SEBI
Topic77 SEBI Mutual Funds Regulations 1996
SEBI (Mutual Funds) Regulations, 1996 — Key Provisions
Supplementary Topic — Sponsor-Trustee-AMC Structure, Fund Types, NAV, Investment Restrictions | SEBI Law Officer
Mutual funds are the largest category of SEBI-regulated collective investment vehicles — managing over ₹50 lakh crore in assets. SEBI (Mutual Funds) Regulations, 1996 create the institutional framework governing every mutual fund in India. The three-tier structure (Sponsor-Trustee-AMC), the concept of NAV, investment restrictions, and SEBI's enforcement powers over mutual funds are consistently tested in the SEBI Law Officer examination.
1. Three-Tier Structure of Mutual Funds
Mutual Fund Structure: Sponsor → creates → Trust (Mutual Fund) → managed by → AMC | Trustee oversees AMC |
Entity | Role | Regulatory Requirements |
|---|---|---|
Sponsor | Promotes and establishes the mutual fund; sets up the trust and appoints trustees; contributes minimum 40% to AMC's net worth | Must have sound financial track record; 5 years in financial services with net worth and profit history; SEBI registration not required for sponsor itself |
Trust (Mutual Fund) | Holds mutual fund assets on behalf of unit holders — a trust under Indian Trusts Act; all fund assets vest in the trust | SEBI registration mandatory; Trust Deed registered; separate legal entity from AMC |
Trustees / Board of Trustees | Oversight body — protect unit holders' interests; approve investment management agreements; ensure AMC complies with regulations | At least 4 trustees or corporate trustee; 2/3 must be independent (not associated with sponsor); meet quarterly |
Asset Management Company (AMC) | Day-to-day investment management; scheme launches; portfolio management; investor services | SEBI-registered under Section 12; minimum net worth ₹50 crore; at least 50% independent directors on board; no conflict of interest |
2. Types of Mutual Fund Schemes
Category | Types | Key Features |
|---|---|---|
By structure | Open-ended, Close-ended, Interval | Open-ended: buy/sell at NAV anytime. Close-ended: fixed maturity; listed on exchange. Interval: transact at specific intervals. |
By investment objective | Equity, Debt, Hybrid, Solution-oriented, Index/ETF | Equity funds: invest primarily in equities. Debt funds: primarily in fixed income. Hybrid: mix of equity and debt. |
By risk | Liquid, Ultra-short, Short duration, Medium, Long duration, Overnight | SEBI's categorisation circular (2017) mandated one scheme per category per AMC to prevent proliferation |
Special categories | ELSS (tax-saving), Sectoral, Thematic, FOF | ELSS: 3-year lock-in; Section 80C tax deduction. FOF (Fund of Funds) invests in other mutual fund schemes. |
3. Net Asset Value (NAV) — Calculation & Disclosure
NAV Definition: NAV per unit = (Market value of investments + Receivables + Other accruals − Liabilities − Accrued expenses) ÷ Total number of units outstanding |
SEBI's NAV disclosure requirements:
- Equity, hybrid, and debt funds: NAV must be published daily (on all business days) on AMFI website + AMC website.
- Liquid and overnight funds: NAV published for all days including non-business days (weekends and holidays).
- NAV is the price at which unit holders buy (purchase NAV + entry load, if any) and sell (redemption NAV − exit load, if any).
- Entry load was abolished by SEBI in 2009 — AMCs cannot charge entry load. Exit load is permitted but capped by SEBI.
4. Investment Restrictions under SEBI (MF) Regulations
Investment Restriction | Rule |
|---|---|
Concentration limit per issuer | No scheme shall invest more than 10% of its NAV in a single company's equity shares/convertible instruments |
Group company concentration | No scheme shall invest more than 25% of its NAV in securities of group companies of the sponsor |
Unlisted securities limit | No scheme shall invest more than 15% of its NAV in unlisted securities |
Mutual fund borrowing | Mutual funds can borrow only for temporary liquidity needs; maximum 20% of net assets; maximum period 6 months |
Inter-scheme investments | Restrictions on inter-scheme investments to prevent artificial cross-holdings |
No market manipulation | AMC shall not engage in short selling (naked) or enter into any prohibited transaction |
5. SEBI's Direct Regulation of AMCs — Key Powers
SEBI regulates AMCs as intermediaries registered under Section 12 of the SEBI Act:
- Approve scheme launches: AMCs must file offer documents with SEBI before launching new schemes.
- Inspection: SEBI can inspect AMC books and records; trustees must conduct independent annual inspection.
- Action on violations: SEBI can suspend/cancel AMC registration; impose penalties under Section 15D and 15E SEBI Act.
- Section 15D: failure by AMC to comply with SEBI's regulations relating to investment management — ₹1 lakh/day + ₹1 crore ceiling.
- Section 15E: failure by AMC to observe investment restrictions — ₹1 lakh/day + ₹1 crore ceiling.
6. Sahara Case — CIS vs Mutual Fund Distinction
📖 Securities & Exchange Board of India v. Sahara India Real Estate Corp. Ltd. (2013) 1 SCC 1 Facts: Sahara entities raised ₹24,000+ crore from millions of retail investors through Optionally Fully Convertible Debentures (OFCDs) — arguing these were private placements and not subject to SEBI's mutual fund/CIS jurisdiction. Held: The Supreme Court held that any offer of securities to 50 or more persons constitutes a PUBLIC OFFER — regardless of how it is labelled. Sahara's OFCDs were in substance a collective investment scheme requiring SEBI registration. SEBI had jurisdiction to order full refund to investors. This landmark ruling clarified the boundary between private placement and public offer. Ratio: The 50-person threshold for 'public offer' is the dividing line between private and public. Any scheme collecting money from 50+ persons and promising returns is within SEBI's jurisdiction as a public offer or CIS — regardless of structure. SEBI's Section 11B refund power extends to such entities. |
7. Model Examination Questions
Q1. Describe the three-tier structure of mutual funds under SEBI (MF) Regulations 1996. What are the key investment restrictions applicable to mutual fund schemes?
Mutual Fund Structure & Investment Restrictions Model Answer — THREE-TIER STRUCTURE: (1) Sponsor: establishes the mutual fund trust; contributes minimum 40% to AMC net worth; must have 5 years financial services track record. (2) Trust (Mutual Fund): holds assets on behalf of unit holders; SEBI registration mandatory; Trust Deed registered. (3) Trustees: oversight body; protect unit holders; at least 2/3 independent; approve investment management agreements. (4) AMC: day-to-day investment manager; SEBI-registered; minimum ₹50 crore net worth; at least 50% independent directors. INVESTMENT RESTRICTIONS: (i) Single issuer limit: max 10% of NAV in one company's equity; (ii) Group company: max 25% of NAV in sponsor group companies; (iii) Unlisted securities: max 15% of NAV; (iv) Borrowing: for liquidity only; max 20% of net assets; max 6 months. NAV: calculated daily; published on AMFI website; entry load abolished since 2009. SEBI PENALTIES: Section 15D — failure to comply with investment management regulations (₹1 lakh/day); Section 15E — failure to observe investment restrictions (₹1 lakh/day). In SEBI v. Sahara (2013 SC), the Court held that 50+ person offer = public offer under SEBI's jurisdiction regardless of structure — landmark ruling on CIS vs private placement. |
🎯 EXAM POINTERS — Topic 77: SEBI (MF) Regulations 1996
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← Topic 76: SEBI (ICDR) Regulations 2018 | Next → Topic 78: SEBI (AIF) Regulations 2012 — Alternative Investment Funds
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