Half Yearly Results, please refer to the section on Formats
132 Master Circular for Mutual Funds
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.
12.13.3.5 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.
12.13.3.6 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.
12.13.3.7 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.
12.13.3.8 Prudential Investment Norms:
a. Investment restrictions specified in Schedule Seven of the
Mutual Funds Regulations are applicable to overseas
investments stipulated under paragraph 12.12.2.1- 12.12.2.9
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
133 Master Circular for Mutual Funds
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 application299 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.
12.14 Investments in Indian Depository Receipts (IDRs)300
12.4.1Mutual funds can invest in Indian Depository Receipts301 [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, specifically investment restrictions as specified in the
Seventh Schedule of the Regulations.
12.15 Investment Restrictions302
12.15.1 All investment restrictions as contained in the Regulations303 shall
be applicable at the time of making investment.
299 Please refer the section on formats for format of proposal for investments in foreign securities
and ETFs
300 SEBI Circular No. IMD/CIR. No.1/165935/2009 dated June 09, 2009
301 Regulation 43(1) of SEBI (Mutual Funds) Regulations, 1996
302 SEBI Circular No. MFD/CIR/09/014/2000 dated January 5, 2000.
303 Seventh Schedule of SEBI (Mutual Funds) Regulations, 1996.
134 Master Circular for Mutual Funds
12.16 Recording of Investment Decisions304
12.16.1 AMC(s) shall exercise due diligence and care in all investment
decisions as would be exercised by other persons engaged in the
same business.305 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, 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.
12.16.2 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, NPAs,
transactions where associates are involved and instances where
the performance of the scheme(s) is poor.
12.16.3 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 Reports306.
Trustees shall also check compliance with these Guidelines
through independent auditors or internal and/or statutory
auditors or other systems developed by them.
304 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
305 Regulation 25(2) of the SE BI (Mutual Funds) Regulations, 1996.
306 For Half Yearly Trustee Report please refer to the section on Formats
135 Master Circular for Mutual Funds
12.17 Norms for investment and disclosure by Mutual Funds in
derivatives307
12.17.1 Exposure Limits:-
12.17.1.1 The cumulative gross exposure through equity, debt and
derivative positions should not exceed 100% of the net assets of
the scheme.
12.17.1.2 Mutual Funds shall not write options or purchase instruments
with embedded written options.
12.17.1.3 The total exposure related to option premium paid must not
exceed 20% of the net assets of the scheme.
12.17.1.4 Cash or cash equivalents with residual maturity of less than 91
days may be treated as not creating any exposure.
12.17.1.5 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 Point
12.16.1.1.
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
307
SEBI Circular No. Cir/ IMD/ DF/ 11/ 2010 dated August 18, 2010
136 Master Circular for Mutual Funds
quantity of the existing position against which hedge has
been taken.
12.17.1.6 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.
12.17.1.7 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 12.16.1.1.
Definition of Exposure in case of Derivative Positions
12.17.1.8 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
Short Future Futures Price * Lot Size * Number of
Contracts
Option bought Option Premium Paid * Lot Size * Number
of Contracts.
137 Master Circular for Mutual Funds
12.18 Interval Schemes/Plans308
12.18.1 Certain SIDs provide that the subscription to the scheme can be
made during a specific period (known as specified transaction
period). These schemes are generally referred to as ‘interval
schemes’.
12.18.2 For all interval schemes/plans309:
12.18.2.1 The units shall be mandatorily listed.
12.18.2.2 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.
12.18.2.3 Minimum duration of an interval period in an interval
scheme/plan shall be 15 days.
12.18.2.4 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.
308 SEBI Circular No. CIR/IMD/DF /19/2010 dated November 26, 2010
309
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.
138 Master Circular for Mutual Funds
12.19 CDS – mutual funds as users (protection buyers)310
12.19.1 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.
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.
310 SEBI Circular No. CIR/IMD/DF/23/2012 dated November 15, 2012.
139 Master Circular for Mutual Funds
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 trustee report, as per the format311. 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 format312 .
12.19.2 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
311 Please refer to section on Formats for requisite formats
312 Please refer to section on Formats for requisite formats
140 Master Circular for Mutual Funds
May 23, 2011 and subsequent guidelines issued by RBI and
SEBI from time to time.
141 Master Circular for Mutual Funds
CHAPTER 13
ADVERTISEMENTS313
13.1 Advertisement shall be in terms of Sixth Schedule314.
13.2 In addition to the provisions of the Sixth Schedule, mutual funds
shall comply with the following:315
13.2.1 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.
13.2.2 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.
13.2.3 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).
13.3 Transparency of Information316
13.3.1 When the scheme has been in existence for more than three years:
313SEBI Circular No.Cir/IMD/DF/13/2011 dated August 22, 2011 and SEBI Circular
No.Cir/IMD/DF/6/2012 dated February 28, 2012
314 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
315 SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
316 SEBI Circular No.Cir/IMD/DF/13/2011 dated August 22, 2011
142 Master Circular for Mutual Funds
13.3.1.1 Point-to-point returns on a standard investment of `10,000/-
shall also be shown in addition to CAGR for a scheme in order to
provide ease of understanding to retail investors.
13.3.1.2 Performance advertisement shall be provided since inception and
for as many twelve month periods as possible for the last 3
years, such periods being counted from the last day of the
calendar quarter preceding the date of advertisement, along with
benchmark index performance for the same periods.
13.3.2 Where scheme has been in existence for more than one year but
less than three years, performance advertisement of scheme(s) shall
be provided for as many as twelve month periods as possible, such
periods being counted from the last day of the calendar quarter
preceding the date of advertisement, alongwith benchmark index
performance for the same periods.
13.3.3 Where the scheme has been in existence for less than one year,
past performance shall not be provided.
13.3.4 In case of Money Market schemes or cash and liquid schemes317,
wherein investors have very short investment horizon, the
performance can be advertised by simple annualisation of yields if a
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.
13.3.5 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:
317 SEBI Circular No.Cir/IMD/DF/6/2012 dated February 28, 2012
143 Master Circular for Mutual Funds
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.
13.3.6 Any disclosure regarding quarterly/ half yearly/ yearly performance
shall pertain to respective calendar quarterly/ half yearly/ yearly
only.
13.3.7 When 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 of that particular scheme.
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 advertisement. 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.
144 Master Circular for Mutual Funds
13.4 Indicative portfolios and yields in mutual funds
schemes318
13.4.1 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.
13.4.2Indicative portfolio or yield in close ended debt
oriented mutual fund schemes319
Mutual Funds (MFs) / AMCs may make following additional
disclosures in the SID/SAI and KIM without indicating the
portfolio or yield, directly or indirectly:
13.4.2.1 MFs/AMCs shall disclose their credit evaluation policy for the
investments in debt securities.
13.4.2.2 MFs/AMCs shall also disclose the list of sectors they would not
be investing.
13.4.2.3 MFs shall disclose the type of instruments which the schemes
propose to invest viz. CPs, CDs, Treasury bills etc
13.4.2.4 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:
318 SEBI Circular No. IMD/CIR No. 14/1510/2009 dated January 19, 2009
319 SEBI Circular No. CIR/IMD/DF/12/2011 dated August 01,2011
145 Master Circular for Mutual Funds
13.4.2.5 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.
146 Master Circular for Mutual Funds
CHAPTER 14
INVESTOR RIGHTS & OBLIGATIONS
PART I – INVESTOR RIGHTS
14.1Payment of interest for delay in dispatch of
redemption and/or repurchase proceeds and/or
dividend320
14.1.1 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 period321,
14.1.2 The AMC(s) shall be liable to pay interest @ 15 per cent per
annum to the unit holders.322 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).
14.1.3 Details of such payments shall be sent to the Board along with the
CTR(s).323 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.
320 SEBI Circular No. SEBI/MFD/CIR/2/266/2000 dated May 19, 2000.
,3 21
SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
,3 22Regulation 53(c) of the SEBI (Mutual Fund) Regulations, 1996.
323 For CTR format please refer to section on Formats
147 Master Circular for Mutual Funds
14.2Unclaimed Redemption Amount324
14.2.1 Unclaimed redemption and dividend amounts may be deployed by
Mutual Funds in Call Money Market or Money Market
instruments, as may be permitted by RBI from time to time.
14.2.2 Investors claiming these amounts within three years from the due
date shall be paid at the prevailing NAV. At the end of three years,
the amount can be transferred to a pool account and investors
can claim the amount at the NAV prevailing at the end of the third
year.
14.2.3 Income earned on such funds can be used for the purpose of
investor education.
14.2.4 The AMC shall make a continuous effort to remind the investors
through letters to take their unclaimed amounts.
14.2.5 The investment management and advisory fee charged by the
AMC for managing unclaimed amounts shall not exceed 50 basis
points.
14.2.6 Disclosures on above provisions shall be made in the SAI /SID.
Disclosure on the unclaimed amounts and the number of such
investors for each scheme shall be made in the Annual Report
also.325
14.3Dispatch of Statement of Accounts326
324SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000
325 Please refer to Schedule XI of SEBI (Mutual Funds) Regulations, 1996
326SEBI 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
148 Master Circular for Mutual Funds
14.3.1 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.
14.3.2 Consolidated Account Statement327
14.3.2.1 As per regulation328, 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.
14.3.3 Systematic Investment Plan (SIP) or Systematic Transfer Plan
(STP) or Systematic Withdrawal Plan (SWP) 329
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, a soft copy of the Statement of Accounts shall be e-
mailed to the unit holders on a monthly basis.
327 SEBI Circular No.Cir/IMD/DF/16/2011 dated September 08, 2011
328 Regulation 36(4) of SEBI (Mutual Funds) Regulations, 1996
329 SEBI Circular No. IMD/CIR/12/80083/2006 dated November 20, 2006
149 Master Circular for Mutual Funds
14.3.4 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.
14.4 AMC’s Annual Reports for unitholders330
14.4.1 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.
14.5Distribution of Proceeds realized from illiquid
securities/ NPAs 331
14.5.1 Some of the investments made by Mutual Funds may become
non-performing assets (NPAs) or illiquid at the time of
maturity/winding up of the scheme(s). In due course of time i.e.
after the maturity/ winding up of the scheme(s), these NPAs and
illiquid securities may be realized by the Mutual Funds. Mutual
Funds shall distribute such amounts to the old investors if such
amounts are substantial and realized within two years. If the
330 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000
331 SEBI Circular No. MFD/CIR/05/432/2002 dated June 20, 2002.
,
150 Master Circular for Mutual Funds
amounts realized are not substantial or are realized after two
years, the same may be transferred to the Investor Education
Fund maintained by each Mutual Fund. The decision as to the
determination of substantial amount shall be taken by the
trustees of mutual funds after considering the relevant factors.
14.6 Change of Mutual Fund Distributor
14.6.1 Incase 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.332
14.7Additional mode of payment through Applications
Supported by Blocked Amount (hereinafter referred to
as “ASBA”) in Mutual Funds333
14.7.1 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 schemes. It shall co-exist with the current process, wherein
cheques/ demand drafts are used as a mode of payment.
14.7.2 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.
14.7.3 Mutual Funds shall ensure that adequate arrangements are made
by Registrar and Transfer Agents for the implementation of ASBA.
332 SEBI Circular No -SEBI/IMD/CIR No./ 13/187052 /2009 December 11, 2009
333 SEBI Circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010
151 Master Circular for Mutual Funds
Mutual Funds/AMCs shall make all relevant disclosures in this
regard in the SAI.
14.7.4 SEBI circulars334 related to ASBA shall be followed to the extent
applicable.
334 SEBI Circular No. SEBI/CFD/DIL/DIP/31/2008/30/7 dated July 30, 2008,
SEBI/CFD/DIL/2008/25/09 dated 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
152 Master Circular for Mutual Funds
PART II – INVESTOR’S OBLIGATIONS
14.8Mandatory mentioning of PAN Number335
14.8.1 For, the requirement of mentioning PAN Number by investors of
mutual fund schemes, the applicable SEBI guidelines may be
referred336
14.9Mandatory mentioning of Bank Account by
Investors337
14.9.1 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.
14.10 Cash Investments in mutual funds338
14.10.1 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 20,000/- 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
335 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.
, 3 ,, 36 SEBI Circular No. MRD/DoP/MF/Cir-08/2008 dated April 3, 2008.
< 3 , 37 SEBI Circular No. IIMARP/MF/CIR/07/826/98 dated April 15, 1998.
153 Master Circular for Mutual Funds
(AML) and other applicable AML rules, regulations and
guidelines and (ii) sufficient systems and procedures in place.
14.10.2 Repayment in the form of redemptions, dividend, etc. with
respect to aforementioned investments shall be paid only through
banking channel.
338 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
154 Master Circular for Mutual Funds
PART III– INVESTOR EDUCATION
14.11 SEBI Investors Education Programme – Investments
in Mutual Funds339
14.11.1 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.
14.11.2 AMCs are advised to circulate copies of the brochure among their
distributors and agents (including brokers, banks, post offices) and
the investors.
14.11.3 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.
14.11.4 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.
14.11.5 Board may be kept informed about the steps taken by the AMCs
in this regard from time to time.
339 SEBI Cir No. MFD/CIR NO -13/370/02 dated January 16,2002
155 Master Circular for Mutual Funds
CHAPTER 15
CERTIFICATION AND REGISTRATION OF INTERMEDIARIES 340, 341
15.1 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.
15.2 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.
15.3 Further, such intermediaries and employees shall also adhere to the
Guidelines specified by the Board and AMFI.342
15.4 Distributors of Mutual Fund products343
15.4.1 The AMCs shall regulate the distributors by putting in place a
due diligence process as follows:
340 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.
<3 41 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,
2003.341 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.
<
3
<
42 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.
343 SEBI Circular No. CIR/IMD/DF/13/2011 dated August 22, 2011.
156 Master Circular for Mutual Funds
15.4.1.1 The due diligence of distributors is solely the
responsibility of mutual funds/AMCs. This
responsibility shall not be delegated to any agency.
However, mutual funds/AMCs may take assistance of
an agency of repute while carrying out due diligence
process of distributors. 344
15.4.1.2 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 `100 Crore across industry in the
non institutional category but including high networth
individuals (HNIs).
c. Commission received of over `1 Crore p.a. across industry.
d. Commission received of over `50 Lakh from a single Mutual
Fund.
15.4.1.3 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.
344 SEBI Circular No. Cir/IMD/DF/7/2012 dated February 28, 2012
157 Master Circular for Mutual Funds
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.
15.4.1.4 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-
158 Master Circular for Mutual Funds
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.
15.4.1.5 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.
159 Master Circular for Mutual Funds
15.4.2 Mutual Funds/AMCs may implement additional measures as
deemed appropriate to help achieve greater investor protection.
15.5 Code of Conduct:
15.5.1 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 by the AMC(s) in their CTR(s) and by the Trustees in their
Half Yearly Reports.
15.5.2 AMFI has prescribed a Code of Conduct for Mutual Fund
intermediaries enclosed herewith as Annexure 1345. All
intermediaries shall follow the Code of Conduct strictly and not
indulge in any practice contravening it directly or indirectly.
15.5.3 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.
15.6 Empanellment of Intermediaries by Mutual Funds
15.6.1 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
345 Refer Annexure for details on Code of Conduct
160 Master Circular for Mutual Funds
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.
15.7 Certification Programme for sale and/ or distribution of
mutual fund products346
15.7.1 With effect from June 01, 2010, the certification examination for
distributors, agents or any other persons employed or engaged or
to 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)347.
15.7.2 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.
15.7.3 The Certification Regulations require the persons referred to in
paragraph 15.7.1 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
346 SEBI Circular No. Cir/IMD/DF/5/2010 dated June 24, 2010
347 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
161 Master Circular for Mutual Funds
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 the relevant clauses of the Certification
Regulations, by December 31, 2010.
15.7.4 An associated person holding a valid AMFI/NISM certification
whose validity expires anytime 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.
15.7.5 The requirement of obtaining registration from AMFI after
obtaining certification, as per the Circular dated November 28,
2002, would continue.
15.8 New cadre of distributors348
15.8.1 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.
15.8.2 Simple and performing mutual fund schemes shall comprise
of diversified equity schemes, fixed maturity plans (FMPs) and
index schemes and should have returns equal to or better than
their scheme benchmark returns during each of the last three
years.
348 SEBI Circular No. CIR/IMD/DF/21/2012 dated September 13, 2012.
162 Master Circular for Mutual Funds
15.8.3 These new cadre of distributors would require a simplified
form of NISM certification and AMFI Registration.
15.9 Unique Identity Number
15.9.1 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.
15.9.2 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.
163 Master Circular for Mutual Funds
CHAPTER 16
TRANSACTION IN MUTUAL FUNDS UNITS
16.1 Maintenance of documents349
16.1.1 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”350, maintenance of all documentation
pertaining to the unitholders/ investors is the responsibility of the
AMC.
16.1.2. 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:
16.1.2.1 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.
16.1.2.2 Take immediate steps to obtain all investor/ unit holders
documents in terms of the AML/ CFT, including KYC
documents/ PoA as applicable.
349 SEBI Circular No - SEBI/IMD/CIR No.12 /186868 /2009 dated December 11,2009
350 SEBI Circular No ISD/AML/CIR-1/2008 dated December 19, 2008
164 Master Circular for Mutual Funds
16.1.2.3 Take immediate steps to obtain all supporting documents in
respect of the past transactions.
16.1.2.4 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.
16.1.2.5 Set up a separate customer services mechanism to handle/
address queries and grievance of the above mentioned unitholders.
16.1.2.6 Pending completion of documentation, exercise great care and be
satisfied of investor bonafides before authorizing any transaction,
including redemption, on such accounts/ folios.
16.1.3 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.
16.1.4 All mutual funds/ AMCs are directed that351:
16.1.4.1 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.
16.1.4.2 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.
16.1.4.3 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.
351
SEBI Circular No Cir /IMD/DF/9 / 2010 dated August 12, 2010
165 Master Circular for Mutual Funds
16.2 Facilitating transactions in Mutual Fund schemes through
the Stock Exchange infrastructure352
16.2.1 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.
16.2.2 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 acceptance353.
16.2.3 The respective stock exchange would provide detailed operating
guidelines to facilitate the same.
16.2.4In this regard, Mutual Funds/AMC are advised that:
16.2.4.1Empanelment 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 examination354.All such stock brokers would then
be considered as empanelled distributors with mutual
fund/AMC.
b. These stock brokers shall also comply with Code of Conduct355
for intermediaries of Mutual Funds, and applicable SEBI
guidelines356, applicable to intermediaries engaged in selling
and marketing of mutual fund units.
352
SEBI Circular No - SEBI /IMD / CIR No.11/183204/ 2009 dated November 13,2009
353 SEBI Circular No. SEBI/IMD/CIR No.11/78450/06 dated October 11, 2006
354 Please refer Chapter 15 on Certification and Registration of Mutual Funds intermediaries
355 For Code of Conduct, please refer to Annexure I
356 Please refer Chapter 15 on Certification and Regiatration of Mutual Funds intermediaries
166 Master Circular for Mutual Funds
c. It is clarified that, stock exchanges shall monitor the
compliance of the code of conduct specified regarding
empanelment of intermediaries by mutual funds357.
16.2.4.2 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 Board358.
16.2.4.3 Statement of Account
16.2.4.4 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 359.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.
16.2.4.5 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.
357Please refer Chapter 15 on Certification and Regiatration of Mutual Funds intermediaries
,3, 58 Please refer to Chapter 8 – Net Asset Value for details on cut off timing provisions
359 For details on dispatch of statement of accountts. refer to Chapter 14- Investor Rights and
services
167 Master Circular for Mutual Funds
16.2.4.6 Option to hold units in demat form360
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.
16.2.4.7 Know your client (KYC).
a. Where investor desires to hold units in dematerialised form, the
KYC performed by DP in terms of SEBI requirements361 would
be considered compliance with applicable requirements
specified in this regard362 by Mutual Funds/AMCs.
b. The Mutual Funds/AMC shall take necessary steps to do KYC
requirements of all investors as per the prescribed
guidelines363.
360 SEBI circular no.CIR/IMD/DF/9/2011, dated May 19, 2011
361 SEBI Circular No - MRD/DoP/Dep/Cir-29/2004 dated August 24, 2004
362 SEBI Circular No - ISD/AML/CIR-1/2008 dated December 19, 2008
363 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
168 Master Circular for Mutual Funds
16.2.4.8 Stock exchanges and mutual funds/AMCs, based on the
experience gained may improve the mechanism in the interest
of investors.
16.2.4.9 In addition to the existing facilities of purchasing and
redeeming directly with the Mutual Funds and Stock Brokers,
the following be noted364:
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.
16.2.4.10 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 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
364 SEBI Circular No CIR/IMD/DF/17/2010 dated November 9, 2010
169 Master Circular for Mutual Funds
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.
16.2.4.11 The following may be noted in this regard:
a. Clearing members and Depository participants will be eligible
to be considered as official points of acceptance365 and
conditions stipulated366 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 specified367 regarding empanelment and code of
conduct for intermediaries of Mutual Funds.
16.2.4.12 The respective stock exchanges and Depositories would
provide detailed operating guidelines to facilitate the above and
ensure that timelines prescribed368 shall be adhered to with
regard to allotment of units and receipt of redemption proceeds
at the investor’s level.
365 SEBI Circular No. SEBI/IMD/CIR No.11/78450/06 dated October 11, 2006
366 SEBI Circular dated November 13, 2009 for stock brokers
367SEBI Circulars MFD/CIR/20/23230/02 dated November 28, 2002 and
SEBI/IMD/08/174648/2009 dated August 27, 2009
368 SEBI (Mutual Funds) Regulations, 1996
170 Master Circular for Mutual Funds
16.2.4.13 Transferability of Mutual Fund units369
a. Regulations370 state 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.
16.2.5 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.
369 SEBI Circular No - CIR/IMD/DF/10/2010 dated August 18, 2010
370 Regulation 37(1) of SEBI (Mutual Fund) Regulations, 1996
171 Master Circular for Mutual Funds
CHAPTER 17
MISCELLANEOUS
17.1Investment by Foreign Investors in Mutual Fund
Schemes371.
17.1.1 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:
17.1.1.1 Direct route - Holding MF units in demat account through a
SEBI registered depository participant (DP).
17.1.1.2 Indirect route- Holding MF units via Unit Confirmation Receipt
(UCR).
17.1.2 The investment through the above mentioned routes shall be
subject to the following conditions:
17.1.2.1 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.
371 SEBI Circular No.CIR/IMD/DF/14/2011 dated August 9, 2011
172 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.
17.1.2.2 MF shall ensure that only QFIs who comply with para 17.1.2.1
are allowed to invest under these routes.
17.1.2.3 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.
17.1.2.4 The aggregate investments by QFIs under both the routes
shall be subject to a total overall ceiling of US $10 billion for
equity schemes.
17.1.2.5 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.
17.1.2.6 MF can accept subscriptions from QFIs till such time the
investments by QFIs under both the routes reaches US $8
173 Master Circular for Mutual Funds
billion in equity schemes and US $2.5 billion in debt schemes
and the 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.
17.1.2.7 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 17.1.2.6.
17.1.2.8 MF/ DP shall ensure that the units held by QFIs by way of
UCR/demat holding are non transferable and non tradable.
17.1.2.9 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.
17.1.2.10 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
174 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.
17.1.2.11 MF shall ensure that Systematic Investments/ transfer/
withdrawals and switches are not available to the QFIs. QFIs can
only subscribe or redeem.
17.1.2.12 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.
17.1.2.13 MF shall comply with all the requirements as per the PMLA, FATF
standards and SEBI circulars issued in this regard on an ongoing
basis.
17.1.2.14 MF shall ensure that all the investor related documents/ records
of the QFIs are available with them.
17.1.2.15 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.
17.1.2.16 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
the attention of SEBI and unitholders of the concerned
scheme.
175 Master Circular for Mutual Funds
17.1.2.17 MF shall be responsible for the deduction of applicable tax at
source out of the redemption proceeds before making redemption
payments to QFIs.
17.1.2.18 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 17.1.2.3 above.
17.1.3 Other conditions for direct route (demat account).
17.1.3.1 There shall be 3 parties under this route - QFIs, qualified DP and
MF.
17.1.3.2 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 alongwith the DP shall have adequate systems to ensure
the compliance of the same.
17.1.3.3 To become a qualified DP, a SEBI registered DP shall fulfill the
following:
a. DP shall have paid up capital of `50 Crore or more,
b. DP shall be either a clearing bank or clearing member of
any of the clearing corporations.
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.
176 Master Circular for Mutual Funds
e. DP shall obtain prior approval of SEBI before commencing
the
activities relating to accepting MF subscription from QFIs.
17.1.3.4 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.
17.1.3.5 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
1.11.3.14. However, MF shall comply with PMLA, FATF standards
and SEBI circulars issued in this regard from time to time on an
ongoing basis.
17.1.3.6 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.
17.1.3.7 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.
177 Master Circular for Mutual Funds
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.
Redemption
a. 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.
b. 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,
178 Master Circular for Mutual Funds
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
a. 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.
17.1.4 Other conditions for Indirect route (Unit Confirmation Receipts)
17.1.4.1 There shall be four parties involved - QFIs, UCR issuer (based
overseas), SEBI registered Custodian (based in India) and MF.
17.1.4.2 QFIs can subscribe / redeem only through the UCR Issuer.
17.1.4.3 MF shall appoint one or more UCR issuing agent overseas and one
SEBI registered custodian in India.
17.1.4.4 UCR issuer appointed by MF shall act as agent of the MF.
17.1.4.5 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.
179 Master Circular for Mutual Funds
17.1.4.6 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.
17.1.4.7 MF shall comply with all the requirements as per the PMLA, FATF
standards and SEBI circulars issued in this regard on an ongoing
basis.
17.1.4.8 Custodians appointed by the MF shall comply with the SEBI
(Custodian of Securities) Regulations, 1996, circulars and
guidelines issued by SEBI.
17.1.4.9 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.
17.1.4.10 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.
17.1.4.11 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.
180 Master Circular for Mutual Funds
17.1.4.12 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 17.1.2.13 above.
17.1.4.13 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 17.1.2.14.
17.1.4.14 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
17.1.5 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.
181 Master Circular for Mutual Funds
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.
a. 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 custodian shall in turn confirm to the UCR Issuer to issue UCR
to the QFIs.
b. 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.
c. 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.
17.1.6 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.
182 Master Circular for Mutual Funds
17.2Clarification372 to Regulation 24373
17.2.1 The amended Regulation 24 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.
17.2.2 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.
17.2.3 Wherein a fund manager is common across mutual fund schemes and
schemes/products under other permissible activities of AMC, then the
AMC shall:
17.2.3.1 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.
17.2.3.2 in case of any performance advertisement is issued by the AMC
for any scheme, then the details of returns of all the schemes
(mutual fund, pension funds, offshore funds etc) managed by that
fund manager shall be provided.
17.2.3.3 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.
372 SEBI Circular No.Cir/IMD/DF/7/2012 dated February 28, 2012
373 Of SEBI (Mutual Funds) Regulations, 1996
183 Master Circular for Mutual Funds
17.3Product Labeling in Mutual Funds374
17.3.1 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, depicted by colour code boxes as
under:
• Blue – principal at low risk.
• Yellow – principal at medium risk.
• Brown – principal at high risk.
The colour codes shall also be described in text beside the colour
code box.
d. A disclaimer that investors should consult their financial advisers
if they are not clear about the suitability of the product.
17.3.2 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.
374 SEBI Circular No. CIR/IMD/DF/5/2013 dated March 18, 2013
184 Master Circular for Mutual Funds
c. Scheme advertisements-placed in manner so as to be
prominently visible to investors.
********
185 Master Circular for Mutual Funds