Deputy General Manager
Investment Management Department
SEBI / IMD / MC No.1 /189241/ 2010
January 1, 2010
All Mutual Funds, Asset Management Companies (AMCs)
and Association of Mutual Funds in India (AMFI)
Sir / Madam,
Sub: Master Circular for Mutual Funds
For effective regulation of the Mutual Fund Industry, Securities and Exchange
Board of India (SEBI) has been issuing various circulars from time to time. In
order to enable the industry and other users to have an access to all the
applicable circulars at one place, Master Circular for Mutual Funds has been
prepared.
This Master Circular is a compilation of all the circulars issued by SEBI on the
above subject, which are operational as on date of this circular.
Yours faithfully,
Asha Shetty
MASTER CIRCULAR FOR MUTUAL FUNDS
BY
S A E B I
ECURITIES ND XCHANGE OARD OF NDIA
1. This Master Circular includes circulars issued upto December 31, 2009.
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 December 31, 2009) issued by other
Department/Division of SEBI relevant to Mutual Funds.
2 Master Circular for Mutual Funds
INDEX
ABBREVIATIONS ............................................................................. 5
CHAPTER 1 ..................................................................................... 6
OFFER DOCUMENT FOR SCHEMES ................................................. 6
CHAPTER 2 ................................................................................... 16
CONVERSION AND CONSOLIDATION OF SCHEMES AND LAUNCH OF
ADDITIONAL PLAN ........................................................................ 16
CHAPTER 3 ................................................................................... 21
NEW PRODUCTS ........................................................................... 21
CHAPTER 4………………………………………………………………………….24
RISK MANAGEMENT SYSTEM........................................................ 24
CHAPTER 5 ................................................................................... 27
DISCLOSURES & REPORTING NORMS ........................................... 27
CHAPTER 6 ................................................................................... 36
GOVERNANCE NORMS .................................................................. 36
CHAPTER 7 ................................................................................... 56
SECONDARY MARKET ISSUES ...................................................... 56
CHAPTER 8 ................................................................................... 60
NET ASSET VALUE ........................................................................ 60
CHAPTER 9 ................................................................................... 69
VALUATION .................................................................................. 69
CHAPTER 10 ................................................................................. 90
LOADS, FEES AND EXPENSES ....................................................... 90
CHAPTER 11 ................................................................................. 95
DIVIDEND DISTRIBUTION PROCEDURE ....................................... 95
CHAPTER 12 ................................................................................. 97
INVESTMENT BY SCHEMES........................................................... 97
CHAPTER 13 ................................................................................111
ADVERTISEMENTS ......................................................................111
3 Master Circular for Mutual Funds
CHAPTER 14 ................................................................................127
INVESTOR RIGHTS & OBLIGATIONS ............................................127
CHAPTER 15 ................................................................................134
CERTIFICATION AND REGISTRATION OF INTERMEDIARIES .......134
CHAPTER 16 ................................................................................136
TRANSACTION IN MUTUAL FUNDS UNITS .....................................136
FORMATS ------------------------------------------Refer the attachment
ANNEXURES --------------------------------------Refer the attachment
4 Master Circular for Mutual Funds
ABBREVIATIONS
American Depository Receipt ADR
Association of Mutual Funds in India AMFI
Asset Management Company AMC(s)
Bombay Stock Exchange BSE
Compliance Test Reports CTR(s)
Contingent Deferred Sales Charge CDSC
Fixed Maturity Plans FMP(s)
Foreign Institutional Investor FII
Global Depository Receipt GDR
Gold Exchange Traded Fund GETF
Hindu Undivided Family HUF
Investor Service Center ISC
Key Information Memorandum KIM
Monthly Cumulative Report MCR
National Stock Exchange NSE
Net Asset Value NAV
New Fund Offer NFO
Non Performing Assets NPA(s)
Permanent Account Number PAN
Regulation Reg.
SEBI (Mutual Funds) Regulations 1996 Regulations
Securities and Exchange Board of India the Board
Scheme Information Document SID Offer
Statement of Additional Information SAI Document
Systematic Investment Plan SIP
Systematic Transfer Plan STP
Systematic Withdrawal Plan SWP
Trustee(s) Board of Trustee(s)/Trustee
Company
Uniform Client Code UCC
5 Master Circular for Mutual Funds
CHAPTER 1
OFFER DOCUMENT FOR SCHEMES
1.1Filing of Offer Document with the Board 1
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 Regulations.4
1.1.3 All offer documents (ODs) of Mutual Fund schemes shall be filed with
SEBI in terms of the Regulations5.
1.1.3.1 Filing of Draft SID:
a. Draft SID of schemes of Mutual Funds filed with the Board
shall also be available on SEBI’s website – www.sebi.gov.in for
21 working days from the date of filing.
b. AMC shall submit a soft copy of draft SID to the Board in
HTML or PDF format. For this purpose, AMC shall be fully
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 the chapter 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
6 Master Circular for Mutual Funds
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.
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
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
7 Master Circular for Mutual Funds
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 Board. 13
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
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.
12Regulation 29(2) of the 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.
8 Master Circular for Mutual Funds
the subsequent financial year. (For example, for a scheme launched
in May, 2008 the SID shall be updated by June 30, 2009 and for a
scheme launched in December 2008, the SID shall be updated by
June 30, 2010) 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 allthe
distributors/brokers/Investor Service Centre (ISC) so that the
same can be attached to copies of SID already in stock, till the
SID is updated.
3. In case any information in SID is amended more than once, the
latest applicable addendum shall be a part of SID. (For example,
in case of changes in load structure the addendum carrying the
latest applicable load structure shall be attached to all KIM and
SID already in stock till it is updated).
4. A public notice shall be given in respect of such changes in one
English daily newspaper having nationwide circulation as well
as in a newspaper published in the language of region where
the Head Office of the Mutual Fund is situated.
5. The account statements issued to investors shall indicate the
applicable load structure.
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
14 Regulation 18 (15A) of SEBI (Mutual Funds) Regulation 1996
9 Master Circular for Mutual Funds
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 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 Validity of SEBI Observations on SID
1.3.1The AMCs shall file their replies to the modifications suggested by SEBI
on SID as required under Regulation 29 (2), if any, within six months
15 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
16 SEBI Circular No – SEBI/IMD/CIR No.10/178129/09 dated September 29,2009
10 Master Circular for Mutual Funds
from the date of the letter. In case of lapse of six-month period, the
AMC shall be required to refile the SID alongwith filing fees.
1.3.2 The scheme shall be launched within six months from the date of the
issuance of final observations from SEBI. If the AMC intends to launch
the scheme at a date later than six months, it shall refile the SID with
SEBI under Regulation 28 (1) along with filing fees.
1.4 Undertaking from Trustees for new 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.”
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 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.
17 SEBI Cir No IMD/CIR No.5/70559/06 dated June 30,2006
18 Reg 18 (4) of SEBI ( Mutual Funds) Regulations, 1996.
19 For Standard Observations, please refer to Formats chapter
11 Master Circular for Mutual Funds
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
1.6.2.1Mutual 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
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 Easy Availability of Offer Document
1.7.1 Trustees and AMCs shall ensure that the SID of the schemes and SAI
are readily available with all the distributors/ISCs and confirm the
same to SEBI in the half yearly trustee report.
20 For fomat of KIM please refer the chapter on formats
12 Master Circular for Mutual Funds
1.8 Selection of Benchmarks21
1.8.1 In case of equity oriented schemes, mutual funds may appropriately
select any of the indices available, (e.g. BSE (Sensitive) Index, S&P CNX
Nifty, BSE 100, BSE 200 or S&P CNX 500 etc.) as a benchmark index
depending on the investment objective and portfolio.
1.8.2 Benchmarks for debt oriented and balanced fund schemes22 developed
by research and rating agencies recommended by the AMFI on a
regular basis shall be used by the Mutual Funds
1.8.3 In case of sector or industry specific schemes, Mutual Funds may select
any sectoral indices as published by the Stock Exchanges and other
reputed agencies.
1.8.4 These benchmark indices may be decided by the AMC(s) and Trustees.
Any change at a later date in the benchmark index shall be recorded
and reasonably justified23.
1.8.5 Examples of benchmarks are illustrated below:24
1.8.5.1 Growth funds maintaining minimum 65% of their investments in
equities shall always be compared against The Bombay Stock
Exchange Ltd. (BSE) Sensex or The National Stock Exchange Ltd.
(NSE) Nifty or BSE 100 or CRISIL 500 or similar standard
indices.
1.8.5.2 Income funds maintaining 65% or more of investments in debt
instruments shall be compared with a suitable index that is a
representative of the fund’s portfolio.
21 SEBI 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.
22 SEBI Circular No. MFD/CIR/01/071/02 dated April 15, 2002.
23 SEBI 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.
24 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000
13 Master Circular for Mutual Funds
1.8.5.3 Balanced funds with equity investments of 40%-60% shall be
compared with a tailored index having 50% of its weight selected
from any equity index as above and the other 50% from an
appropriate bond return index.
1.8.5.4 Money Market funds or liquid plans can be compared against a
suitable Money Market Instrument or a combination of such
instruments.
1.9 New Fund Offer (NFO) Period25
1.9.1 In case of open ended schemes, the NFO should be open for 30 days.
The scheme should open for ongoing sales and repurchases within 30
days from the closure of the NFO of the scheme.
1.10 Discontinuation of the nomenclature – ‘Liquid Plus
Scheme(s)’26
1.10.1 The nomenclature “Liquid Plus Scheme(s)” has been discontinued from
January 2009 since it gives a wrong impression of added liquidity.
Mutual funds have been advised to carry out appropriate change(s) in
the nomenclature of their scheme(s) designated as “Liquid Plus
Scheme(s)”.
1.11 Fundamental Attributes27
1.11.1 The words "fundamental attributes"28 are elaborated below:
1.11.1.1 Type of a scheme
a. Open ended/Close ended/Interval scheme
25 SEBI circular no MFD/Cir.No 9/120/2000 dated November 24, 2000
26
SEBI/IMD/CIR No.13/150975 / 09 dated January 19, 2009
27 SEBI Circular No- IIMARP/MF/CIR/01/294/98 dated February 4, 1998
28 as mentioned in clause (d) of sub-regulation (15) of regulation 18
14 Master Circular for Mutual Funds
b. Sectoral Fund/Equity Fund/Balance Fund/Income Fund/Debt
Fund/Index Fund/Any other type of Fund
1.11.1.2 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.
1.11.1.3 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.
15 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)29
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
Regulations30, following requirements are clarified again in the interests of
investors:
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 Board31 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 format32
29 SEBI Circular No. MFD/CIR No.22/2311/03 dated January 30, 2003.
30 Regulation 33(3) of the Mutual Funds Regulations.
31 SEBI Circular No. SEBI/IMD/Cir No 5/126096/08 dated May 23, 2008
32 Refer to format of half yearly portfolio disclosure under chapter on formats.
16 Master Circular for Mutual Funds
b. Details of the financial performance of the scheme(s) since inception
in the format prescribed in SID33 along with comparisons with
appropriate benchmark(s)34.
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.
33 Please refer to format of SID under chapter on Formats.
34 For examples of Benchmarks, refer to chapter on SID
17 Master Circular for Mutual Funds
PART II – CONSOLIDATION OF SCHEMES
2.2 Consolidation of Schemes35
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 regard36.
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, shall disclose all
35 SEBI Circular No. SEBI/MFD/CIR No.5/12031/03 dated June 23, 2003.
36 Regulation 18(15A) of the Mutual Funds Regulations.
18 Master Circular for Mutual Funds
relevant information enabling them to take well informed
decisions. This information will include, inter alia:
1. Latest portfolio of the concerned schemes37.
2. Details of the financial performance of the concerned schemes since inception
in the format prescribed in SID38 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 scheme39.
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 filed with the Board within 21 days from the date of
closure of the exit option40.
37 Refer format of half yearly portfolio disclosure under chapter on Formats
38 Please refer to SID Format under Chapter on Formats
39 Please refer to SID chapter for further details
40
SEBI Circular No- SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
19 Master Circular for Mutual Funds
PART III – LAUNCH OF ADDITIONAL PLANS41
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).
41 SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
20 Master Circular for Mutual Funds
CHAPTER 3
NEW PRODUCTS
3.1 Fund of Funds Scheme42
3.1.1 The SID and the advertisements pertaining to Fund of Funds Scheme43
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.
3.2 Gold Exchange Traded Fund Scheme44
3.2.2 A Gold Exchange Traded Fund (GETF) Scheme45 shall invest primarily in:
3.2.2.1 Gold and
3.2.2.2 Gold related instruments.46 However investments in gold related
instruments shall be done only after such instruments are specified by
the Board47
3.2.3 Valuation:
3.2.3.1 Gold shall be valued based on the methodology provided in Clause
3A of, Schedule Eight of the Mutual Funds Regulations48.
42 SEBI Circular No. MFD/CIR. No.04/11488/2003 dated June 12, 2003.
43 Regulation 2(ma) of the Mutual Funds Regulations introduced vide Gazette Notification No.
S.O 632(E) dated May 29, 2003.
44 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.
45 Regulation 2(mb) of the Mutual Funds Regulations introduced vide Gazette Notification No.
S.O. 38(E) dated January 12, 2006.
46 Regulations 2(mc) of the Mutual Funds Regulations introduced vide Gazette Notification
No. S.O. 38(E) dated January 12, 2006.
47 SEBI Circular No. SEBI/IMD/CIR No. 4/58422/06 dated January 24, 2006.
48 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.
21 Master Circular for Mutual Funds
3.2.4 Determination of Net Asset Value49
3.2.4.1 The NAV of units under the GETF Scheme shall be calculated up
to four decimal points as shown below:
Market or Fair Value of Scheme's investments + Current
-
Assets Current Liabilities and Provision
NAV (in Rs. terms) = ______________________________________________
Number of Units outstanding under Scheme on the
Valuation Date
3.2.5 Recurring Expenses50
3.2.5.1The recurring expenses limits applicable to equity schemes51 shall
be applicable to GETF Scheme(s).
3.2.6 Benchmarks for GETF Scheme52
3.2.6.1GETF Scheme(s) shall be benchmarked against the price of gold.
3.3 Capital Protection Oriented Scheme53
3.3.1 The SID, KIM and advertisements pertaining to Capital Protection Oriented
Scheme54 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
49 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
50 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
51 Regulation 52(6) of the Mutual Funds Regulations.
52 SEBI Circular No. SEBI/IMD/CIR No.2/65348/06 dated April 21, 2006.
53 SEBI Circular No. SEBI/IMD/CIR No.9/74364/06 dated August 14, 2006.
54 Regulation 2(ea), 33(2A) and 38A of the Mutual Funds Regulations introduced vide Gazette
Notification No. S.O. 1254(E) dated August 3, 2006.
22 Master Circular for Mutual Funds
structure of the scheme and not from any bank guarantee, insurance
cover etc.
3.3.2 The proposed portfolio structure indicated in the SID and KIM shall be
rated by a Credit Rating Agency registered with the Board from the view
point of assessing the degree of certainty for achieving the objective of
capital protection and the rating shall be reviewed on a quarterly basis.
3.3.3 The Trustees shall continuously monitor the portfolio structure of the
scheme and report the same in the Half Yearly Trustee Reports55 to the
Board. The AMC(s) shall also report on the same in its bimonthly
(CTR(s)56to the Board.
3.3.4 It shall also be ensured that the debt component of the portfolio structure
has the highest investment grade rating.
3.4 Real Estate Mutual Funds57:
3.4.1 A real estate mutual fund scheme58 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
Annexure4.
55 For format of Half Yearly Trustee Report please refer Chapter on Formats
56 For format of bimonthly CTR please refer Chapter on Formats
57 SEBI Circular No - SEBI/IMD/CIR No.4/124477/08 May 2,2008
58refer Regulation 49 A(a)(i)
23 Master Circular for Mutual Funds
CHAPTER 4
RISK MANAGEMENT SYSTEM
59
4.1 An Operating Manual60 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
59 SEBI Circular No. MFD/CIR/15/19133/2002 dated September 30, 2002.
60 The Manual has been developed by AMFI in association with Pricewaterhouse Coopers as a
part of Indo-US Financial Institutions Reforms and Expansion Project.
24 Master Circular for Mutual Funds
b. Insurance cover against certain risks.
4.2.3 Best Practices to be followed by Mutual Funds:
4.2.3.1 Mutual Funds shall adopt these practices as a part of their
due diligence exercise after considering the size of their
operations.
4.3 Implementation of the Risk Management System
4.3.1 Mutual Funds shall adopt the following approach to implement the
Risk Management System:
4.3.2 Identification of observance of each recommendation:
4.3.2.1 Mutual Funds shall identify areas of current adherence as well
as non-adherence of various Risk Management practices under
each of the aforesaid 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.
4.3.3Review of Progress of implementation by Board of AMC and Trustee(s):
4.3.3.1The 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.
4.3.4Review by Internal Auditors:
25 Master Circular for Mutual Funds
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.
26 Master Circular for Mutual Funds
CHAPTER 5
DISCLOSURES & REPORTING NORMS
PART I - DISCLOSURES
5.1 Half Yearly disclosure of Portfolios61
5.1.1 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 advertisement62.
5.1.2 The Scheme Portfolio(s)63 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 same shall be filed with the
Board along with the Half Yearly Results64.
5.2 Unaudited Half Yearly Financials 65
5.2.1 The publication of the unaudited half-yearly results in news paper and
websites shall be made in the format prescribed in Twelfth Schedule in
line with provisions of the Regulations66.
61 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
62 Regulation 59A of the Mutual Funds Regulations & SEBI Circular No. MFD/CIR
No.010/024/00 dated January 17, 2000.
63 For format of half yearly portfolio, please refer to the formats chapter
64
SEBI Circular No. MFD/CIR No.10/310/01 dated September 25, 2001.
65 SEBI Circular MFD/CIR/1/200/2001 dated April 20, 2001 & SEBI Circular No. IMD/CIR
No.8/132968/2008 dated July 24, 2008
66
Reg 59 of SEBI (Mutual Funds) Regulations, 1996.
27 Master Circular for Mutual Funds
5.2.2 The half yearly results must be published before the expiry of one month
from the close of each half year. Copies of the advertisements carrying the
results must be filed with SEBI within 7 days from the date of
publication67.
5.3 Abridged Schemewise Annual Report Format68
5.3.1The Abridged Schemewise Annual Report69 may be mailed to the investors’
e-mail address if so mandated by the investor and the Scheme wise
Annual Report shall be displayed on the website of the mutual fund. 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
place70. However, as per the Regulations71, a copy of Scheme wise Annual
Report shall be also made available to unitholder(s) on payment of nominal
fees.
5.4 Disclosure of large unit holdings72
5.4.1 The number of investors holding over 25 % of the NAV73 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 Results74.
67 For format of Half Yearly Financials, please refer to the formats chapter
68 SEBI Circular No. IMD/CIR No.8/132968/2008 dated July 24, 2008
69 For format of abridged schemewise report, please refer the formats chapter
70 SEBI Cir No – MFD/CIR/15/041/2002 dated March 14,2002
71 regulation 56(1) & 56(3)
72
SEBI Circular No. MFD/CIR No.3/211/2001 dated April 30, 2001.
73 For further details, refer Section II – Scheme Governance in the Chapter on Governance
Norms
74 Please refer the format chapter for requisite formats
28 Master Circular for Mutual Funds
5.5 Portfolio disclosure for debt oriented close-ended and
interval schemes/plans75
5.5.1 AMCs shall disclose the portfolio of such schemes in the prescribed
format76 on a monthly basis on their respective websites.
5.5.2 The said disclosure of the portfolio as on the last day of the month shall be
made on or before 3rd working day of succeeding month. For example,
portfolio as of March 31, 2009 shall be disclosed by April 04, 2009 - April 3,
2009 being a non working day.
5.6 Annual report of the AMC 77
5.6.1 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 request for a copy of the annual report
of the asset management company.
5.7 Submission of bio data of key personnel78
5.7.1 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 AMC79.
75 SEBI Circular No. IMD/CIR No.15/157701/2009 dated March 19, 2009
76 For portfolio format please refer to chapter on formats
77 MFD/CIR/9/120/2000 dated November 24,2000
78 IIMARP/CIR /08/845/97 DATED May 7,1997,IIMARP/MF/CIR/05/788/97 dated April
28,1997
79 For format of bio-data of key personnel, please refer the chapter on formats
29 Master Circular for Mutual Funds
PART II - REPORTS
5.8 Monthly Cumulative Report (MCR)80
5.8.1 Date and Mode Of Submission:
5.8.1.1 MCR81 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.
5.8.2 Other Guidelines:
5.8.2.1 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.
5.8.2.2 Further, additional report on overseas investment82 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 chapter on formats.
5.8.2.3 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.
80 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.
81 For format of MCR please refer to chapter on formats.
82 SEBI Circular No. SEBI/IMD/CIR NO 15/87045/07 dated February 22,2007
30 Master Circular for Mutual Funds
5.9 New Scheme Report (NSR)83
5.9.1 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
format84.
5.10 Bi–monthly Compliance Test Reports85
5.10.1 AMCs’ shall do exception reporting on a bi-monthly basis. AMCs’ are
required to report only exceptions in the CTR to SEBI, i.e. AMCs’ shall
report for only those points in the CTR where they have not complied
with the same. 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).
5.10.2 The CTRs86 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.
83 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,
84 For details on format of NSR please refer the formats chapter.
85 SEBICircular 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,
86For CTR format, please refer the formats chapter.
31 Master Circular for Mutual Funds
5.11 Annual Statistical Report (ASR)87
5.11.1 AMC should submit the annual statistical report to SEBI in the
prescribed format by 30th of April each year88.
5.12 Daily Transaction Report89
5.12.1 All Mutual Funds shall submit details of transactions in secondary
90
market on daily basis in the prescribed format . 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.
5.12.2 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).
5.13 Responsibilities of AMC(s) and Trustees91
5.13.1 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.
87 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,
88 For format of ASR refer the chapter 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
89 SEBI Circular No.MFD/CIR/07/384/99 dated December 17, 1999 and
MFD/CIR/08/23026/99 dated December 23, 1999
90 For format of daily transaction report, please refer the chapter on formats
91 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.
32 Master Circular for Mutual Funds
5.13.2 The Trustee(s) shall also review all information and documents received
from the AMC(s) as required under the compliance process.
5.13.3 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
Trustees92.
5.13.4 The half-yearly report on the activities of the mutual fund to be submitted
by the trustees to the Board under the Mutual Funds Regulations 93shall
cover all issues mentioned in the prescribed format as well as any other
issue relevant to the operation of the Mutual Fund 94.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.
5.13.5 AMC(s) and the Trustees shall update the reporting formats including
relevant provisions of amendments made to the Mutual Funds
Regulations and/or guidelines and/or circulars issued by the Board and
shall specifically comment on their compliance.
5.14 Filing of Annual Information Return by Mutual Funds95
92 Please refer the formats chapter for format for reporting by AMC to Trustees
93 Regulation 18(23)(a) of SEBI (MF) Regulations, 1996
94 For format of Trustee Report, please refer to the formats chapter.
95
SEBI cir no IMD/CIR No.8/73580/06 dated August 4,2006
33 Master Circular for Mutual Funds
5.14.1 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).
5.14.2. Some common errors in these returns have been pointed out by the
Directorate of Income Tax (Systems) as:
5.14.2.1. Not mentioning PAN or mentioning invalid PAN.
5.14.2.2.Entering incomprehensible/ incomplete names of transacting
parties, e.g. names of 2 or 3 letters.
5.14.2.3.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.
5.14.2.4Incorrect district and state codes.
5.14.2.5 Incorrect transaction codes.
5.14.2.6 Wrongly showing transaction as of ‘Govt.’ party.
It may be noted that Annual Information Returns (AIRs) constitute an important source of
information to Income Tax Department and, as such, it is imperative that the data furnished to
them is complete and accurate in all respects. It is therefore advised that to re-check the
accuracy of the data furnished by your office for the Financial Year 2004-05 and ensure that all
the columns are correctly filled-in and submit a ‘Supplementary Information Report’, if need be,
to the Income Tax Department.
The AIRs for the financial year 2005-2006 are required to be filed before August 31, 2006.
34 Master Circular for Mutual Funds
5.14.3 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.
35 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 AMC96
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 Transactions97
6.2.1 Reporting of transactions
6.2.1.1 Transaction(s) by directors of the AMC
96 SEBI Circular No. MFD/CIR No.010/024/2000 dated January 17, 2000.
97 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.
36 Master Circular for Mutual Funds
a. Directors of the AMC shall file with the trustees on a quarterly basis
details of transactions in securities exceeding Rs. 1 lakh98.
6.2.1.2 Trustee(s) Directors
a. Trustees are required to report to Mutual Funds only those
transactions in securities that exceed Rs. 1 lac in value99.
6.2.2 Review of transactions
6.2.2.1 Trustees shall review all transactions of the Mutual Fund with
the associates as defined below on a regular basis and ensure
that Regulations are complied with100.
6.3 Role of Independent Director on the Board of the AMC and
Independent Trustees101
6.3.1 An Independent Trustee shall not be associated in any manner with
the Sponsor(s)102. 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 trustees103.
6.3.2 An ‘associate’ shall be defined as:
98 SEBI Circular No. SEBI/MFD/CIR/10/039/2001 dated February 9, 2001.
99 Regulation 18(11) of SEBI (MF) Regulations, 1996 and SEBI Circular No.
MFD/CIR/09/014/2000 dated January 5, 2000.
100 Regulations 18 (6) and 18 (7) and SEBI Circular No. MFD/CIR No.010/024/2000 dated
January 17, 2000.
101 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.
102 See Regulation 16(5) of the SEBI (Mutual Funds) Regulations, 1996.
103 See Regulation 21(d) of the SEBI (Mutual Funds) Regulations, 1996.
37 Master Circular for Mutual Funds
6.3.2.1 Relatives104 of Sponsor(s) or directors of the Sponsor Company or
relatives of Associate Directors of the AMC(s) and Trustee.
6.3.2.2 Persons providing any type of professional service to the Mutual
Funds, the AMC and the Trustees and the Sponsor(s). Also,
persons having a material pecuniary relationship with the above
mentioned entities that may, in the judgment of the Trustees,
affect their independence.
6.3.2.3 Nominees of the companies who are stakeholders in the Sponsor
company or AMC(s) (even if they are not deemed sponsors by
virtue of holding less than 40% of net worth of AMC(s)).
6.3.3 Cooling off Period
6.3.3.1 An “Associate”105 as defined above cannot be appointed as
Independent Director even after he ceases to be an “Associate”
unless a cooling off period of three years has elapsed from the
date of his disassociation. For example, an employee of the
Sponsor(s) or their associate companies or AMC(s) or Trustees
resigns on December 1, 2001 then he cannot be appointed as an
Independent Director till December 1, 2004. During this
intervening period, he can be appointed only as Associate
Director. However, if he is taken as an Associate Director, say on
December 2, 2001, then he cannot be considered as
“Independent” from December 2, 2004. There must be a cooling
off period of 3 years from the date he ceases to be an Associate
Director.
6.3.4 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
104 As defined under Section 6 of the Companies Act 1956.
105 Regulation 2(c) of the SEBI (Mutual Funds) Regulations, 1996.
38 Master Circular for Mutual Funds
Trustees respectively.106 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.
6.3.5 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 non
compliance. Mutual Funds may maintain a panel of eligible persons
who can be appointed as Independent Directors107 as and when
required. They may also consider appointing more than the required
minimum number of Independent Directors to enhance the standards
of corporate governance and also to meet the regulatory requirements
in case of resignation of an independent director.
6.3.6 On appointment of new directors of the AMC or Trustee, their bio-
data108 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) 109
6.4.1The 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 Board110.
106 Regulation 21(d) and Regulation 16(5) of the SEBI (Mutual Funds) Regulations, 1996.
107 For biodata of directors (AMC and Trustee), please refer to chapter on formats
108 For biodata of directors (AMC and Trustee), please refer to chapter on formats
109 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.
110 Regulation 25(9) & 23(b) of SEBI (MF) Regulations, 1996
39 Master Circular for Mutual Funds
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.
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
40 Master Circular for Mutual Funds
Director/President or by any other name), the Fund
Managers, Dealers, Research Analysts, all employees in the
Fund Operations Department, Compliance Officer and Heads
of all divisions and/or departments or any other employee as
decided by the AMC(s) and/or Trustees.
c. To guide employees of AMC(s) and Trustees in maintaining a
high standard of probity that one would expect from an
employee in a position of responsibility.
6.4.4 General
6.4.4.1Investments 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.,111 where there is no likely conflict between the
Mutual Fund’s interest and the employees’ interest.
111 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.
41 Master Circular for Mutual Funds
3. Investments in government securities, Money Market
instruments and Money Market Mutual Fund schemes.
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 approval112.
112 SEBI Circular No. SEBI/IMD/CIR No.7/13391/03 dated July 11, 2003.
42 Master Circular for Mutual Funds
e. If a transaction approved by Compliance Officer has not been
effected within seven113 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 transaction114.
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.
113 SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
114 SEBI Circular No. SEBI/IMD/CIR No.7/13391/03 dated July 11, 2003.
43 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 name of
44 Master Circular for Mutual Funds
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
the same securities either before or after the employee’s
transaction(s).
45 Master Circular for Mutual Funds
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.
46 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;
47 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
48 Master Circular for Mutual Funds
issues within 7 calendar days in tandem with SEBI
(Insider Trading) Regulations.
b. A statement of holding in securities as on March 31
within 30 calendar days (in tandem with SEBI (Insider
Trading) Regulations) 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.
6.4.8 Review by the Board of Directors of AMC and the Trustee(s)
6.4.8.1 The Board of the AMC and the Trustees shall review the
compliance of these Guidelines in their periodic meetings. They
shall review the existing procedures and recommend changes in
procedures based on the AMCs experience, industry practices
and/or developments in applicable laws and regulations. They
shall report compliance and any violations and remedial action
taken by them in their reports submitted to the Board.
6.5 Responsibilities of AMC & Trustees115
6.5.1 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)
115 MFD/CIR/09/014/2000 dated January 5, 2000
49 Master Circular for Mutual Funds
shall place correspondence and reports submitted to SEBI before the
Trustees.
6.6 Applicability of Insider Trading Regulations116
6.6.1 Securities and Exchange Board of India (Insider Trading) (Amendment)
Regulations, 2002 shall be followed strictly by the trustee companies,
asset management companies and their employees and directors.
116 SEBI Cir MFD/CIR/05/432/2002 June 20, 2002
50 Master Circular for Mutual Funds
PART II -SCHEME GOVERNANCE
6.7 Minimum Number of investors117
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 Regulation118
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
117 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.
118 Reg.39(2)(c) of the SEBI (MF) Regulations, 1996
51 Master Circular for Mutual Funds
automatic redemption by the Mutual Fund on the applicable
Net Asset Value on the 15th day of the notice period.
6.7.1.5 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 Regulation119 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
119 Reg. 39 (2) (c) of SEBI (MF) Regulations, 1996
52 Master Circular for Mutual Funds
exposure over 25% limits will lead to refund within 6 weeks of the
date of closure of the New Fund Offer.
6.7.2.5 For interval scheme the aforesaid provision will be applicable at
the end of NFO and 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).
53 Master Circular for Mutual Funds
6.7.6 Reporting to the Board
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 basis120. 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).
120 SEBI Circular No. dated July 27, 2000 & SEBI Cir 16/400/02 dated March 26, 2002.
54 Master Circular for Mutual Funds
PART III -SYSTEMS AUDIT OF MUTUAL FUNDS121
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 alongwith trustee comments should be
communicated to SEBI.
6.14 For the financial years April 2008 – March 2010, the systems audit should be completed by
September 30, 2010.
121 SEBI Circular No SEBI/IMD/CIR No. 9/176988/2009 dated September 16, 2009
55 Master Circular for Mutual Funds
CHAPTER 7
SECONDARY MARKET ISSUES
7.1 Non Applicability of Listing Deposit122
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 Margins123
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 Codes124
7.3.1 Mutual Funds are not permitted to operate in the securities market
without furnishing a valid Unique Client Code (UCC).125 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 launched126. Such UCC should be obtained
122 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.
123 SEBI Circular No. MFD/CIR/9/230/2001 dated August 14, 2001
124 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
125 SEBI Circular No. SMDRP/Policy/Cir-39/2001 dated July 18, 2001.
126 SEBI Circular No. SEBI/IMD/CIR No.01/1756/04 dated January 27, 2004.
56 Master Circular for Mutual Funds
before commencing the trading on behalf of the scheme(s)/plan(s).
At the time of entering an order, the UCC pertaining to the parent
Mutual Fund shall be provided and the allocation to individual
schemes shall be done in the post closing session.127 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 Contracts128
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.129
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.
7.4.1.4 The participation of existing schemes of the Mutual Funds in the
derivatives market shall be subject to the following conditions:
127 SEBI Circular No. MRD/DoP/SE/Cir-35/2004 dated October 26, 2004.
128 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.
129 SEBI Circular No. DNPD/Cir-29/2005 dated September 14, 2005.
57 Master Circular for Mutual Funds
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 applicable130.
7.5 Trading in Interest Rate Derivatives131
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 Guidelines132, mutual funds can also trade in interest rate
derivatives through the Stock Exchanges subject to requisite disclosures
in the SID133.
130 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.
131 SEBI Circular No. SEBI/MFD/CIR No.03/158/03 dated June 10, 2003.
132 RBI Circular dated November 1, 1999.
133 SEBI Circular No. SEBI/MFD/CIR No.03/158/03 dated June 10, 2003.
58 Master Circular for Mutual Funds
7.6 Transactions of mutual funds in Government Securities in
dematerialised form134
7.6.1 According to Regulation135, the Mutual Funds having an aggregate of
securities worth Rs. 10 crore or more are required to settle their
transactions only through dematerialised securities. All Mutual Funds
should enter into transactions relating to government securities only in
dematerialised form.
134 SEBI Circular No. MFD/CIR/05/432/2002 dated June 20, 2002
135 Regulation 44(1A) of SEBI (MF) Regulations, 1996
59 Master Circular for Mutual Funds
CHAPTER 8
NET ASSET VALUE136
8.1 Disclosure of Net Asset Value137
8.1.1 The NAV of schemes shall be published on a daily basis by the Mutual
Funds at least in two daily newspapers138.
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 day139.
8.1.3 Fund of Fund Schemes shall have an extended time up to 10 a.m. the
following business day in this regard140 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)141 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
136 Regulation 48(1) of SEBI (Mutual Funds) Regulations, 1996
137 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
138 Regulation 48(2) of SEBI (Mutual Funds) Regulations, 1996
139 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
140 SEBI Circular No. SEBI/IMD/CIR No.5/96576/2007 dated June 25, 2007.
141 For format of CTR, please refer to chapter on formats
60 Master Circular for Mutual Funds
steps taken by AMC to reduce the number of occurrences shall also be
disclosed142.
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 NAVs143.
8.2 Rounding off NAVs144
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 desire145. Relevant
disclosure in this regard shall be made in the SID/SAI146.
8.3 Uniform Cut off Timings for applicability of Net Asset Value
of Mutual Fund scheme(s) and/ or plan(s)147
8.3.1 Mutual Funds should follow the Guidelines enumerated below with respect
to uniform Cut -off Timings:
142 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
143 SEBI Circular No. SEBI/IMD/CIR No.5/63714/06 dated March 29, 2006.
144 SEBI Circular No. MFD/CIR/08/514/2002 dated July 22, 2002, SEBI Circular No.
MFD/CIR/11/16159/2002 dated August 22, 2002.
145 SEBI Circular No. MFD/CIR/11/16159/2002 dated August 22, 2002.
146 SEBI Circular No. MFD/CIR/08/514/2002 dated July 22, 2002.
147 SEBI Circular No. SEBI/IMD/CIR No. 11/78450/06 dated October 11, 2006.
61 Master Circular for Mutual Funds
8.3.2 Definitions:
8.3.2.1 In these Guidelines, unless the context otherwise requires:
a. ‘Cut-off Timing’, in relation to an investor making an application to a
Mutual Fund for purchase or sale of units, shall mean, the outer limit
of timing within a particular day which is relevant for determination
of the NAV applicable for his transaction;
b. ‘International scheme’ means a Mutual Fund scheme having
substantial investments in foreign securities valued as per time zones
other than Indian Standard Time zone;
c. ‘Liquid fund schemes and plans’ shall mean the schemes and plans of
a Mutual Fund as specified in the guidelines148 issued by SEBI in this
regard149.
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.
148 Please refer to the Section on liquid schemes
149 SEBI Circular No.SEBI/IMD/CIR No.13/150975/09 dated January 19, 2009
62 Master Circular for Mutual Funds
8.3.4.2 Mutual Funds shall ensure that each payment instrument for
subscription or purchase of units is deposited in a bank expeditiously
by utilization of the appropriate banking facility, so as to comply with
the requirement in Clause 8.3.4.1 above.
8.3.4.3 AMCs shall compensate any loss occasioned to any investor or to the
scheme and/or plan on account of non compliance with Clause
8.3.4.2 above.
8.3.5 Cut-off Timings for liquid fund schemes and plans
8.3.5.1 The following Cut-off Timings shall be observed by the Mutual Funds
in respect of purchase of units in liquid fund schemes and plans and
the following NAVs shall be applied for such purchase:
a. Where the application is received up to 12.00 noon on a given day and
funds are available for utilization on the same day – closing NAV of the
day immediately preceding the day on which the application is received;
b. Where the application is received after 12.00 noon on a given day and
funds are available for utilization on the same day – closing NAV of the
day immediately preceding the next business day; and
c. Irrespective of the time of receipt of application, where funds are not
available for utilization on the day of the application –closing NAV of the
day immediately preceding the day on which the funds are available for
utilization.
8.3.5.2 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
63 Master Circular for Mutual Funds
b. Where the application is received after 3.00 pm – the closing NAV of the
next business day.
8.3.5.3 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:
a. 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;
b. 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
c. 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.
8.3.6.2.In respect of purchase of units in Income/ Debt oriented schemes (other
than liquid fund schemes and plans) with amount equal to or more
than Rs. 1 crore, irrespective of the time of receipt of application, the
64 Master Circular for Mutual Funds
closing NAV of the day on which the funds are available for utilization
shall be applicable150.
8.3.6.3 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:
a. Where the application is received up to 3.00 pm – closing NAV of the day
on which the application is received; and
b. 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.
150 SEBI Circular No SEBI/IMD/CIR No. 11/142521/08 dated October 24, 2008
65 Master Circular for Mutual Funds
8.3.8.2 Cut off timings as prescribed under Paragraphs 8.3.5 and 8.3.6 shall
apply with reference to the point of time at which the applications are
received at such official points of acceptance.
8.3.8.3 Time stamping machines at all official points of acceptance shall be in
compliance with the requirements mentioned in Section 8.4.
8.3.9 Compliance Reporting
8.3.9.1 Status of compliance with these Guidelines shall be reported to the
Board in the CTR(s)151 of the AMC(s) and the Half Yearly Trustee
Reports152.
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.
8.4 Requirements with respect to time stamping machines
[pursuant to Clause 8(3)]
8.4.1 For every machine, running serial number shall be stamped from the
first number to the last number as per its capacity before repetition of
the cycle.
8.4.2 Every application for purchase shall be stamped on the face and the
corresponding payment instrument shall be stamped on the back
indicating the date and time of receipt and running serial number. The
151 for CTR format, please refer to the chapter on formats
152 For Trustee report, please refer to the chapter on formats
66 Master Circular for Mutual Funds
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 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.
67 Master Circular for Mutual Funds
8.4.10 Mutual Funds shall maintain and preserve all applications / requests,
duly time stamped as aforesaid, at least for a period of eight years153 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 price154
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 units155,
8.5.1.2 To avoid variation in the amounts payable to investors and/or
number of units allotted to them, and
8.5.1.3 To make the calculations more comprehensible to the investors.
8.5.2 Exit loads shall be charged as a percentage of the NAV i.e. applicable load
as a percentage of NAV will be subtracted from the NAV to calculate the
repurchase price.
8.5.3 The formula for the same is as follows:
8.5.3.1 Sale Price = Applicable NAV
8.5.3.2 Repurchase Price = Applicable NAV *(1 – Exit Load, if any)
153 Regulation 50(2) of SEBI (Mutual Funds) Regulations, 1996
154 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
155 Regulation 49(3) of the SEBI (Mutual Funds) Regulations, 1996.
68 Master Circular for Mutual Funds
CHAPTER 9
VALUATION
9.1Definitions156
9.1.1Non Traded Securities157
9.1.1.1When 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:158
a. When trading in an equity and/or equity related security (such as
convertible debentures, equity warrants etc.) in a month is both
less than Rs. 5 lacs and the total volume is less than 50,000
shares, the security shall be considered as thinly traded security
and valued accordingly.
b. In order to determine whether a security is thinly traded or not,
the volumes traded in all recognized Stock Exchanges in India
may be taken into account.
c. For example, if the volume of trade is 1, 00,000 and value is Rs.
4,00,000, the shares do not qualify as thinly traded. Also if the
volume traded is 40,000, but the value of trades is Rs. 6, 00,000,
the shares do not qualify as thinly traded.
156 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.
157 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
158 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001.
69 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.
9.1.3Thinly traded Debt Securities159
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:160
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, the value at
159 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
160 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
70 Master Circular for Mutual Funds
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:161
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.
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.
161 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
71 Master Circular for Mutual Funds
d. In case the EPS is negative, EPS value for that year shall be taken
as zero for arriving at capitalised earning.
e. In case 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 valuation162.
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
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. Non Traded/ Thinly Traded Debt Securities of up to 182 Days to
Maturity:163
162 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001
163 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001.
72 Master Circular for Mutual Funds
1. As the Money Market securities164 are valued on the basis of
amortization (cost + accrued interest till the beginning of the day
+ the difference between the redemption value and the cost
spread uniformly over the remaining maturity period of the
instruments) a similar process should be adopted for non-traded
debt securities with residual maturity of up to 182 days, in the
absence of any other standard benchmarks in the market.
2. Debt securities purchased with residual maturity of up to 182
days are to be valued at cost (including accrued interest till the
beginning of the day) plus the difference between the
redemption value (inclusive of interest) and cost spread
uniformly over the remaining maturity period of the instrument.
In case of a debt security with maturity greater than 182 days
at the time of purchase, the last valuation price plus accrued
interest should be used instead of purchase cost. All other non
traded Non Government debt instruments shall be valued using
the method suggested below in (b) hereof.
b. Non Traded/ Thinly Traded Debt Securities of over 182 Days to
Maturity:165
1. For the purpose of valuation, all non-traded Debt Securities
would be classified as "Investment grade" and "Non
Investment grade" securities based on their credit ratings.
Non investment grade securities would further be classified
as "Performing" and "Non Performing" assets as below:
164 Refer Clause 2(ii)(c) of Eighth Schedule of SEBI (Mutual Fund) Regulations, 1996 for
valuation of money market instruments
165 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
73 Master Circular for Mutual Funds
i. All Non Government investment grade debt securities,
classified as not traded, shall be valued on yield to
maturity basis as described below.
ii. All Non Government non investment grade performing
debt securities would be valued at a discount of 25%
to the face value
iii. All Non Government non investment grade non
performing debt securities would be valued based on
the provisioning norms.
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.
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:
74 Master Circular for Mutual Funds
9.3.1 Construction of Risk Free Benchmark166
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.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. 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 relefect any
change in the market conditions.
9.3.2 Building a Matrix of Spreads for Marking-up the Benchmark Yield167
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
166 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
167 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
75 Master Circular for Mutual Funds
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 Rs. 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
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
76 Master Circular for Mutual Funds
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 industry168.
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
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
agencies169
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.
168 SEBI Circular No. MFD/CIR.No 23 / 066 /2003 dated March 7,2003
169 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
77 Master Circular for Mutual Funds
b. Adjustments for Internally Rated Securities170
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 with Discretionary discount of
duration upto 2 years upto +50 bps over and
above mandatory discount
of +50 bps
Unrated instruments with Discretionary discount of
duration over 2 years upto +50 bps over and
above mandatory discount
of +25 bps
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.171
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:172
9.4.1 The option embedded securities would be valued as follows:
170 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
171 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
172 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
78 Master Circular for Mutual Funds
9.4.1.1 Securities with call option
1. 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
1. The securities with put option shall be valued at the higher of the
value as obtained by valuing the security to final maturity and
valuing the security to put option. In case there are multiple put
options, the highest value obtained by valuing to the various put
dates and valuing to the maturity date is to be taken as the value of
the instruments.
9.4.1.3 Securities with both Put and Call option on the same day
1. 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 NAVs173.
9.6. Illiquid Securities174
173 SEBI Circular No. MFD/CIR/14/442/2002 dated February 20, 2002.
174 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
79 Master Circular for Mutual Funds
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 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)175
9.7.1 Definition of a Non Performing Asset (NPA)
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
175 SEBI Circular No. MFD/CIR/8/92/2000 dated September 18, 2000.
80 Master Circular for Mutual Funds
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. For e.g. if the due date for interest is 30.06.2000, it will be classified as
NPA from 01.10.2000.
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 i.e. if the due
date for interest falls on 30.06.2000 and if the interest is not received,
accrual will continue till 30.09.2000 after which there will be no further
accrual of income. In short, taking the above example, 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. For e.g. if interest
income falls due on 30.06.2000, accrual of interest will continue till
30.09.2000 even if the income as on 30.06.2000 has not been received.
Further, no accrual will take place from 01.10.2000 onwards. Full
provision will be made for interest accrued and outstanding as on
30.06.2000.
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
81 Master Circular for Mutual Funds
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.
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:
82 Master Circular for Mutual Funds
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.
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.
83 Master Circular for Mutual Funds
i. Explanation: The words “2nd quarter” wherever appear, shall mean 2nd
calendar quarter.176
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.
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.
176 SEBI Circular No. MFD/CIR/14/088/2001 dated March 28, 2001.
84 Master Circular for Mutual Funds
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.
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
85 Master Circular for Mutual Funds
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
prescribed177.
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 Shares178
9.8.1 To ensure uniformity in calculation of NAV the following guidelines are
issued:
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
177 For formats of Half yearly disclosure, please refer to the formats chapter
178 SEBI Circular No. MFD/CIR/03/526/2002 dated May 9, 2002.
86 Master Circular for Mutual Funds
Revaluation Reserves) - Miscellaneous expenditure not written off or
deferred revenue expenditure, intangible assets and accumulated
losses] / Number of Paid up Shares plus Number of Shares that
would be obtained on conversion and/or exercise of Outstanding
Warrants and Options.
3. The lower of (1) and (2) above shall be used for calculation of Net
Worth per share and for further calculation in (c) below.
b. Average capitalisation rate (P/E ratio) for the industry based upon either
BSE or NSE data (which shall be followed consistently and changes, if any,
noted with proper justification thereof) shall be taken and discounted by
75 per cent. i.e. only 25 per cent of the industry average P/E shall be
taken as capitalisation rate (P/E ratio). Earnings per share (EPS) of the
latest audited annual accounts will be considered for this purpose.
c. The value as per the Net Worth value per share and the capital earning
value calculated as above shall be averaged and further discounted by 15
per cent for illiquidity so as to arrive at the fair value per share.
9.8.1.2 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
87 Master Circular for Mutual Funds
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 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 meetings179.
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 CTRs180 and Half Yearly Reports181 filed
with the Board.
179 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
180 For CTR format please refer to the chapter on formats
88 Master Circular for Mutual Funds
181 For Half Yearly Reports, please refer to the chapter on formats
89 Master Circular for Mutual Funds
CHAPTER 10
LOADS, FEES AND EXPENSES
10.1 Limits on fees and expenses charged to schemes182
10.1.1 Mutual Funds may charge certain expenses to a scheme, as specified
under Regulations.183 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).184
10.1.2 The following expenses cannot be charged to the schemes of Mutual
Funds:
10.1.2.1 Penalties and fines for infraction of laws.
10.1.2.2 Interest on delayed payment to the unit holders.
10.1.2.3 Legal, marketing, publication and other general expenses not
attributable to any scheme(s).
10.1.2.4 Fund Accounting Fees.
10.1.2.5 Expenses on investment management/general management.
10.1.2.6 Expenses on general administration, corporate advertising and
infrastructure costs.
10.1.2.7 Depreciation on fixed assets and software development expenses.
182 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.
183 52(4) of the Mutual Funds Regulations,1996
184 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
90 Master Circular for Mutual Funds
10.1.2.8 Such other costs as may be prohibited by the Board.
10.1.3 The expenditure and/or fee payable by Mutual Funds to the
Depositories may either be capitalized or included as part of recurring
expenditure within the limits prescribed under Regulation 52(6) of the
Mutual Funds Regulations.185
10.1.4 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 schemes186
10.2 Restriction on paying brokerage or commission187
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 Tax188
10.3.1 AMC(s) can charge Service Tax, as per applicable Taxation Laws, to the
scheme(s) within the limits prescribed under Regulations189
10.4 Empowering investors through transparency in payment
of commission and load structure190
185 SEBI Circular No. IIMARP/MF/CIR/07/826/98 dated April 15, 1998.
186 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
187 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.
188 SEBI Circular No. MFD/CIR/04/430/2002 dated June 19, 2002.
189 52(6) of the Mutual Funds Regulations.
190 SEBI Circular No SEBI/IMD/CIR No. 4/ 168230/09 dated June 30, 2009
91 Master Circular for Mutual Funds
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 load191 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
assessment of various factors including the service rendered by
the distributor.
10.4.1.3 Of the exit load or CDSC charged to the investor, a maximum of
1% of the redemption proceeds shall be maintained in a separate
account which can be used by the AMC to pay commissions to
the distributor and to take care of other marketing and selling
expenses. Any balance shall be credited to the scheme
immediately.
10.4.1.4 The distributors should disclose all the commissions (in the form
of trail commission or any other mode) payable to them for the
different competing schemes of various Mutual Funds from
191 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.
92 Master Circular for Mutual Funds
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, 2009192
10.4.4 The AMCs are required to bring the contents of these guidelines to the
notice of their distributors and monitor compliance.
10.5 No Load on Bonus Units and Units allotted on
Reinvestment of Dividend193
10.5.1 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 Board.194
193 SEBI Circular No. SEBI/IMD/CIR No. 14/120784/08 dated March 18, 2008.
93 Master Circular for Mutual Funds
10.6 Filing fees 195
10.6.1 Revised filing fee196 as per the amendment would be applicable to
those scheme(s) whose SID has been filed with SEBI on or after July
01, 2009
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 subscription.197 While complying
with the same, Mutual Funds should ensure that “any imposition or
enhancement in the load shall be applicable on prospective
investments only.198
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.199
195 SEBI Cir No. SEBI / IMD / CIR No. 5 / 169030 / 2009 dated July 8, 2009
196 Gazettee Notification No. LAD-NRO/GN/2009-10/11/167759 on SEBI (Payment of Fees)
(Amendment) Regulations, 2009 dated 29 June, 2009
197 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
198 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)
199 SEBI Circular No - SEBI / IMD / CIR No. 7 /173650 / 2009 dated August 17,2009
94 Master Circular for Mutual Funds
CHAPTER 11
DIVIDEND DISTRIBUTION PROCEDURE
200, 201
11.1 Regulations202 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.203
11.2.1 Unlisted Scheme(s)/ Plan(s)
11.1.1.1 The Trustees shall decide the quantum of dividend and the
record date in their meeting204. Dividend so decided, shall be
paid, subject to availability of distributable surplus.
11.2.1.2 Record date shall be the date which will be considered for the
purpose of determining the eligibility of investors whose
names appear on the register of unit holders for receiving
dividends. The NAV shall be adjusted to the extent of dividend
distribution and statutory levy, if applicable, at the close of
business hours on record date.
11.2.1.3 Within one calendar day of the decision of the Trustees with
respect to the dividend to be distributed, the AMC(s) shall
issue a notice to the public communicating the decision
200 SEBI Circular No. SEBI/IMD/CIR No.1/64057/06 dated April 4, 2006.
201 For details on advertisement on dividend please refer to chapter on ‘Advertisements’
202 Regulation 53(a) of the Mutual Funds Regulations
203 SEBI Circular No SEBI/IMD/CIR No. 3/65370/06 dated April 21,2006
204 Clause 20 of Third Schedule of Mutual Funds Regulations
95 Master Circular for Mutual Funds
including the record date. The record date shall be five
calendar days from the issue of public notice.
11.2.1.4 Before the issue of such notice, no communication whatsoever
indicating the probable date of dividend declaration shall be
issued by any Mutual Fund or its distributors of its products.
11.2.1.5 Such notice shall be given in at least one English daily
newspaper having nationwide circulation as well as in a
newspaper published in the language of the region where the
head office of the Mutual Fund is situated.
11.2.1.6 The notice shall, in font size 10, bold, categorically state that
pursuant to dividend distribution, NAV of the scheme would fall
to the extent of payout and statutory levy (if applicable).
11.2.2 Liquid / Debt Schemes with frequent dividend distribution
11.2.2.1 The requirement of giving notice is not mandatory for scheme(s)/
plan(s)/ option(s) with dividend distribution frequency ranging
from daily up to monthly distribution if requisite disclosures in
this regard are made in the SID.
11.2.3 Listed Schemes/Plans
11.2.3.1 Listed scheme(s)/ plan(s) shall follow the requirements
stipulated in the Listing Agreement for dividend declaration and
distribution.
96 Master Circular for Mutual Funds
CHAPTER 12
INVESTMENT BY SCHEMES205
12.1 Investments by Index Funds:206
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 SID207 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 plans208
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 209.
This shall also be applicable in case of inter scheme transfer of securities
210
205
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.
206
SEBI Circular No - MFD/CIR/09/014/2000 dated January 5, 2000
207 See Clause 10, Seventh Schedule of Mutual Funds Regulations.
208 SEBI Circular No - SEBI/IMD/CIR No.13/150975 / 09 dated January 19, 2009
209 With effect from February 01, 2009 make investment in /purchase debt and money
market securities with maturity of upto182 days only.
210
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.
97 Master Circular for Mutual Funds
12.2.1.1 Explanation:
a. In case of securities where the principal is to be repaid in a single
payout the maturity of the securities shall mean residual maturity.
In case the principal is to be repaid in more than one payout then
the maturity of the securities shall be calculated on the basis of
weighted average maturity of security.
b. In case of securities with put and call options (daily or otherwise) the
residual maturity of the securities shall not be greater than 91
days211
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:
12.3.1 Close ended debt schemes shall invest only in such securities which
mature on or before the date of the maturity of the scheme212
12.4 Stock Lending Scheme213
12.4.1 The following guidelines are issued to facilitate lending of securities by
Mutual Funds through intermediaries approved by the Board in
accordance with the Stock Lending & Borrowing Scheme.214
12.4.2 Disclosure Requirements
12.4.2.1 The following information shall be disclosed in the SID to enable
the investors and unit holders to take an informed decision:
211 w.e.f May 01, 2009.
212 SEBI Circular No IMD/CIR No 12/147132/08 dated December 11, 2008.
213 SEBI Circular No MFD/CIR/01/047/99 dated February 10, 1999.
214 Regulation 44(4) of the Mutual Funds Regulations.
98 Master Circular for Mutual Funds
a. Intention to lend securities belonging to a particular Mutual Fund
scheme in accordance with the guidelines on securities lending and
borrowing scheme issued by SEBI from time to time.215
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.
12.4.3 Reporting Requirement
12.4.3.1 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.
12.4.3.2 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.
12.4.3.3 The Trustees shall offer their comments on the above aspects in the
Half Yearly Trustee Report filed with the Board.216
12.4.4 Existing schemes
12.4.4.1 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.
215 SEBI Circular No - SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
216 Regulation 18(23)(a) of the Mutual Funds Regulations. Further, for format of Half Yearly
Trustee Report please refer to chapter on Formats.
99 Master Circular for Mutual Funds
12.5 Approval for Investment in Unrated Debt Instruments217
12.5.1 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.
12.6 Investments in Units of Venture Capital Funds218
12.6.1 Mutual Fund schemes can invest in listed or unlisted securities or units
of Venture Capital Funds within the prescribed investment limits as
applicable.219
12.7 Investment limits for Government guaranteed debt
securities220
12.7.1 Prudential investment norms as per Regulations stipulating limits for
investments in debt securities221 issued by a single issuer are applicable
217 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
218 SEBI Circular No. MFD/CIR/9/230/2001 dated August 14, 2001.
219 Clauses 10 and 11, Seventh Schedule of Mutual Funds Regulations.
220 SEBI Circular No. SEBI/IMD/CIR No.8/18944/03 dated October 6, 2003.
221 Clauses 1 and 1A, Seventh Schedule of Mutual Funds Regulations.
100 Master Circular for Mutual Funds
to all debt securities issued by public bodies or institutions such as
electricity boards, municipal corporations, state transport corporations
etc. guaranteed by either State / Central Government. Government
securities issued by Central and/or State Government or on its behalf, by
the RBI are however exempt from these limits.
12.8 Investment Restrictions for Securitised Debt222
12.8.1 For investments made in Securitised Debt (mortgage backed securities
and asset backed securities), restrictions as per Clause 1 of Seventh
Schedule223 shall not apply at the originator level.
12.9 Investments in Short Term Deposits of Scheduled
Commercial Banks224
12.9.1 The guidelines for deployment of funds in short term deposits of
commercial banks for schemes are as under:
12.9.1.1 “Short Term” for parking of funds by Mutual Funds shall be treated as
a period not exceeding 91 days.225
12.9.1.2 Such deposits shall be held in the name of the concerned scheme.
12.9.1.3 Mutual Funds shall not 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
222 SEBI Circular No. SEBI/IMD/CIR No.6/63715/06 dated March 29, 2006.
223 Clause I of Schedule VII of Mutual Fund Regulations
224 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.
225 SEBI Circular No. SEBI/IMD/Cir No.1/91171/07 dated April 16, 2007.
101 Master Circular for Mutual Funds
20% of the total deployment by the Mutual Fund in short term
deposits.
12.9.1.4 Mutual Funds shall not park more than 10% of the net assets in short
term deposits with any one scheduled commercial bank including its
subsidiaries.
12.9.1.5 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.
12.9.1.6 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.
12.9.1.7 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.
12.9.1.8 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).
12.9.1.9 Investments made in short term deposits pending deployment of
funds226 shall be recorded227 and reported to the Trustees including
the reasons for the investment especially comparisons with interest
rates offered by other scheduled commercial banks.228
226 Clause 8, Schedule Seven, Mutual Funds Regulations.
227 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
228 SEBI Circular No. SEBI/IMD/CIR No.9/20306/03 dated November 12, 2003.
102 Master Circular for Mutual Funds
12.9.1.10Except for clause (12.9.1.7) the above guidelines shall not apply to
term deposits placed as margins for trading in cash and derivatives
market229. However, duration of such term deposits shall be disclosed
in the Half Yearly Portfolio.230
12.10 Reconciliation Procedure for Investment in Government
Securities231
12.10.1 According to the RBI guidelines232 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.
12.10.2 Mutual Funds shall reconcile the balances reported in the monthly
statements furnished by RBI with the transactions undertaken by
them.
12.10.3 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.
229 SEBI Circular No. SEBI/IMD/Cir No.7/129592/08 dated June 23, 2008.
230 SEBI Circular No. SEBI/IMD/Cir No.7/129592/08 dated June 23, 2008
231 SEBI Circular No. MFD/CIR/19/22474/2002 dated November 20, 2002.
232 RBI Circular No.P.D.O.SGL.CIRR/1945/2002-2003 dated November 1, 2002.
103 Master Circular for Mutual Funds
12.11 Overseas Investment233
12.11.1 Applicable limits:
12.11.1.1 Aggregate ceiling for overseas investments is US $ 7 billion234 and
within this overall limit, Mutual Funds can make overseas
investments subject to a maximum of US $ 300 million per Mutual
Fund.
12.11.1.2 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.
12.11.2 Permissible investments:
12.11.2.1 ADR(s) and/or GDR(s) issued by Indian or foreign companies.
12.11.2.2 Equity of overseas companies listed on recognized Stock Exchanges
overseas.
12.11.2.3 Initial and Follow on Public Offerings for listing at recognized Stock
Exchanges overseas.
12.11.2.4 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.
12.11.2.5 Money Market Instruments rated not below investment grade.
12.11.2.6 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
233 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.
234 SEBI Circular No. SEBI/IMD/CIR No.2/122577/08 dated April 8, 2008.
104 Master Circular for Mutual Funds
12.11.2.7 Government securities where the countries are rated not below
investment grade.
12.11.2.8 Derivatives traded on recognized stock exchanges overseas only for
hedging and portfolio balancing with underlying as securities.
12.11.2.9 Short term deposits with banks overseas where the issuer is rated not
below investment grade.
12.11.2.10 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
12.11.3 Other Conditions:
12.11.3.1 Apart from the Mutual Funds Regulations and guidelines issued
from time to time, Mutual Funds shall adhere to the following
specific guidelines while making overseas investments:
12.11.3.2 Appointment of a Dedicated Fund Manager:
a. A dedicated fund manager shall be appointed for making the above
overseas investments stipulated under clause 12.11.2.1 to
12.11.2.9.
12.11.3.3 Due Diligence:
a. The Board of the AMC and Trustees shall exercise due diligence in
making investment decisions and record the same.235 They shall
make a detailed analysis of risks and returns of overseas investment
and how these investments would be in the interest of investors.
235 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
105 Master Circular for Mutual Funds
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.
12.11.3.4 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). Such disclosures shall be in a
language comprehensible to an average investor
b. Mutual Funds shall disclose the name of the Dedicated Fund Manager for
making overseas investments as stipulated under paragraph 12.11.3.2
above.
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
106 Master Circular for Mutual Funds
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 format236 as a footnote.
12.11.3.5 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 12.11.3.2. 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 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.
12.11.3.6 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.
12.11.3.7 Review of Performance:
236 For Half Yearly Results, please refer to the chapter on Formats
107 Master Circular for Mutual Funds
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.
12.11.3.8 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.
12.11.3.9 Prudential Investment Norms:
a. Investment restrictions specified in Schedule Seven of the Mutual
Funds Regulations are applicable to overseas investments stipulated
under paragraph 12.11.2.1- 12.11.2.9
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 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
108 Master Circular for Mutual Funds
d. The application237 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.
12.12 Investments in Indian Depository Receipts (IDRs)238
12.12.1 Mutual funds can invest in Indian Depository Receipts239 [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.
12.1 3 Investment Restrictions240
12.13.1 All investment restrictions as contained in the Regulations241 shall
be applicable at the time of making investment.
12.14 Recording of Investment Decisions242
237 Please refer the chapter on formats for format of proposal for investments in foreign securities
and ETFs
238 SEBI Circular No. IMD/CIR. No.1/165935/2009 dated June 09, 2009
239 regulation 43(1) of SEBI (Mutual Funds) Regulations 1996
240 SEBI Circular No. MFD/CIR/09/014/2000 dated January 5, 2000.
241 Seventh Schedule of Mutual Funds Regulations.
242 SEBI Circular No. MFD/CIR/6/73/2000 dated July 27, 2000.
109 Master Circular for Mutual Funds
12.14.1 AMC(s) shall exercise due diligence and care in all investment
decisions as would be exercised by other persons engaged in the
same business.243 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. The contents of the
research reports may be decided by the AMC(s) and the Trustees.
12.14.2 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.
12.14.3 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 Reports244. Trustees
shall also check compliance with these Guidelines through
independent auditors or internal and/or statutory auditors or
other systems developed by them.
243 Regulation 25(2) of the Mutual Funds Regulations.
244 For Half Yearly Trustee Report please refer to the chapter on Formats
110 Master Circular for Mutual Funds
CHAPTER 13
ADVERTISEMENTS245
13.1 The following guidelines are supplementary to the existing Advertisement
Code246 and shall apply to all forms of advertisements, sales literature and
communications howsoever released.
13.2 Definitions:
13.2.1 Communication includes all advertisements through any media, sales
literature, TV interview public speaking, presentation at seminars,
freelance writing and websites.
13.2.2 Advertisement shall have the same meaning as defined under
Regulations247 and would include any material published or designed
to be published, in which a Mutual Fund has no control over the
audience and which is broadly distributed. The purpose of such
communication shall be either to sell Mutual Fund units or to convey
the performance of the schemes or to influence the opinion or behavior
of those who receive such communication. All material contained in
such advertisements must be verified or substantiated with the
disclosures made in the Scheme Information Document (SID).
13.2.3 Sales Literature means any written communication not amounting to
"advertisement" and distributed to sell or induce sale of units of a
mutual fund scheme or convey periodic performance of the schemes
and disclosure of their portfolios or to influence the opinion or behavior
245 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000, SEBI Circular No.
SEBI/MFD/CIR No.6/12357/03 dated June 26, 2003 and SEBI Circular No.
SEBI/IMD/CIR No. 12/118340/08 dated February 26, 2008.
246 See Advertisement Code – Sixth Schedule, Mutual Funds Regulations,1996
247 Regulation 2(b) of the Mutual Funds Regulations,1996
111 Master Circular for Mutual Funds
of those who receive such communication. It includes leaflets,
newsletters, brochures, mailers, performance reports or summaries,
circulars, seminars/workshop materials,248 fund fact sheets, research
reports, telemarketing scripts, press releases and reprints or excerpts
of any other advertisements or published article, etc.249 but will not
include motivational letters written to marketing intermediaries and
agents.
13.2.4 .Advertisements or distribution of Sales Literature must be
accompanied or preceded by issue of a SID and SAI, unless stated
otherwise250 and shall be substantiated with the disclosures made in
the SID and SAI.
13.3 Standards of Communications251
13.3.1 The following standards of communication shall be followed. These
shall also be followed in case of activities organized to promote Mutual
Funds, the AMC(s) or their schemes:
13.3.1.1 Communications shall be fair and in good faith.
13.3.1.2 No material fact shall be omitted, if such omission will cause the
communication to be misread and misunderstood.
13.3.1.3 The fact that Mutual Fund investments are prone to risks of
fluctuation in NAV, uncertainty of dividend distributions, etc. shall
be adequately brought to the notice of unit holders or public in all
communications.
248 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000.
249 SEBI Circular No. SEBI/MFD/CIR No.6/12357/03 dated June 26, 2003.
250 SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
251 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000.
112 Master Circular for Mutual Funds
13.3.1.4 When engaged in public speaking, seminars, TV or Radio shows,
interview to the press etc., Mutual Funds and their employees
shall observe these Guidelines, even though some of such forms of
communications may not amount to advertisement and/or
distribution of Sales Literature.
13.3.1.5 Use of exaggerated or unwarranted claims, superlatives and
opinions, not substantiated by available public data shall be
refrained from and future forecasts and estimates of growth shall
be avoided.
13.3.1.6 Disclosure of risks as required by the Mutual Funds Regulations
shall not be treated as a hedge in communications with investors
or customers.
13.3.1.7 Statistical information, charts, graphs, etc., when used, shall be
supported by their source, if any.
13.3.1.8 Comparisons shall be refrained from unless essential to the form
and content of the advertisement. If used, such comparisons must
be clear and unambiguous.
13.4 Misleading Advertisement or Sales Literature or
Communication252
13.4.1 An Advertisement or Sales Literature or Communication is misleading
if it:
13.4.1.1 Contains an untrue statement.
13.4.1.2 Omits a fact, material to an investor’s decision to buy/hold/sell
units
252 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000.
113 Master Circular for Mutual Funds
13.4.1.3 Does not contain appropriate explanation or limitations to make the
statements made therein clear.
13.4.1.4 Portrays part incomes, returns, growth in NAV unless such incomes,
returns or growth are computed according to these Guidelines.
13.4.1.5 Contains forecasts of growth in NAVs or promises returns that is not
backed by adequate reserve funds or sponsors’ or third party
guarantees.
13.4.1.6 Contains unwarranted or unexplained comparisons.
13.4.1.7 Contains claims about management capability where such capability
is not supported by a track record of minimum 3 years.
13.5 Applicability
13.5.1 These guidelines apply to T.V. interviews, public speaking,
presentations in seminars and workshops, and any forum used by
Mutual Funds to market or convey the performance of their schemes.
However these guidelines will not be applicable for communications
that carry general messages or public speaking that is a general
discourse on Mutual Funds with no references to a fund scheme or
performance.
13.6 Forms of Advertisement253
13.6.1 Tombstone Advertisement254
13.6.1.1 This form of advertisement can only give basic information
about a:
253 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000.
254
SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
114 Master Circular for Mutual Funds
a. Mutual fund registered with SEBI whose Statement of Additional
Information is filed with SEBI or
b. Scheme which is already launched and is in existence and whose
Scheme information document is available.
13.6.1.2 These advertisements must contain the following minimum
information:
a. Name of the Mutual Fund and the Asset Management Company
(AMC).
b. Scheme name and classification (i.e. income/growth etc.)
indicating investment objectives of the scheme.
c. Logo or trademark or corporate symbol, if any.
d. General services offered i.e. frequency of Net Asset Value (NAV)
disclosure, liquidity etc.
e. Contact details for further information and scheme literature, etc.
f. Entry and/or exit loads, if applicable if the advertisement is for a
scheme.
13.6.1.3 The following information is prohibited in this form of
advertisement:
a. Declaration of NAV and performance of the scheme.
b. Promise of any returns except in case of assured returns schemes.
c. Comparisons and usage of ranking given by a third party.
d. Product Launches - mean and include all advertisements issued
during the period in which the NFO is open.
115 Master Circular for Mutual Funds
13.6.1.4 In such advertisements, risk factors may not be mentioned.
However, a general statement to refer to the SID for details is
necessary. Tombstone advertisement could be through any
media and would cover hoardings, bus panels, kiosks, web –
display etc.
13.6.2 Product Launch Advertisement:
13.6.2.1 This form of advertisement shall be used only for launch and/
or re-launch of schemes. These advertisements must contain
the following minimum information:
a. Name of the Mutual Fund and the AMC.
b. Scheme name and classification (i.e. income/growth etc.)
c. Investment objective, asset allocation or highlights thereof.
d. Terms of issue and mode of sale and redemption of units.
e. Investor benefits and general services offered i.e. frequency of NAV
disclosure etc.
f. In case of assured return schemes, the resources that back such
assurances.
g. Logo or trademark or corporate symbol, if any.
h. Risk factors as stated in the SID with a font equal to that of the
text of the highlights.
i. Applicable load structure
j. Contact information of person from whom a copy of SID and SAI
and Key Information Memorandum along with an application form
may be obtained.
k. The statement that an investor should read the SID and SAI before
investing in the scheme
l. In addition, any other information as may be required by the
Advertisement Code or voluntarily disclosed by the Mutual Fund
as long as such information is not specifically prohibited by these
Guidelines.
116 Master Circular for Mutual Funds
.
13.6.2.2 The following information is prohibited in this form of
advertisement:
a. Declaration of NAV and performance figures of any of the previous
schemes unless such performance statements conform to these
Guidelines.
b. Comparisons with other Mutual Funds or schemes.
c. Ranking by any ranking entity as defined under these Guidelines.
13.6.2.3 All that is stated in the Product Launch advertisement should
be substantiated with the SID & SAI,
13.6.3 Performance Advertisement:
13.6.3.1 If Mutual Funds use performance figures in their
advertisements and/ or sales literature or issue exclusive
performance advertisements, such advertisements shall adhere
to the following Guidelines:
a. Such advertisements shall identify the nature of the scheme
and its basic investment objective.
b. The dividends declared or paid shall also be mentioned 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.
c. Only compounded annualized yield shall be advertised,
calculated using the procedure detailed in the Standard
Format of the SID255, if the scheme has been in existence for
more than 1 year. All performance calculations shall be based
only on NAV and payouts to the unit holders. The calculation
255 For SID format please refer chapter on Formats
117 Master Circular for Mutual Funds
of returns shall assume that all payouts during the period
have been reinvested in the scheme at the then prevailing NAV
and this shall be clarified in the advertisements. The type of
plan or option of the scheme for which yield is advertised shall
also be mentioned.
d. The aforesaid annualized yields when used shall be shown for
the, last 1 year, 3 years, 5 years and since the launch of the
scheme. For Funds in existence for less than one year,
performance may be advertised in terms of total returns and
such return shall not be annualized.
e. In case of Money Market schemes or cash and liquid plans,
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 days256,
15 days257 and 30 days258 provided it does not reflect an
unrealistic or misleading picture of the performance or future
performance of the scheme.259
f. All advertisements displaying returns or yields must disclose
in the main body of the advertisement, immediately after the
returns or yields and in the same font that past performance
may or may not be sustained in future. If the returns or yield
are unrealistically higher due to extraordinary circumstances
(e.g. rise or fall in interest rates etc.), the same shall be
clarified in the advertisement.
g. All performance data contained in the advertisement must be
of most recent practicable date depending upon the type of
256
SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
257 SEBI Circular No. SEBI/MFD/CIR No.6/12357/03 dated June 26, 2003.
258 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000.
259 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000.
118 Master Circular for Mutual Funds
communication. In any case, the data used must not be older
than the most recent calender quarter ended prior to the
release of the advertisement.
h. Appropriate benchmark(s) and identical time periods shall be
used for comparisons.260
i. 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. 261
j. Pay out of Dividend: While advertising pay out of dividends, all
advertisements shall disclose, immediately below the dividend
figure (in percentage or in absolute terms) and in the same
font size that the NAV of the scheme, pursuant to payment of
dividend would fall to the extent of payout and statutory levy
(if applicable).262
13.7 Advertisements through Hoardings and/or Posters263
13.7.1 It is essential for the investors to read the SID and SAI and risk
factors before investing in Mutual Fund schemes to arrive at a well
informed investment decision. Considering that investors get very
little time to read the advertisements through hoardings or posters
etc. while passing by, it is clarified that such advertisements shall
carry only the following statement besides the copy of advertisement:
“Mutual Fund investments are subject to market risks, read the
Offer Document carefully before investing.”
260 For examples of benchmarks and other details refer Chapter on Scheme Information
Document.
261 SEBI Circular No. SEBI/MFD/CIR No.6/12357/03 dated June 26, 2003.
262 SEBI Circular No. SEBI/IMD/CIR No.1/64057/06 dated April 4, 2006.
263 SEBI Circular No. SEBI/MFD/CIR No.6/12357/03 dated June 26, 2003.
119 Master Circular for Mutual Funds
13.7.2 The above statement shall be displayed in black letters of at least 8
inches height or covering 10% of the display area, on a white
background. The Compliance Officers of the Mutual Funds/ AMC
shall ensure that the statements appearing in such advertisements
are in legible font.
13.8 Advertisements through Audio-Visual Media264
13.8.1 In audio-visual media based advertisements, the statement “Mutual
Fund investments are subject to market risks, read the Offer
Document carefully before investing” shall be displayed in a clearly
legible font size covering at least 80% of the total screen space. The
remaining 20% space can be used for the name of the Mutual Fund
or logo or name of the scheme, etc. The display and voice over
reiteration of the statement mentioned above shall be for a period of
at least five seconds265 and in an easily understandable manner.
13.8.2 Advertisements through audio media like radio, cassettes, CDs etc.
shall read the above statement in a manner easily understandable to
the listeners over a period of five seconds.266
13.9 Sales Literature
13.9.1 All statements made and facts reported in sales literature of a
scheme should be substantiated with the disclosures made in the
SID & SAI.267
264 SEBI Circular No. SEBI/MFD/CIR No.6/12357/03 dated June 26, 2003.
265 SEBI Circular No. SEBI/IMD/CIR No. 12/118340/08 dated February 26, 2008.
266 SEBI Circular No. SEBI/IMD/CIR No. 12/ 118340/08 dated February 26, 2008.
267 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000.
120 Master Circular for Mutual Funds
13.9.2 Sales Literature containing information on performance of schemes
must adhere to the ‘performance advertisement’ guidelines.
13.10 Use of Rankings in Advertisements and Sales
Literature268
13.10.1 Definition of "Ranking Entity":
13.10.1.1 For purposes of these Guidelines, the term “Ranking Entity” refers
to an entity that:
a. Provides general information about AMC(s) or Mutual Funds
to the public; and
b. Is independent of the AMC(s) or Mutual Fund and its affiliates,
and
c. Whose services have not been procured by the AMC(s) or
Mutual Fund or any of its affiliates to assign a ranking to the
AMC(s) or Mutual Fund.
13.10.2 No AMC(s) or Mutual Fund shall use rankings except those
developed and produced by entities meeting the “Ranking Entity”
criteria detailed above and which conform to these guidelines.
13.10.3 Required Disclosures:
13.10.3.1 Headlines/Prominent Statements:
a. A headline or other prominent statement must not state or imply
that an AMC(s) and/or Mutual Fund is the best performer in a
category unless it is actually ranked first in the category.
268 SEBI Circular No. MFD/CIR/4/51/2000 dated June 5, 2000.
121 Master Circular for Mutual Funds
b. Prominent disclosure of the AMC(s)/Mutual Fund’s ranking, the
total number of AMC(s)/Mutual Funds in the category, the name of
the category and that the ranking is based upon category created
by the AMC/ MF, and the time period on which the ranking is
based (i.e., the length of the period and the ending date; or, the
first day of the period and the ending date), shall appear in close
proximity to any headline or other prominent statement that refers
to a ranking.
13.10.3.2 All advertisements and Sales Literature containing an
AMC(s)/Mutual Fund ranking must disclose, with respect to the
ranking:
a. The name of the category (e.g. income/growth).
b. The number of AMC(s)/Mutual Funds in the category.
c. The name of the Ranking Entity.
d. The length of the period and the ending date, or the first day
of the period and the ending date.
e. Criteria on which the ranking is based.
f. For schemes assessing front-end sales loads, whether the
ranking takes into account sales charge.
g. In case the ranking is for a period where fees/expenses have
been waived and the waiver or advancement had a material
effect on the yield for that period, the same should be
disclosed in the advertisement.269
h. The publisher of the ranking data.
13.10.3.2 The above disclosures must be set forth prominently in the body of
the advertisement and/or Sales Literature.
269
SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
122 Master Circular for Mutual Funds
13.10.3.4 If the ranking consists of a symbol (for e.g., a star system) rather
than a number, the advertisement or Sales Literature must disclose
the meaning of the symbol (for e.g., a four-star ranking indicates
that the fund is in the top 30% of all Mutual Fund schemes).
13.10.3.5All advertisements and/ or Sales Literature containing rankings
must disclose prominently in the main body of such communication
that past performance is not a guarantee of future results.
13.10.4 Time Periods:
13.10.4.1All ranking set forth in an advertisement and/ or Sales Literature
must be current to the most recent calendar quarter ended, in case
of advertising prior to the submission for publication or in case of
Sales Literature prior to use.
13.10.4.2 Except for Money Market Mutual Funds:
a. Advertisements and/ or Sales Literature must not use
rankings based on yield for a period of less than one year.
b. A ranking based on compounded annualized yield must be
based on rankings supplied by the same Ranking Entity,
relating to the same category and the same time period and
based on returns for
1. One year period for scheme in existence for at least one year;
2. One and five year periods for schemes in existence for at least
five years, and
3. One, five and ten year periods for scheme in existence for at
least ten years.
provided that, if rankings for such one, five and ten year time
periods are not published by the Ranking Entity, then
rankings representing short, medium and long term
123 Master Circular for Mutual Funds
performance must be provided in place of rankings for the
required time periods.
13.10.5 Categories:
13.10.5.1 The choice of category (including a subcategory) on which the
rankings are based must be such that it provides a sound basis
for evaluating the performance of the Mutual Fund.
13.10.5.2 Subject to the standards mentioned below, a ranking must be
based only on
a. Published category or subcategory created by a Ranking
Entity; or
b. Category or subcategory created by AMC(s)/ Mutual Fund
which is based on the performance measurements prescribed
by a Ranking Entity. In such cases, the advertisement and/ or
Sales Literature shall prominently disclose
1. The fact that the ranking category has been created by the
AMC/Mutual Fund.
2. The number of schemes in the category.
3. The basis for selecting the category and
4. The name of the Ranking Entity that has developed and/or
prescribed the criteria on which the ranking is based.
13.10.5.3 When the ranking is based on a subcategory, the advertisements
and/ or Sales Literature shall disclose the name of the main
category, the ranking and the number of schemes in the main
category. This requirement does not apply if:
a. The subcategory is based solely on the investment objectives
of the schemes included and
b. The subcategory is created by a Ranking Entity.
This disclosure may be included in a footnote.
124 Master Circular for Mutual Funds
13.10.5.4 The advertisements and/or Sales Literature must not use any
category or subcategory that is based upon the asset size of the
AMC or Mutual Fund, whether created by the Ranking Entity or
not.
13.10.6 Multiple class or Two-Tier Funds:
13.10.6.1 Rankings for more than one class of AMC(s)/Mutual Fund
schemes with the same portfolio must be accompanied by
prominent disclosure of the fact that the scheme or class of
schemes have a common portfolio.
13.11 Indicative portfolios and yields in mutual funds
schemes270
13.11.1 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.
13.12 Disclosure of risk factors in the advertisements271
13.12.1 Regarding disclosure of risk factors in the advertisements by the mutual
funds as mentioned Regulations272, it is clarified that :
270 SEBI Circular No. IMD/CIR No. 14/1510/2009 dated January 19, 2009
271 SEBI Circular No IIMARP/MF/CIR/01/294/98 dated February 4,1998
272 Clauses 10, 13 and 14 of the Advertisement Code of SEBI ( Mutual Funds) Regulations,
1996
125 Master Circular for Mutual Funds
13.12.1.1 All advertisements announcing the launch of a scheme and
those which solicit subscription to the scheme shall disclose all
the risk factors as required by the advertisement code.
13.12.1.2 All advertisements containing performance information,
advertising yield/return etc. shall also disclose all the risk
factors.
13.12.1.3 Any advertisement which discloses only the latest NAV, sale
and/or repurchase price without any reference to the
corresponding past figures may not disclose all the risk factors.
However, it shall include a statement that ‘investors are advised
to read the offer document before investing in the scheme’.
126 Master Circular for Mutual Funds
CHAPTER 14
INVESTOR RIGHTS & OBLIGATIONS
PART I – INVESTOR RIGHTS
14.1 Payment of interest for delay in dispatch of redemption
and/or repurchase proceeds and/or dividend273
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 period274,
14.1.2 The AMC(s) shall be liable to pay interest @ 15 per cent per annum to
the unit holders.275 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).276 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.
14.2 Unclaimed Redemption Amount277
273 SEBI Circular No. SEBI/MFD/CIR/2/266/2000 dated May 19, 2000.
274
SEBI Circular No. SEBI / IMD / CIR No 14 / 187175/ 2009 dated December 15,2009
275Regulation 53(c) of the Mutual Fund Regulations.
276 For CTR format please refer to chapter on Formats
277SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000
127 Master Circular for Mutual Funds
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.278
14.3 Dispatch of Statement of Accounts279
14.3.1 Mutual Funds shall dispatch Statement of Accounts within 30 days
from the closure of the NFO. AMC(s) may also start dispatching the
Statement of Accounts once the minimum subscription amount
278 Please refer to Schedule XI of SEBI ( Mutual Funds) Regulations, 1996
279 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000, SEBI Circular No.
IMD/CIR/12/80083/2006 dated November 20, 2006
128 Master Circular for Mutual Funds
specified in the SID is received, even before the closure of the
NFO.280
14.3.2 Systematic Investment Plan (SIP) or Systematic Transfer Plan
(STP) or Systematic Withdrawal Plan (SWP)
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.
14.3.3 Dormant Accountholders
14.3.3.1 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 unitholders 281
280 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000.
129 Master Circular for Mutual Funds
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.
14.5 Distribution of Proceeds realized from illiquid securities/
NPAs 282
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 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,
281 SEBI Circular No. MFD/CIR/9/120/2000 dated November 24, 2000
282 SEBI Circular No. MFD/CIR/05/432/2002 dated June 20, 2002.
130 Master Circular for Mutual Funds
without compelling that investor to obtain a ‘No Objection Certificate’
from the existing distributor.283
283 SEBI Circular No -SEBI/IMD/CIR No./ 13/187052 /2009 December 11,2009
131 Master Circular for Mutual Funds
PART II – INVESTOR’S OBLIGATIONS
14.7 Mandatory mentioning of PAN Number284
14.7.1 For, the requirement of mentioning PAN Number by investors of
mutual fund schemes, the applicable SEBI guidelines may be
referred285
14.8 Mandatory mentioning of Bank Account by Investors286
14.8.1 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.
284 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.
285 SEBI Circular No. MRD/DoP/MF/Cir-08/2008 dated April 3, 2008.
286 SEBI Circular No. IIMARP/MF/CIR/07/826/98 dated April 15, 1998.
132 Master Circular for Mutual Funds
PART III– INVESTOR EDUCATION
14.9 SEBI Investors Education Programme – Investments
in Mutual Funds 287
14.9.1 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.
14.9.2 AMCs are advised to circulate copies of the brochure among their
distributors and agents (including brokers, banks, post offices) and the
investors.
14.9.3 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
14.9.4 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.
14.9.5 Board may be kept informed about the steps taken by the AMCs in this
regard from time to time.
287 SEBI Cir No. MFD/CIR NO -13/370/02 dated January 16,2002
133 Master Circular for Mutual Funds
CHAPTER 15
CERTIFICATION AND REGISTRATION OF INTERMEDIARIES
288, 289
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 conducted by AMFI.
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 conducted by AMFI.
15.3 Further, such intermediaries and employees shall also adhere to the
Guidelines specified by the Board and AMFI.290
15.4 Code of Conduct:
15.4.1 Mutual Funds are required to monitor the activities of their
distributors, agents, brokers to ensure that they do not indulge in
288 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.
289 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, 2003.289 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.
290 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.
134 Master Circular for Mutual Funds
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.
15.4.2 AMFI has prescribed a Code of Conduct for Mutual Fund
intermediaries enclosed herewith as Annexure 1 291 All
intermediaries shall follow the Code of Conduct strictly and not
indulge in any practice contravening it directly or indirectly.
15.4.3 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.
15.5 Empanellment of Intermediaries by Mutual Funds
15.5.1 Empanelment of intermediaries by Mutual Funds, payment of
commissions, brokerage and/or sub-brokerage etc. shall be in
accordance with parameters and guidelines specified by the Board
and AMFI from time to time. Mutual Funds shall monitor the
compliance of these guidelines and Code of Conduct by their
intermediaries in terms of business done across all Mutual Funds.
In case of non-compliance, Mutual Funds shall suspend further
business and payment of commissions, etc. until full compliance by
the empanelled intermediary.
291 Refer annexure and reports for details on code of conduct
135 Master Circular for Mutual Funds
CHAPTER 16
TRANSACTION IN MUTUAL FUNDS UNITS
16.1 Maintenance of documents 292
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”293, 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
16.1.2.3 Take immediate steps to obtain all supporting documents in
respect of the past transactions.
292 SEBI Circular No - SEBI/IMD/CIR No.12 /186868 /2009 dated December 11,2009
293 SEBI Circular No ISD/AML/CIR-1/2008 dated December 19, 2008
136 Master Circular for Mutual Funds
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.
16.1.3 Pending completion of documentation, exercise great care and be
satisfied of investor bonafides before authorizing any transaction,
including redemption, on such accounts / folios.
16.1.4 The Trustees were required forthwith to confirm to Board that the
steps had been taken to address the above and also send a status to
the Board as and when process was completed to their satisfaction.
16.2 Facilitating transactions in Mutual Fund schemes through
the Stock Exchange infrastructure294
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 acceptance.295
16.2.3 The respective stock exchange would provide detailed operating
guidelines to facilitate the same.
294
SEBI Circular No - SEBI /IMD / CIR No.11/183204/ 2009 dated November 13,2009
295 SEBI Circular No. SEBI/IMD/CIR No.11/78450/06 dated October 11, 2006
137 Master Circular for Mutual Funds
16.2.4 In this regard, Mutual Funds/AMC are advised that :
16.2.4.1 Empanelment and monitoring of Code of Conduct for
brokers acting as mutual fund intermediaries-
a. The stock brokers intending to extend the transaction in Mutual
Funds through stock exchange mechanism shall be required to
comply with the requirements of passing the AMFI certification
examination296.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 Conduct297
for intermediaries of Mutual Funds, and applicable SEBI
guidelines298., applicable to intermediaries engaged in selling
and marketing of mutual fund units.
c. It is clarified that, stock exchanges shall monitor the
compliance of the code of conduct specified regarding
empanelment of intermediaries by mutual funds. 299
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 provisons mandated
by Board300
296 Please refer Chapter 15 on Certification and Registration of Mutual Funds intermediaries
297 For Code of Conduct , please refer to Annexure I
298 Please refer Chapter 15 on Certification and Regiatration of Mutual Funds intermediaries
299Please refer Chapter 15 on Certification and Regiatration of Mutual Funds intermediaries
300 Please refer to Chapter 8 – Net Asset Value for details on cut off timing provisions
138 Master Circular for Mutual Funds
16.2.4.3 Statement of Account
a. Where investor desires to hold units in dematerialised form, demat
statement given by depository participant would be deemed to be
adequate compliance with requirements for account statement
prescribed by SEBI 301..
16.2.4.4 Investor grievance mechanism
a. Stock exchanges shall provide for investor grievance handling
mechanism to the extent they relate to disputes between brokers
and their client.
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.
16.2.4.6 Know your client (KYC).
a. Where investor desires to hold units in dematerialised form, the KYC
performed by DP in terms of SEBI requirements 302 would be
considered compliance with applicable requirements specified in this
regard303 by Mutual Funds /AMCs.
16.2.5 Stock exchanges and mutual funds/AMCs, based on the experience
gained may further improve the mechanism in the interest of investors.
301 For details on dispatch of statement of accountts. refer to Chapter 14- Investor Rights and
services
302 SEBI Circular No - MRD/DoP/Dep/Cir-29/2004 dated August 24, 2004
303 SEBI Circular No - ISD/AML/CIR-1/2008 dated December 19, 2008
139 Master Circular for Mutual Funds
Necessary clarifications, if any, would be issued at appropriate time by
SEBI in this regard.
140 Master Circular for Mutual Funds