Role Of Regulators In India:
- Financial market regulations aim to protect consumers and promote market development for economic growth.
- India has four key financial regulators:
- RBI: Regulates banking and money markets.
- SEBI: Regulates securities markets.
- IRDAI: Regulates insurance markets.
- PFRDA: Regulates pension markets.
- All these regulators function under the Ministry of Finance.
Role Of Securities And Exchange Board Of India:
- SEBI’s Role: SEBI regulates securities markets in India, covering mutual funds, depositories, custodians, RTAs, and credit rating agencies. Its mandate is to protect investor interests, promote market development, and ensure regulation.
- Regulatory Focus: SEBI regulations emphasize issuer disclosures, investor protection, fair practices, and financial market stability by addressing insider trading, speculation, and mutual fund risk-taking.
- Mutual Fund Regulations: Introduced via SEBI (Mutual Funds) Regulations, 1996 and amended regularly, these address NAV accounting, valuation norms, disclosures, and investor services.
- Regulation Categories: Regulations span 17 areas including scheme documents, new product approvals, governance, risk management, NAV, valuation, advertisement, and investor rights.
- Scheme Benchmarking: SEBI mandates benchmarking mutual fund schemes to Total Return Indices (TRI) instead of just price indices to reflect complete returns.
- Scheme Consolidation: Regulations require rationalization of schemes to reduce investor confusion, mandating one scheme per category.
- Risk Management: SEBI enforces credit event segregation, liquidity crisis measures, and exposure limits to mitigate systemic risks.
- Disclosure Norms: Guidelines ensure transparency in investor communication, with defined formats and reporting frequency.
- Investment Restrictions:
- General: No loans, limited investment in sponsor group companies, restricted cross-scheme holdings.
- Debt: Limits per issuer, restrictions on unlisted instruments, and minimum liquidity requirements.
- Equity: Capped at 10% per company; ELSS must invest 80% in equity-related instruments.
- REITs/InvITs: Exposure capped at 10% per issuer across all schemes, 5–10% per scheme.
- Compliance with Other Regulators: Mutual funds must adhere to RBI rules for money/forex markets and stock exchange regulations for listing and trading.
- SEBI Advertisement Code:
- Ads must be clear, accurate, unbiased, and not misleading or exaggerated.
- No use of celebrities, slogans, or testimonials is allowed.
- Ads should match disclosures in scheme documents and include a standard risk warning.
- Performance ads must present returns in terms of CAGR for 1, 3, 5 years and since inception, with benchmarks like Sensex/Nifty.
- Dividend payouts must mention per unit values, NAV, and applicable terms.
- Celebrity endorsements are permitted only at the industry level for awareness, with SEBI’s approval.
- Performance Disclosure Guidelines:
- Schemes >3 years old must disclose returns with benchmark comparisons.
- Short-term funds can use simple annualized yields (with limits).
- Fund manager’s tenure and performance of other schemes managed by them must be disclosed.
- Web ads may link to detailed fund manager performance data.
- Unauthenticated News Guidelines:
- SEBI requires intermediaries to restrict or monitor access to informal news platforms and mandate compliance officer approval before sharing market news.
- Investor Rights:
- Include beneficial ownership, right to nominate, inspect key documents, change distributor, and pledge units.
- Investors may exit without charges if scheme’s fundamental attributes change.
- 75% unit-holders can vote to remove AMC or wind up a scheme.
- Unclaimed funds must be actively tracked and disclosed; investors can reclaim with or without accrued income depending on time.
- Transparency Measures:
- Daily disclosure (with 15-day lag) of debt and money market transactions is required.
- Recoveries from illiquid securities are returned to original investors (if timely) or transferred to Investor Education Fund.
Due Diligence Process By AMCs For Distributors Of Mutual Funds :
- Asset Management Companies (AMCs) and Mutual Funds are regulated by SEBI under the SEBI (Mutual Funds) Regulations, 1996.
- AMCs are responsible for overseeing distributor practices.
- They must perform due diligence on distributors.
Investor Grievance Redress Mechanism :
- Investors should first approach the AMC’s Investor Service Centre for grievance redressal.
- If unresolved, complaints can be escalated to SEBI, which mandates resolution within 21 days.
- SEBI provides a centralized online platform called SCORES (http://scores.gov.in) for filing and tracking complaints.
- Investors can also submit physical complaints to SEBI offices, which are uploaded to SCORES.
- SEBI handles complaints against listed companies, brokers, mutual funds, depositories, portfolio managers, and others.
- The principle of caveat emptor applies—investors are expected to be aware of scheme provisions.
AMFI Code Of Conduct For Intermediaries :
- Purpose of ACE:
AMFI’s Code of Ethics (ACE) promotes investor interest by ensuring high ethical and professional standards among Asset Management Companies (AMCs). - Compliance Requirement:
SEBI mandates AMCs and Trustees to follow the Code of Conduct per its 1996 Regulations (Fifth Schedule), which ACE complements. - Enhanced Standards:
ACE encourages standards beyond SEBI’s minimum requirements to better protect mutual fund investors. - AMFI Code for Intermediaries:
AMFI also issues guidelines (AGNI) for intermediaries like agents, brokers, and banks distributing mutual funds. - Disciplinary Process:
- AMFI requests an explanation within 3 weeks upon a code breach.
- If the response is inadequate, a warning is issued.
- A second proven violation leads to cancellation of AMFI registration.
- Intermediaries may appeal AMFI’s decision.