GENERAL GUIDELINES

For proper functioning of mutual funds and for ensuring investor protection, the following important guidelines have been framed by the Government of India:

(A) General

(i) Money market mutual funds would be regulated by the RBI while other mutual funds would be regulated by the Securities and Exchange Board of India (SEBI)

(ii) Mutual Fund shall be established in the form of Trusts under the Indian Trust Act and be authorized for business by the SEBI.

(iii) Mutual Funds shall be operated only by separately established Asset Management Companies (AMCs).

(iv) At least 50% of the Board of AMC must be independent directors who have no connections with the sponsoring organization. The directors must have professional experience of at least 10 years in the relevant fields such as portfolio management, financial administration, etc.

(v) The AMC should have a minimum net worth of Rs.5 crores at all times.

(vi) The SEBI is given the power to withdraw the authorization given to any AMC if it is found to be not serving the best interest of investors as well as the capital market. It is not applicable to bank sponsored AMCs.

(B) Business Activities

(i) Both AMCs and trustees should be treated as two separate legal entitles.

(ii) AMCs shuld not be permitted to undertake any other business activity except mutual funds.

(iii) One AMC cannot act as the AMC for another mutual fund.

(C) Schemes

(i) Each scheme of a mutual fund must be compulsorily registered with the SEBI before it is floated in the market.

(ii) The minimum size of the fund should be Rs.20 crores in the case of each closed-end scheme and it is Rs.50 crores for each open-end scheme.

(iii) Closed-end schemes should not be kept opened for subscription for more than 45 days. For open-end scheme, the first 45 days should be considered for determining the target figure or the minimum size.

(iv) If the minimum amount or 60 per cent of the targeted amount, whichever is higher, is not raised, then, the entire subscription has to be refunded to the investors.

(v) To provide continuous liquidity, closed-end schemes should be listed on stock exchanges. In the case of open-end schemes, mutual funds shall sell and re-purchase units at pre-determined prices based on the Net Asset Value and such prices should be published at least once in a week.

(vi) For each scheme, there should be a separate and responsible fund manager.

(D) Investment Norms

(i) Mutual funds should invest only in transferable securities either in the capital market or money market or securitised debt. It cannot exceed 10 per cent in the case of growth funds and 40 per cent in the case of income funds.

(ii) The mutual fund should not invest more than 5% of its corpus of any scheme in any one company’s shares.

(iii) This list of 5 % can be extended to10 % if all the schemes of a mutual fund are taken together.

(iv) No scheme should invest if any other scheme under the same AMC.

(v) No mutual fund under all its schemes take together can invest more than 15 per cent of the funds in the shares and debentures of any specific industry, except in the case of those schemes which are specifically floated for investment in one or more specified industries.

(E) Expenses

(i) The AMC may charge the mutual fund with investment management and advisory fees. Such fees should have been disclose in the prospectus.

(ii) The initial issue expenses should not exceed 6% of the funds raised under each scheme.

(iii) Excepting the initial issue expenses, all other expenses to be charged to the fund should not exceed 3% of the weekly average net assets outstanding during the current year. It must be disclosed through advertisements, accounts etc.

(F) Income Distribution

All mutual funds must distribute a minimum of 90% of their profits in any given year.

(G) Disclosure and Reporting

(i) The SEBI is given wide powers to call for any information regarding the operation of mutual funds and any of its schemes from the mutual fund or any person associated with it like the AMC, Trustee, Sponsor etc.

(ii) Every mutual fund is required to send its copies of duly audited annual statements of accounts, six monthly unaudited accounts, quarterly statements of movements in net assets for each of its schemes to the SEBI.

(iii) The SEBI, can lay down the accounting policies, the format and contents of financial statements and other reports.

(iv) The SEBI shall also lay down a common advertising code for all mutual funds to comply with.

Accounting Norm

(i) All mutual funds should segregate their earnings as current income, short term capital gains and long term capital gains.

(ii) Accounting for all the schemes must be done for the same year-ending (I) Winding Up

(i) Each closed-end scheme should be wound up or extended with the permission of the SEBI as soon as the predetermined period is over.

(ii) An open-end scheme shall be wound up, if the total number of units outstanding after repurchases at a point of time falls below 50% of the originally issued number of units.

(J) Violation of Guidelines

The SEBI can, after due investigation, impose penalties on mutual funds for violating the guidelines as may be necessary.