REGISTRATION OF MUTUAL FUND

[Mr. M. GOVINDARAJAN]

Mutual Fund

Section 2(q) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 defines the expression ‘mutual fund’ as  a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money market instruments, gold or gold related instruments, silver or silver related instruments, real estate assets and such other assets and instruments as may be specified by the Board from time to time.  The infrastructure debt fund schemes may raise monies through private placement of units, subject to conditions specified in these regulations.  The mutual fund schemes investing in exchange traded commodity derivatives may hold the underlying goods in case of physical settlement of such contracts.

Investments are held in trust of which the investors alone are the joint beneficial owners. 

Components

The mutual fund scheme consists of sponsors, trustees, investors, custodian, asset management companies.  Under the Asset Management Company agents/distributors, bankers, fund accountants, Registrar and Transfer Agencies will come. 

Working of mutual fund

The following is the working of a mutual fund-

• Pool of investors’ money;
• Invested according to pre-specified investment objectives;
• Benefits accrue to those that contribute to this pool;
• There is thus mutuality in the contribution and the benefit.

Therefore, it is called mutual fund.

Sponsor

Section 2(x) defines the term ‘sponsor’ as any person who, acting individually or in concert with another body corporate, establishes a mutual fund.

Registration of Mutual fund

Eligibility criteria for applicant

Regulation 7 provides that the applicant, to get the registration, has to fulfill the following, namely-

1. the sponsor should have a sound track record and general reputation of fairness and integrity in all business transactions.
2. the sponsor has contributed or contributes at least 40% to the net worth of the asset management company; any person who holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor and will be required to fulfill the eligibility criteria specified in these regulations;
3. the sponsor or any of its directors or the principal officer to be employed by the mutual fund should not have been guilty of fraud or has not been convicted of an offence involving moral turpitude or has not been found guilty of any economic offence;
4. the applicant is a fit and proper person.
5. in the case of an existing mutual fund, such fund is in the form of a trust and the trust deed has been approved by the Board;
6. The appointment of trustees to act as trustees for the mutual fund in accordance with the provisions of the regulations;
7. appointment of asset management company to manage the mutual fund and operate the scheme of such funds in accordance with the provisions of these regulations;
8. appointment of custodian in order to keep custody of the securities or goods or gold or gold related instruments or silver or silver related instruments or other assets of the mutual fund held in terms of these regulations, and provide such other custodial services as may be authorized by the trustees.

Sound track record

Explanation to The expression ‘sound track record’ means the sponsor should,-

• be carrying on business in financial services for a period of not less than 5 years;
• ensure that the net worth is positive in all the immediately preceding 5 years;
• ensure that the positive liquid net worth is more than the proposed capital contribution of the sponsor in the asset management company and ensure that in case of change in control of the existing asset management company due to acquisition of shares, the positive liquid net worth of the sponsor or funds tied up by the sponsor is to the extent of aggregate par value or market value of the shares proposed to be acquired, whichever is higher;
• have net profit after providing for depreciation, interest and tax in each of the immediately preceding 5 years; and
• have average net annual profit after depreciation, interest and tax during the immediately preceding 5 years of at least Rs.10 crore.

If the above requirements are not fulfilled the sponsor shall ensure-

• adequately capitalize the asset management company such that the net worth of the asset management company is not less than Rs.150 crore;
• that the initial shareholding equivalent to capital contributed to the asset management company to the extent of not less than Rs.150 crore  is locked-in for a period of 5 years;
• appoint experienced personnel in asset management company such that the total combined experience of Chief Executive Officer, Chief Operating Officer, Chief Risk Officer, Chief Compliance Officer and Chief Investment Officer should be at least 30 years;
• that in case of acquisition of existing asset management company, the sponsor shall have minimum positive liquid net worth equal to incremental capitalization required to ensure minimum capitalization of the asset management company and the positive liquid net worth of the sponsor or the funds tied up by the sponsor are to the extent of aggregate par value or market value of the shares proposed to be acquired, whichever is higher;
• that in case of acquisition of stake in an existing asset management company, the shareholding equivalent to at least Rs.150 crores shall be locked in for 5 years.
• ensure that other conditions in this regard as may be specified by the Board from time to time are adhered to.

A private equity fund or a pooled investment vehicle or a pooled investment fund may also be permitted to sponsor mutual funds subject to such other conditions as may be specified by the Board from time to time.

Filing application

The application for registration of a mutual fund shall be in Form A by the sponsor to the Securities and Exchange Board of India (‘Board’ for short).  The Board may require the sponsor to furnish such further information or clarification as may be required by it. The application is required to confirm with the requirements.  Otherwise, it will be rejected.  Before rejection of the application the applicant shall be given an opportunity to complete such formalities within such time as may be specified by the Board.

Fee

The application fee for registration of a mutual fund is Rs.5 lakhs which is nonrefundable.  The said fee shall be payable along with the application.

Shareholding norms

The sponsor, its associate or group company including the asset management company of the fund, through the schemes of the mutual fund or otherwise, individually or collectively, directly or indirectly, shall not have –       

• 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other mutual fund; or
• representation on the board of the asset management company or the trustee company of any other mutual fund.

Any shareholder holding 10% or more of the share-holding or voting rights in the asset management company or the trustee company of a mutual fund, shall not have, directly or indirectly, -

• 10% or more of the share-holding or voting rights in the asset management company or the trustee company of any other mutual fund; or
• representation on the board of the asset management company or the trustee company of any other mutual fund.

In the event of a merger, acquisition, scheme of arrangement or any other arrangement involving the sponsors of the mutual funds, shareholders of the asset management companies or trustee companies, their associates or group companies which results in the incidental acquisition of shares, voting rights or representation on the board of the asset management companies or trustee companies, this regulation shall be complied with within a period of one year of coming into force of such an arrangement.

Disassociation

The sponsor may be permitted to disassociate from the asset management company.  At this event the asset management company of the existing mutual fund may act as sponsor of the same mutual fund subject to such conditions and in the form and manner as may be specified by the Board.   The mutual fund, the shareholding for any shareholder in the asset management company shall be below 10%.  The board of directors of such asset management company shall have at least two third independent directors.

Grant of registration

The Board shall consider the application for registration of a mutual fund.  If the Board is satisfied that the application is complete in all aspects then it may register the mutual fund and grant a certificate in Form B on the applicant.  The fee prescribed for registration of a mutual fund is Rs.25 lakhs.

Conditions of registration

The registration of a mutual fund is subject to the following conditions-

• the trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations;
• it shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect;
• it shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by it;
• payment of annual service fees before the 15th April each for every financial year.

Annual Service Fees

The Annual Service Fees is based on the Average Assets under Management (AAUM) as on 31^st March. 

• The annual fee for AAUM up to Rs.10000 crore – 0.0015% of the AAUM;
• Part of AAUM above Rs.10000 crore - 0.0010% of the portion of AAUM in excess of Rs.10000 crore.

The Board may not permit a mutual fund who has not paid service fee to launch any scheme.