usage of pool a/cs – mutual funds

SEBI has vide its circular dated 4th October, 2021 discontinued usage of pool funds by entities including online platforms except stock exchange platforms for all mutual fund transactions. That means no entity can accumulate funds and then invest it into various mutual funds. It has to go directly from the investor’s bank account to the mutual fund and similarly in case of redemption also, from the mutual fund a/c directly into the investor’s account without any intermediary in between. This will come into effect from 1st April, 2022.

The gist of the circular is given below

1. SEBI, vide circulars dated October 04, 2013 and October 19, 2016, allowed Mutual Fund Distributors (‘MFDs’) and SEBI registered Investment Advisers (‘IAs’) to use the infrastructure of recognized stock exchanges to purchase and redeem Mutual Fund (‘MF’) units on behalf of their clients.
2. MFDs, IAs, Mutual Fund Utilities (‘MFU’), channel partners and other entities including online platforms (‘service providers’/ ‘platforms’) are providing services to investors to transact in mutual fund units. It is observed that based on bilateral understanding with AMCs, a few platforms pool the clients’ funds into a nodal account and subsequently transfer to AMCs either on per transaction basis or lump sum basis.
3. Based on the discussions with stakeholders and recommendations of the Mutual Fund Advisory Committee of SEBI, the following has been decided with respect to transactions in the units of Mutual Funds undertaken through service providers/platforms other than stock exchanges:
   3.1. AMCs shall ensure that the transactions (financial/ non-financial) can be executed only if there is a service agreement between the AMC and the service provider / platform.
   3.2. AMCs shall ensure that intermediate pooling of funds and/or units in any manner by MFDs, IAs, MFU, channel partners or any other service providers/ platforms, by whatsoever name called, are discontinued for MF transactions. However, this requirement shall not apply to the SEBI registered Portfolio Managers subject to compliance with SEBI (Portfolio Managers) Regulations, 2020 and circulars issued thereunder.
   3.3. AMCs shall put necessary systems in place to ensure the following:
   3.3.1. For subscription, funds should be credited directly from the investors’ account into the MF scheme account without any intermediate pooling. For ease of transactions, funds can be routed through payment aggregators authorized by RBI or SEBI recognized clearing corporations, as the case may be.
   3.3.2. For redemption, funds should be directly credited to the investor’s registered bank account from the MF scheme account without any intermediate pooling.
   3.3.3. For subscription, units should be directly credited into the investor’s account by the mutual fund for both demat and non-demat modes without any intermediate pooling.
   3.3.4. For redemption, units should be directly transferred from investor’s account to the mutual fund without any intermediate pooling, in both demat and non-demat modes.
   3.3.5. MFDs / IAs, MFU, channel partners and other entities (including online platforms) facilitating MF transactions shall not accept payment through one-time mandate or issuance of mandates/ instruments in their name for mutual fund transactions.
   3.3.6. Cheque payments from investor shall be made in favor of the respective MF Schemes only.
   3.3.7. For better investor experience and faster transfer of funds, AMCs shall provide different methods of payment through RBI recognized modes of payment.
   3.4. AMFI, in consultation with SEBI, shall issue guidelines for AMCs with regard to mitigating risks of co-mingling of funds at the level of Payment Aggregators/Payment Gateways involved in mutual fund transactions. It shall be mandatory for all AMCs to follow such guidelines.
   3.5. AMCs shall ensure that for the purpose of investor servicing:
   3.5.1. Detailed information at each stage of the relevant transaction, including rejection, shall be made available at the same time to all the stakeholders involved in the transactions, as applicable, including investors, Registrar and Transfer Agents (‘RTAs’), MFDs, IAs, etc. Only payment related information required to ensure reconciliation and traceability shall be made available to the Payment Aggregators.
   3.5.2. Information sharing shall be system generated and adequately secured.
   3.5.3. The information sharing with respect to direct plans of mutual fund schemes shall be in line with the clarifications issued by SEBI to AMFI vide letter dated September 6, 2021 (can be accessed from AMFI website at https://www.amfiindia.com/Themes/Theme1/downloads/circulars/SEBICla
   rificationw.r.t.transactionsunderDirectPlan.PDF)
   3.5.4. Cost towards system development / improvement in this regard, if any, shall not be passed on to the investors.
   B. Other measures to prevent third-party payments and to safeguard the interest of unitholders
4. For mitigation of the risk of third party payments:
   4.1. The onus of compliance with PMLA provisions and not permitting usage of third party bank account payments continues to lie with the AMCs.
   4.2. In order to ensure that the folio and source bank account belong to the same person, AMCs shall make sure that payment for MF transactions are accepted through only such modes where independent traceability of end investor can be ensured and source account details are available as audit trail without relying on any other intermediary’s records. However, the investment in MF by way of cash/ through e-wallets (Prepaid Payment Instruments) shall be in compliance with SEBI
   Circulars dated September 13, 2012 and May 22, 2014 (for cash) and May 8, 2017 (for e-wallets), respectively.
   4.3. AMCs shall ensure that payment is credited directly to the registered and verified bank account of the investor mapped with the concerned folio, after due verification. The process carried out by AMCs to verify bank account details i.e. investor name, bank account number, bank name, etc. shall be available as audit trail.
   4.4. In case of redemption of units, Two-Factor Authentication (for online transactions) and signature method (for offline transactions) shall be used to authenticate transactions. One of the Factors for such Two-Factor Authentication (for online transactions) shall be a One-Time Password sent to the unit holder at his/her email/ phone number registered with the AMC.
5. AMC would be liable to compensate for losses, if any, occurred to a unit holder, where unauthorised transaction(s) occur(s) in unit holder’s folio due to fraud/ negligence/ deficiency on the part of the AMC, employee of AMC or persons/ entities whose services have been availed by the AMC including the platform providers, MFDs, RTAs, MFU, and channel partners, irrespective of whether or not the fraud is reported by the unit holder. For this purpose, it is clarified that any unauthorised transaction(s) performed by the Investment Advisors while providing services to the unit holder(s)
   would not be considered as a liability of the AMC.
6. To strengthen control with respect to verification of key details of investors like Bank account details, email id, mobile number and address etc., AMFI shall, in consultation with SEBI, issue guidelines. It shall be mandatory for all AMCs to follow such guidelines.
7. The provisions of this Circular shall be applicable with effect from April 1, 2022.

schemes filed by AMCs – timelines

SEBI circular dated 23rd July, 2021 wherein they have specified that if SEBI does not suggest modification or review in any scheme documents filed by mutual funds, within 21 days, then it will be deemed as approved. Read on .

In order to promote ease of doing business and bring uniformity in the timelines for processing of scheme related applications filed by AMCs, the following has been decided:

1. The application filed by AMCs for the following matters may be deemed to be taken on record in case no modifications are suggested or no queries are raised by SEBI within 21 working days:
    Change in the Fundamental Attributes of a scheme
    Merger/Consolidation of Schemes
    Rollover of Close-ended schemes
    Conversion of Close-ended scheme to Open ended scheme
2. In respect of applications filed by AMCs under Regulation 24 (b) of SEBI (Mutual Funds) Regulations, 1996, no objection will have been deemed to be communicated in case no modifications are suggested or no queries are raised by SEBI within 21 working days.
3. The timelines mentioned at para 1 and 2 above shall generally be adhered to (a) provided the application is complete in all respects and in compliance with all the relevant Regulations and circulars issued by SEBI. (b) except in cases where subject matter of approval requires a policy view to be taken or presents a unique situation which requires wider
   consultation and deliberation.
4. The circular shall be applicable for all the applications received on or after September 01, 2021.

inter operable platform for MF investors

SEBI has vide its circular dated 26th July, 2021 mandated the setting up of an inter operable platform for the mutual fund investors, where in one site they are able to view everything related to their mutual fund investments as well carry out transactions therein, instead of navigating to multiple sites. Salient features are :

1. RTAs shall implement standardized practices, system interoperability amongst themselves to jointly develop a common industry wide platform that will deliver an integrated, harmonized, elevated experience to the investors across the
   industry. AMCs and Depositories shall facilitate the RTAs for development of the proposed platform.
2. The aforesaid platform shall, inter alia in phases, enable a user-friendly interface for investors for execution of mutual fund transactions viz. purchase, redemption, switch etc., initiation and tracking of service requests viz. change of email id / contact number / bank account details etc., initiation and tracking of queries and complaints, access investment related reports viz. mutual fund holdings (both in demat and standard Statement of Account), transactions reports (including historic transactions), capital gains/loss report, details of unclaimed dividend/redemption etc. Through this platform, investors will be able to access these services for all Mutual Funds in an integrated manner. In this regard,
   AMCs, RTAs and Depositories shall take necessary measures to provide data via APIs on a real time basis to the proposed platform. Additionally, RTAs and Depositories shall also share their respective data feeds between themselves for generation of investment related reports.
3. The platform may also over time, provide services to the distributors, registered investment advisors, AMCs, Stock Exchange platforms and digital platforms for transacting in mutual funds to further augment ease of investing and servicing of investors through the above stakeholders in consultation with SEBI.
4. AMCs, RTAs and Depositories shall review and agree to harmonize the processes across the industry to provide a single-window, integrated, simplified investment and service experience for the investors.
5. AMCs, RTAs, and Depositories shall adopt the data definitions and standards as provided / recommended by SEBI for data exchange amongst various participants.
6. The Platform should be scalable with robust cyber security protocols and supported through an API-based architecture. In this regard, the platform shall adopt the Cyber Security and Cyber Resilience framework specified by SEBI from time to time to “MIIs” (Market Infrastructure Institutions such as Stock Exchanges, Depositories and Clearing Corporations) and “Qualified RTAs” (QRTAs). Further, on request basis, APIs could be exposed to other industry
   stakeholders such as distributors, registered investment advisors, Stock Exchange platforms and digital platforms etc. with due approval of the concerned Mutual Fund on mutually agreed terms.
7. The RTAs are jointly and severally responsible for compliance with all the applicable regulations including system audit and cyber security audit. Further, RTAs shall ensure that the platform complies with the guidelines for Business
   Continuity Plan (BCP) and Disaster Recovery (DR) specified by SEBI from time to time to “MIIs”.
8. All the stakeholders are advised to collaborate and work together towards the development and implementation of the proposed investor-friendly platform.
9. AMCs and Depositories shall facilitate and RTAs shall make the aforesaid platform operational in a phased manner (starting with non-financial transactions) and shall be fully operational by December 31, 2021.
10. AMCs, RTAs, Depositories, AMFI and key stakeholders are advised to create awareness about this initiative amongst the investors.
11. Any RTA providing its services to Mutual Fund(s), subsequent to issuance of this circular, shall follow the guidelines specified in this circular or amendments thereto as may be intimated by SEBI from time to time.

AIFs in IFSC

Circular issued by IFSCA dated 25th June, 2021 allowing further relaxations in AIF operations in IFSC. The salient features are as follows:

A. Continuing interest by the Manager or Sponsor in the AIF
In order to facilitate relocation of funds established or incorporated or registered outside India to IFSC, the continuing interest requirement by the Manager or Sponsor in the AIF provided under para 8 of the Annexure to the operating guidelines for AIFs in IFSC dated November 26, 2018 shall be voluntary.
B. Investment in Mutual Fund
An AIF in IFSC is permitted to invest in units of schemes launched by mutual fund regulated in FATF compliant jurisdiction (including India).

https://ifsca.gov.in/Viewer/Index/192

overseas investment limits for MFs

SEBI has vide its circular dated 3rd June, 2021 enhanced the overseas investment limits for mutual funds as follows:

1. they can make overseas investments subject to a maximum of US$1 billion per mutual fund subject to an industry limit of USD$7 billion;
2. in overseas exchange traded fund, they can make investment of US$ 300 million per mutual fund subject to an industry limit of US$1 billion.

The earlier limits were US$600 million (per mutual fund) and US$200 million (for exchange traded fund) respectively. The overall industry limits are the same.

In respect of investment limits to be disclosed in the scheme documents at the time of NFO as specified in Para 2.2 of the aforesaid circular, and the investment limits on ongoing schemes as specified in Para 2.3 of the aforesaid circular, such limits would henceforth be soft limits for the purpose of reporting only by Mutual Funds on monthly basis in the format prescribed vide SEBI circular dated November 5, 2020.

The aforesaid circular referred to above is the Para 1 of SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2020/225 dated
November 05, 2020 which is here i.e.

https://www.sebi.gov.in/legal/circulars/nov-2020/circular-on-enhancement-of-overseas-investment-limits-for-mutual-funds_48090.html

https://www.sebi.gov.in/legal/circulars/jun-2021/circular-on-enhancement-of-overseas-investment-limits_50415.html

distribution of mutual funds/ insurance – IFSC

IFSCA has issued a circular dated 3rd May, 2021 giving guidelines to Finance Company/ Finance Unit in IFSC for distribution of mutual funds and insurance products. Read on.

3. This circular shall apply to all FC/FU as the case may be, registered with the Authority under section 3 of IFSCA (Finance Company) Regulations, 2021 and who intends to undertake the above mentioned activities. Further, the circular shall remain applicable as amended by the Authority from time to time.

B. General Guidelines:

4. The following guidelines shall be adhered to for undertaking activities as specified in the circular:
   (i) The activities shall be carried out on fee basis, without any risk participation.
   (ii) All employees dealing with mentioned activities shall possess the requisite qualification as per industry best practices. There shall be a system of continuous development and training (internal as well as external) of such employees so that they may understand the complexity of the product.
   (iii) There shall be standardized system of assessing the need/ suitability of products for a customer and the process of initiation/ transaction as well as the functions of the marketing and operational staff shall be segregated.
   (iv)There shall be a Board approved policy encompassing the model of distribution such investment products to be adopted, issues of customer appropriateness, suitability, customer compensation, grievance redressal arrangements and marketing and distribution of such products (which shall, inter alia specifically consider the issue of addressing mis-selling).
   (v) The FC/FU shall not follow any restrictive practices or link the sale of its investment products to any other products offered by it.
   (vi)It shall be prominently stated in all publicity material, if any, distributed by the FC/FU that the purchase by a FC/FU’s customer of any investment products is purely voluntary, and is not linked to availment of any other facility from the FC/FU.
   (vii) The third party product issuer shall be a regulated financial entity.
   (viii) There shall be a Code of Conduct for the sales personnel who shall adhere to the same.
   (ix)The fact that the FC/FU is only acting as an agent shall be clearly brought to the notice of the customer.
   (x) No incentive (cash or non-cash) shall be linked directly or indirectly to the sale/income received from marketing/distribution services of such investment products. The staff of the FC/FU shall not be permitted to receive any incentive (cash or non-cash) directly from the third party issuer. FC/FU must ensure that there is no violation of the above in the incentive structure to staff.
   

(xi)FC/FUs shall disclose in the ‘Notes to Accounts’ to their Balance Sheet, the details of fees/remuneration received in respect of marketing and distribution function undertaken by them.
C. Guidelines on distribution of mutual funds units

5. In addition to the general guidelines as above, an FC/FU shall also adhere to the following guidelines while undertaking distribution of mutual fund products:
   (i) The investors’ applications for purchase/sale of mutual fund units shall be forwarded to the mutual funds/registrars/transfer agents.
   (ii) The purchase of units shall be at the customers’ risk without the FC/FU guaranteeing any assured return.
   (iii) No mutual fund units shall be acquired from the secondary market or bought back from a customer for selling it to other customers.
   (iv)Extension of credit facility to individuals against the security of mutual fund units shall be in accordance with the extant instructions on advances against shares/debentures and units of mutual funds.
   (v) A FC/FU holding custody of mutual fund units on behalf of its customers shall keep the investments of the customers distinct from its own investments. FC/FUs shall put in place adequate and effective control mechanisms in this regard.
   D. Guidelines on distribution of insurance products
6. In addition to the general guidelines as above, an FC/FU shall also adhere to the following guidelines while undertaking distribution of insurance products:
   (i) FC/FU shall necessarily undertake a customer need assessment prior to sale of insurance products.
   (ii) The FC/FU shall comply with provisions of IRDAI (International Financial Services Centre Insurance Intermediary Offices) Guidelines, 2019 No. IRDA/RI/GDL/MISC/012/01/2019, dated January 16,2019 and any other Regulation/ Circular/Guidelines issued by the Authority from time to time.
   (iii) It shall be ensured that performance assessment and incentive structure for staff is not violative of IRDAI (Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries) Regulations ,2016 as amended from time to time

Finance Company and Finance Unit derive their meanings from the main act i.e. The International Financial Services Centre Authority Act, 2019 which stipulates that finance company is a financial institution set up in IFSC to carry on business in financial services in IFSC in securities, mutual funds, insurance, deposits, credit arrangements etc. Finance Unit is the branch unit of the said financial institution set up in accordance with these regulations.

For more details please go to https://ifsca.gov.in/

reporting formats for mutual funds

SEBI circular dated 12th April, 2021 wherein they have revised the reporting format for mutual funds. Read on.

A. Pursuant to regulatory revamp exercise of SEBI (Mutual Funds) Regulations, 1996 (hereinafter called as “MF Regulations”) and various circulars issued thereunder, a circular no. SEBI/HO/IMD/DF2/CIR/P/2021/024 dated March 04, 2021 has been issued. Further, based on the consultation with industry the formats for the following reports i.e. reports to be submitted by AMCs to Trustees, by AMCs to SEBI and by Trustees to SEBI have been reviewed and
revised as under:

1. Reporting by AMCs to Trustees
   1.1.Bi-monthly Compliance Certificate (BCC)
   In partial modification to the SEBI circular No. MFD/CIR/09/014/2000 dated January 5, 2000, the Compliance Certificate to be submitted by the AMC to the Trustees on a Bi-monthly basis shall be discontinued.
   1.2.Half yearly Compliance Certificate (HYCC) by AMC to Trustees
   In partial modification to the SEBI circular No. MFD/CIR/09/014/2000 dated January 5, 2000, the Compliance Certificate to be submitted by the AMC to the Trustees on an half yearly basis shall be discontinued. The contents of both BCC and HYCC have been suitably incorporated in the Quarterly Report by AMC to Trustees.
   1.3.Quarterly Report by AMC to Trustees (QR)
   The AMC shall submit QR to the trustees, as required in sub-regulation (4) of Regulation 25 of MF Regulations, on its activities and the compliance with MF Regulations and various circulars issued thereunder. The format of QR is prescribed at Annexure I. The same shall be submitted by AMC to Trustees by 21st calendar day of succeeding month for the quarters ending March, June, September and December.
2. Reporting by AMCs to SEBI
   2.1.Compliance Test Report by AMC to SEBI (CTR)
   To synchronize the frequency of submission of the CTR and QR, SEBI circulars No. MFD/CIR/5/360/2000 dated July 4, 2000, SEBI/ IMD/CIR No. 11 /36222/2005 dated March 16, 2005 and SEBI/IMD/CIR NO 6/98057/07 dated July 5, 2007 have been modified to the extent that, instead of exceptional reporting, complete CTR shall be submitted by
   AMC to SEBI on a quarterly basis, by 21st calendar day of succeeding month for the quarters ending March, June, September and December. The revised format of CTR is prescribed at Annexure II.
3. Reporting by Trustees to SEBI
   3.1.Half Yearly Trustee Report by Trustees to SEBI (HYTR)
   a) In partial modification to the SEBI circular No. MFD/CIR/09/014/2000 dated January 5, 2000, the HYTR containing the broad coverage of report of trustees to SEBI has been revised & prescribed at Annexure III.
   b) Trustees, shall submit corrective steps taken with respect to the noncompliance reported in the HYTR.
   c) Trustees shall continue to submit HYTR for the half year ending September and March within two month from the end of the half year.
   B. Applicability
4. For QR and CTR reports, the circular shall come into effect for reporting from the quarter ending June, 2021;
5. For HYTR report, the circular shall come into effect for reporting from the halfyear ended March, 2021;
6. BCC and HYCC shall be discontinued subsequent to the effective date of the QR report as mentioned at paragraph B(1) above.

mutual funds

SEBI has vide its detailed circular dated 4th March, 2021 revamped quite a lot of procedural formalities/ documentation etc. with respect to mutual funds.

These can be broadly classified into : – Gross Exposure Limits, Investment Pattern, Procedure for change in control of AMC, Go Green Initiatives, AMC annual report to unit holders, filing of AIR by mutual funds, investment in securities by employees of AMCs and trustees of mutual funds, advertisement, disclosure of performance of mutual funds, undertaking from trustees for new scheme document, key personnel of AMC, updation of scheme information document (SID) and key information memorandum (KIM), disclosure of votes cast by mutual funds, dividend distribution procedure, postal ballot, exit period for unit holders, models of payments and despatch, timelines for issuance of CAS etc.

In Gross exposure limits, it says : – “The cumulative gross exposure through equity, debt, derivative positions (including commodity and fixed income derivatives), repo transactions and credit default swaps in corporate debt securities, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), other permitted securities/assets and such other securities/assets as may be permitted by the Board from time to time should not exceed 100% of the net assets of the scheme.”

On Investment Pattern : – The tentative portfolio break-up of Equity, Debt, Money Market Instruments, other permitted securities and such other securities as may be permitted by the Board from time to time with minimum and maximum asset allocation, while retaining the option to alter the asset allocation for a short term period on defensive considerations.

On annual report for unit holders : – “The annual report containing accounts of the AMC should be displayed on the websites of the mutual funds immediately after approval in Annual General Meetings within a period of four months, from the date of closing of the financial year. It should also be mentioned in the annual report of mutual fund schemes that the unitholders, if they so desire, may request for the annual report of the AMC. Further, the annual report of AMCs shall be displayed on their websites in machine readable format.

On annual information return by mutual funds : – “Mutual funds are required to submit the Annual Information Return (AIR)
under section 285 BA of the Income Tax Act, and various guidelines notified by Central Board of Direct Taxes (CBDT). 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 through electronic medium to Income Tax
Department giving PAN of the transacting parties in an Annual Information Return (AIR).”

On disclosure of votes cast by mutual funds : – “AMCs shall be required to make disclosure of votes cast on their website (in
machine readable spreadsheet format) on a quarterly basis, within 10 working days from the end of the quarter as per the format enclosed. A detailed report in this regard along with summary thereof shall also be disclosed on their website. The format for disclosure of vote cast by Mutual Funds in respect of resolutions passed in general meetings of the investee companies and the
format for presenting summary of votes cast by Mutual Funds is placed as Annexure B. Further, AMCs shall provide the web link in their annual reports regarding the disclosure of voting details.”

On Auditor of a mutual fund: – “The auditor of a mutual fund, appointed in terms of Regulation 55 (1) of MF Regulations shall be a firm, including a limited liability partnership, constituted under the LLP Act, 2008.”

All other changes, you can read from the link given below

https://www.sebi.gov.in/legal/circulars/mar-2021/circular-on-mutual-funds_49393.html

voting by mutual funds

SEBI has vide its circular dated 5th March, 2021 advised the mutual funds holding shares in listed companies to mandatorily vote in respect of certain resolutions. What action will be taken against those mutual funds not voting on the said resolutions has not been specified but the fund managers/ decision makers have to report on a quarterly basis to their trustees that they voted in the best interest of the unit holders of their schemes. The trustees in turn will have to submit a half yearly report to the SEBI in this regard.

This will be applicable from 1st April, 2021 onwards in respect of the identified list of resolutions. But in respect of all the resolutions, the mutual funds will have to mandatorily vote but after 1st April, 2022 onwards. The identified list of resolutions are :

a) Corporate governance matters, including changes in the state of incorporation. merger and other corporate restructuring, and anti-takeover provisions.
b) Changes to capital structure, including increases and decreases of capital and preferred stock issuances.
c) Stock option plans and other management compensation issues.
d) Social and corporate responsibility issues.
e) Appointment and Removal of Directors.
f) Any other issue that may affect the interest of the shareholders in general and interest of the unit-holders in particular.

ii. Related party transactions of the investee companies (excluding own group companies). For this purpose, “Related Party Transactions” shall have same meaning as assigned to them in clause (zc) of Sub-Regulation (1) of Regulation (2) of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015.

https://www.sebi.gov.in/legal/circulars/mar-2021/circular-on-guidelines-for-votes-cast-by-mutual-funds_49405.html

uniformity in applicability of NAV

SEBI circular dated 31st December 2020 on the subject follows,

1. In terms of paragraph 1 of SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2020/175 dated September 17, 2020, the uniform applicability of NAV in respect of purchase of units of mutual fund schemes upon realization of funds, was to come into effect from January 1, 2021.
2. Upon consideration of the subsequent representation received from AMFI regarding operational challenges, it has been decided to extend the date of applicability of the aforementioned provision to February 1, 2021.

B. Trade Execution and Allocation:

1. In partial modification to paragraph 2 on ‘Trade Execution and Allocation’ of SEBI Circular No. SEBI/ HO/ IMD/DF2/CIR/P/2020/175 dated September 17, 2020, the following has been decided:
   i. Clause a) of paragraph 2.2.1 on orders pertaining to equity and equity related instruments of the aforesaid circular is modified as under:
   “(1) AMCs shall use an automated Order Management System (hereinafter referred to as ‘OMS’), wherein the orders for equity and equity related instruments of each scheme shall be placed by the fund manager(s) of the respective schemes. However, a fund manager may authorize an employee of the AMC for order placement on his behalf, subject to adherence to the following:
   
   a. The order instructions to such employee by the fund manager shall be through electronic mode i.e. either through e-mail or other electronic utility, wherein schemewise audit trail of such orders starting from the
   instruction of the fund manager is maintained along with time stamping of each stage of the process.
   b. The employee placing the order shall be bound by the same requirements of maintaining confidentiality and the code of conduct as applicable to the fund manager in this regard i.e. in respect of order
   placement.
   (2) Further, the orders in case of arbitrage transactions, stock lending and borrowing transactions, passive schemes (such as Index Funds and ETFs) and schemes investing primarily based on pre-defined rules and models, where the discretion of the fund manager is not required for placement of order, is not mandated to be placed through OMS, subject to the following:
   a. The AMC shall document and demonstrate that no judgement and discretion of the fund manager is required for placement of such orders.
   b. The AMCs shall ensure that orders in breach of applicable regulatory limits and allocation limits as specified in Scheme Information Documents (SIDs), should not be placed and executed.
   c. The fund manager shall provide the schemewise details as required for order placement such as value of transaction(s), nature of transaction(s), etc. to the dealer.
   d. The schemewise audit trail of placement of orders (including the information provided by the fund manager), order execution and trade allocation shall be maintained along with time stamping of each stage of the process.
   (3) At all points of time, the responsibility associated with order placement shall continue to vest with the fund manager.”
   ii. Clause d) of Paragraph 2.2.1 of the aforesaid circular is modified as under:
   “All orders of fund manager(s) shall be received by dedicated dealer(s) responsible for order placement and execution. However, in case of orders for arbitrage transactions, stock lending and borrowing transactions, passive schemes (such as Index Funds and ETFs) and schemes investing
   primarily based on pre-defined rules and models, the requirement of a dedicated dealer shall not be mandatory.”
   
   iii. Paragraph 2.3.2 of the aforesaid circular is modified as under:
   “Audit trail of activities as detailed in paragraph 2.2.1 related to order placement, trade execution and allocation shall be available in the system. Further, there should be time stamping with respect to order placed by fund manager (or the order placed by the employee of the AMC authorized by the fund manager), order placed by dealer, order execution and trade allocation in the OMS. The audit trail and time stamping of all other orders (including orders through RFQ platform) not placed through OMS shall also
   be adequately maintained.
   C. All other conditions specified in SEBI circular dated September 17, 2020 shall remain unchanged.

flexi cap fund

https://www.sebi.gov.in/legal/circulars/nov-2020/circular-on-introduction-of-flexi-cap-fund-as-a-new-category-under-equity-schemes_48108.html

Introduction of a new category called “Flexi Cap Fund” under Equity schemes for mutual funds.

SEBI vide circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06,
2017, has issued guidelines regarding categorization and rationalization of
Mutual Fund Schemes.

In order to give more flexibility to the mutual funds and on the basis of the recommendations of Mutual Fund Advisory Committee (MFAC), a new
category named “Flexi Cap Fund” under Equity Schemes has been made available with the following scheme characteristics.

The AMC have to ensure that a suitable benchmark is adopted for the Flexi Cap Fund. For easy identification by investors and in order to bring uniformity in names of schemes for a particular category across Mutual Funds, the scheme name shall be the same as the scheme category.

Mutual Funds have been given the option to convert an existing scheme into a Flexi Cap Fund subject to compliance with the requirement for change in fundamental attributes of the scheme in terms of Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996.

Scheme under the aforesaid mentioned new category can be launched with
effect from the date of this circular.

overseas investment limits for mutual funds

SEBI circular dated 5th November, 2020 regarding enhancement in overseas limits for mutual funds.

1. In partial modification to clause 1(b) of SEBI Circular No. SEBI/IMD/CIR
   No.7/104753/08 dated September 26, 2007 and clause 2 of SEBI Circular
   SEBI/IMD/CIR No.2/122577/08 dated April 08, 2008, it has been decided by SEBI to enhance the investment limits per Mutual Fund as follows:
   1.1. Mutual Funds can make overseas investments subject to a maximum of US $ 600 million per Mutual Fund, within the overall industry limit of US $ 7 billion.
   1.2. Mutual Funds can make investments in overseas Exchange Traded
   Fund (ETF(s)) subject to a maximum of US $ 200 million per Mutual
   Fund, within the overall industry limit of US $ 1 billion.
2. The allocation methodology of the aforementioned limits shall be as follows:
   2.1. In case of overseas investments specified at Para 1.1, US $ 50 million
   would be reserved for each Mutual Fund individually, within the overall
   industry limit of US $ 7 billion.
   2.2. New Fund Offers (NFOs): Mutual Funds launching new schemes
   intending to invest in Overseas securities / Overseas ETFs shall ensure
   that the scheme documents shall disclose the intended amount that
   they plan to invest in Overseas securities / Overseas ETFs subject to
   maximum limits specified at Para 1, as the case maybe. Such limits
   disclosed in scheme documents will be valid for a period of six months
   from the date of closure of NFO. Thereafter the unutilized limit, if any,
   shall not be available to the Mutual Fund for investment in Overseas
   securities / Overseas ETFs and shall be available towards the unutilized
   industry wide limits. Further investments should follow the norms for
   ongoing schemes.
   2.3. Ongoing Schemes: For all ongoing schemes that invest or are allowed
   to invest in Overseas securities / Overseas ETFs, an investment
   headroom of 20% of the average AUM in Overseas securities /
   Overseas ETFs of the previous three calendar months would be
   available to the Mutual Fund for that month to invest in Overseas
   securities / Overseas ETFs subject to maximum limits specified at Para
   1, as the case maybe.
3. Further, Mutual Funds shall report the utilisation of overseas investment limits on monthly basis, within 10 days from end of each month. The format for reporting is given at Annexure A of the circular.
4. The circular shall come into force with immediate effect.

https://www.sebi.gov.in/legal/circulars/nov-2020/circular-on-enhancement-of-overseas-investment-limits-for-mutual-funds_48090.html

inter scheme transfer of securities

SEBI circular dated 8th October, 2020 on the subject, which is self explanatory.

Presently, transfers of securities from one scheme to another scheme in the same mutual fund is allowed only if such transfers are done at the prevailing market price for quoted instruments on spot basis and the securities so transferred are in conformity with the investment objective of the scheme to which such transfer has been made. In order to ensure that such Inter Schemes Transfers (ISTs) of securities are in conformity with the
above objective, the following additional safeguards have been prescribed:

1. In case of Close Ended Schemes, IST purchases would be allowed within “three” business days of allotment pursuant to New Fund Offer (NFO) and thereafter, no ISTs shall be permitted to/from Close Ended Schemes.
2. In case of Open Ended Schemes, ISTs may be allowed in the following scenarios:
   a) For meeting liquidity requirement in a scheme in case of unanticipated redemption pressure:
   AMCs shall have an appropriate Liquidity Risk Management (LRM) Model at scheme level, approved by trustees, to ensure that reasonable liquidity requirements are adequately provided for. Recourse to ISTs for managing liquidity will only be taken after the following avenues for raising liquidity have been attempted and exhausted:
   I. Use of scheme cash & cash equivalent
   II. Use of market borrowing
   III. Selling of scheme securities in the market
   IV. After attempting all the above, if there is still a scheme level liquidity deficit, then out of the remaining securities, outward ISTs of the optimal mix of low duration paper with highest quality shall be effected.
   The use of market borrowing before ISTs will be optional and Fund Manager may at his discretion take decision on borrowing in the best interest of unitholders. The option of market borrowing or selling of security as mentioned at para .2.a.II & 2.a.III above may be used in any combination and not necessarily in the above order. In case option of market borrowing and/or selling of security is not used, the reason for the same shall be recorded with evidence.
   b) For Duration/ Issuer/ Sector/ Group rebalancing
   I. ISTs shall be allowed only to rebalance the breach of regulatory limit.
   II. ISTs can be done where any one of duration, issuer, sector and group balancing is required in both the transferor and transferee schemes. Different reasons cannot be cited for transferor and transferee schemes except in case of transferee schemes is being a Credit Risk scheme.
   III. In order to guard against possible mis-use of ISTs in Credit Risk scheme, trustees shall ensure to have a mechanism in place to negatively impact the performance incentives of Fund Managers, Chief Investment Officers (CIOs), etc. involved in process of ISTs in Credit Risk scheme, in case the security becomes default grade after the ISTs within a period of one year. Such negative impact on performance shall mirror the existing mechanism for performance incentives of the AMC.
3. No ISTs of a security shall be allowed, if there is negative news or rumors in the mainstream media or an alert is generated about the security, based on internal credit risk assessment in terms of clause F of SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 01,
   2019 during the previous four months.
4. AMC shall ensure that Compliance Officer, Chief Investment Officer and Fund Managers of transferor and transferee schemes have satisfied themselves that ISTs undertaken are in compliance with the regulatory requirements. “Template” (Annexure – A) and documentary evidence in this regard shall be maintained by the AMC for all ISTs.
5. If security gets downgraded following ISTs, within a period of four months, Fund Manager of buying scheme has to provide detailed justification /rationale to the trustees for buying such security.
6. The circular shall be applicable with effect from January 1, 2021.

https://www.sebi.gov.in/legal/circulars/oct-2020/circular-on-guidelines-on-inter-scheme-transfers-of-securities_47817.html

dividend option plan – mutual funds

SEBI circular dated 5th October, 2020 on the subject.

1. Please refer to Ninth and Eleventh Schedule of SEBI (Mutual Funds)
   Regulations, 1996 and SEBI circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010, which provide the accounting policies to be followed for determining distributable surplus and accounting the sale and repurchase of units in the books of the Mutual Fund.
2. The aforesaid regulatory requirements, inter-alia, mandates that when units are sold, and sale price (NAV) is higher than face value of the unit, a portion of sale price that represents realized gains shall be credited to an Equalization Reserve Account and which can be used to pay dividend.
3. There is a need to clearly communicate to the investor that, under dividend option of a Mutual Fund Scheme, certain portion of his capital (Equalization Reserve) can be distributed as dividend.
4. Based on the recommendations of Mutual Funds Advisory Committee (MFAC), it is decided to stipulate the following:
   4.1.All the existing and proposed Schemes of Mutual Funds shall name /
   rename the Dividend option(s) in the following manner:

1. 
   4.2.Offer documents shall clearly disclose that the amounts can be
   distributed out of investors capital (Equalization Reserve), which is part of sale price that represents realized gains. Further, AMCs shall ensure that the said disclosure is made to investors at the time of subscription of
   such options/plans.
   4.3.AMCs shall ensure that whenever distributable surplus is distributed, a clear segregation between income distribution (appreciation on NAV) and capital distribution (Equalization Reserve) shall be suitably disclosed in the Consolidated Account Statement provided to investors as required
   under Regulation 36(4) of SEBI (Mutual Funds) Regulations, 1996 and
   SEBI Circular No. CIR/MRD/ DP/ 31/2014 dated November 12, 2014.
2. The aforesaid changes shall not be treated as Fundamental Attribute Change in terms of Regulation 18 (15A) of SEBI (Mutual Funds) Regulations, 1996.
3. All other conditions specified in this regard shall remain unchanged.

mutual funds – NAV

SEBI circular dated 17th September, 2020 on the subject.

1. Uniformity in applicability of Net Asset Value (NAV) across various schemes upon realization of funds
   1.1. In partial modification to SEBI Circular No. SEBI/IMD/DF/21/2012 dated September 13, 2012, it has been decided that in respect of purchase of units of mutual fund schemes (except liquid and overnight schemes), closing NAV of the day shall be applicable on which the funds are available for utilization irrespective of the size and time of receipt of such application.
   1.2. The existing provision on NAV applicability for liquid and overnight funds and cut-off timings for all schemes shall remain unchanged.
2. Trade Execution and Allocation
   2.1. It has been decided that AMCs shall put in place a written down policy which inter-alia detail the specific activities, role and responsibilities of various teams engaged in fund management, dealing, compliance, risk management, back-office, etc., with regard to order
   placement, execution of order, trade allocation amongst various schemes and other related matters.
   
   2.2. The aforesaid policy shall ensure that all the schemes and its investors are treated in a fair and equitable manner. Further, the policy shall be approved by the Board of AMC and the trustees and they shall ensure compliance with the following:
   2.2.1. For orders pertaining to equity and equity related instruments:
   a) AMCs shall use an automated Order Management System (hereinafter referred to as ‘OMS’), wherein the orders for equity and equity related instruments of each scheme shall be placed by the fund manager(s) of the respective schemes.
   b) In case a fund manager is managing multiple schemes, the fund manager shall necessarily place scheme wise order.
   c) All regulatory limits and allocation limits as specified in SID shall be in-built in the OMS to ensure that orders in breach of such limits are not accepted by the OMS. AMCs may further place soft limits for internal control and risk management based on its internal policy. Further, any change in limits specified in OMS shall be subject to the approval of
   Compliance and Risk Officer.
   d) All orders of fund manager(s) shall be received by dedicated dealer(s) responsible for order placement and execution.
   e) The internal policy of AMC may also provide certain scenarios within the regulatory limits, wherein, prior approval of Compliance or Risk Officer would be required through OMS before the order is received by the dealer.
   2.2.2. Requirements with respect to investments in all instruments:
   a) AMC shall ensure that the dealing desk is suitably staffed and comply with the following:
   i. All conversations of the dealer shall be only through the dedicated recorded telephone lines.
   ii. No mobile phones or any other communication devices other than the recorded telephone lines shall be allowed inside the dealing room.
   iii. Restricted access to internet facilities on computers and other devices inside the dealing room. It shall be used for activities related to trade execution only.
   iv. No sharing of information by dealer through any mode, except for trade execution under the approved internal policy.
   b) Orders by dealer can be placed either for each scheme individually or pooled on the basis of orders from multiple schemes. The trade allocation policy of the AMCs shall inter-alia detail (i) specific situations (not generic) wherein the orders by dealers shall be placed for each scheme individually or pooled from multiple schemes, (ii) the timeline to
   be considered for pooling of orders in case of multiple schemes.
   c) In case of pooled orders, post allocation of trades shall be on pro-rata basis as per the size of the order placed. The said allocation shall be based on weighted average price.
   The policy shall clearly include scenarios / situations (e.g. redemption pressure) in which deviation from the allotment of units on pro-rata basis would be permissible, if at all.
   Further, the deviations shall be on account of exigency only and require prior written approval of Chief Investment Officer, Risk Officer and the Compliance Officer with detailed rationale for such deviation.
   d) In case of scenarios, wherein, the mutual funds are required to place certain margins / collaterals in order to execute certain transactions, the policy shall include details on how such margins / collaterals shall be segregated / placed from amongst various schemes, without affecting the interest of investors of any scheme.
   2.3. Monitoring of Compliance
   2.3.1. AMC shall have a system based monitoring mechanism to ensure compliance with the requirements under paragraph 2.2.1 and 2.2.2.
   2.3.2. Audit trail of activities related to order placement, trade execution and allocation shall be available in the system. Further, there should be time stamping with respect to order placed by fund manager, order placed by dealer, order execution and trade allocation.
   
   2.3.3. Any non-compliance and all material information in this regard shall be reported to trustees on quarterly basis. Trustees shall inform the same to SEBI in their half yearly trustee report.
3. Applicability:
   The circular shall be applicable with effect from January 1, 2021.

https://www.sebi.gov.in/legal/circulars/sep-2020/circular-on-mutual-funds_47574.html