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mutual funds

SEBI has vide its circular dated 30th September 2022 authorised the two factor authentication for subscription to the units of mutual funds as well. Earlier it was adopted for redemption transaction for the units of mutual funds. The operative part of the SEBI circular reads as follows:

In order to further safeguard interest of investors, it has now been decided to extend the Two-Factor Authentication for subscription transactions in the units of Mutual Funds as well. Accordingly, Clause 4.4 of the SEBI Circular dated October 4, 2021, as modified vide the SEBI Circular No. dated March 15, 2022, stands further modified as under:
“4.4. In case of subscription and redemption of units, Two-Factor Authentication (for online transactions) and signature method (for offline transactions) shall be used for authentication. One of the Factors for such Two-Factor Authentication for non-demat transaction shall be a One-Time Password sent to the unit holder at his/her email/ phone number registered with the AMC/RTA. In case of demat transaction, process of Two-Factor authentication as laid down by the Depositories shall be followed. It is also clarified that in case of mandates/systematic transactions the requirement of Two-Factor Authentication shall be applicable only at the time of registration of mandate/ systematic transactions.”

SEBI further advises AMFI’s (Association of Mutual Funds of India – a self regulatory body, which is a useless body in my view) best practice guidelines issued for AMCs with regard to Two-Factor authentication for redemption transactions of Mutual Funds shall be revised suitably to include subscription transactions of Mutual Funds. It shall be mandatory for all AMCs to follow such guidelines.

These provisions, however shall become applicable only with effect from April 01, 2023.
SEBI has advised the AMCs, AMFI, recognized Stock Exchanges, Depositories, recognized Clearing
Corporations and Registrar to an Issue and Share Transfer Agents to take necessary steps for implementing the circular, including putting required processes and systems in place to ensure compliance with the provisions of this circular.
Also, AMFI shall be required to furnish by October 14, 2022, the activity wise schedule for implementation so as to ensure compliance with these issues and to furnish progress report on implementation of provisions of this circular to SEBI on a bi-monthly basis, starting from December 01, 2022.

https://www.sebi.gov.in/legal/circulars/sep-2022/two-factor-authentication-for-transactions-in-units-of-mutual-funds_63557.html

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nomination for MF holders

Important communication from SEBI regarding nomination facility for mutual fund unit holders.

In order to bring uniformity in practices across all constituents in securities market,
the following is decided in case of nomination for eligible Mutual Fund Unit
Holders:

  1. Investors subscribing to mutual fund units on or after August 1, 2022, shall have the choice of:
    a. Providing nomination in the format specified in fourth schedule of SEBI (Mutual Funds) Regulations, 1996 (or)
    b. Opting out of nomination through a signed Declaration form as provided in Annexure – A to this circular.
  2. AMC shall provide an option to the unit holder(s) to submit either the nomination form or the declaration form for opting out of nomination in physical or online as per the choice of the unit holder(s). In case of physical option, the forms shall carry the wet signature of all the unit holder(s) and in case of online option, the forms shall be using e-Sign facility recognized under Information
    Technology Act, 2000, instead of wet signature(s) of all the unit holder(s).
  3. All AMCs shall ensure that adequate systems are in place for providing the eSign facility and take all necessary steps to maintain confidentiality and safety of client records.
  4. All the AMCs are advised to set deadline as March 31, 2023 for nomination / opting out of nomination for all the existing individual unit holder(s) holding mutual fund units either solely or jointly as mentioned at para 1 above, failing which the folios shall be frozen for debits.

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mutual funds amendments

SEBI has vide its press release dated 28th December, 2021 announced some amendments to the Mutual Funds Regulations. Details are given below:

  1. The Board approved amendment to MF Regulations to mandate Mutual Funds schemes to follow Indian Accounting Standard (IND AS) from Financial Year 2023-24 onwards. Further, the Board approved amendments to MF Regulations with respect to accounting related regulatory provisions to remove redundant provisions and to bring more clarity.
  2. The Board approved amendment to MF Regulations to mandate the Trustees to obtain the consent of the unitholders when the majority of the trustees decide to wind up a scheme or prematurely redeem the units of a close ended scheme. Further, the trustees shall obtain consent of the
    unitholders by simple majority of the unitholders present and voting on the basis of one vote per unit held and publish the results of voting within 45 days of the publication of notice of circumstances leading to winding up. In case the trustees fail to obtain the consent, the scheme shall open for business activities from the second business day after publication of results of voting

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benchmarks of mutual funds

SEBI has laid down guiding principles for benchmarking of mutual funds by introducing a two tier structure in the case of income/ debt oriented schemes and growth/ equity oriented schemes, single tier in case of hybrid/ solution oriented schemes, thematic/ sectoral schemes, exhange funds/ ETFs, and Fund of Funds schemes. Please read on for details

https://www.sebi.gov.in/legal/circulars/oct-2021/guiding-principles-for-bringing-uniformity-in-benchmarks-of-mutual-fund-schemes_53539.html

  1. In order to standardize and bring uniformity in the Benchmarks of Mutual Fund Schemes and taking into account the recommendations of Mutual Fund Advisory Committee (MFAC), it has been decided that there would be twotiered structure for benchmarking of schemes for certain categories of schemes. The first tier benchmark shall be reflective of the category of the scheme, and the second tier benchmark should be demonstrative of the investment style / strategy of the Fund Manager within the category. All the benchmarks followed should necessarily be Total Return Indices.
  2. The following are the guiding principles for first tier benchmarks:
    i. For Income / Debt Oriented Schemes
    First Tier: One Broad Market Index per Index Provider for each category e.g.: NIFTY Ultra Short Duration Debt Index or CRISIL Ultra Short Term Debt Index for Ultra Short Duration Fund Category
    Second Tier: Bespoke according to Investment Style/Strategy of the Index e.g.: AAA Bond Index
    ii. For Growth / Equity Oriented Schemes
    First Tier: One Broad Market Index per Index Provider for each category e.g.: S&P BSE 100 Index or NSE 100 Index for Large Cap Fund Category
    Second Tier: Bespoke according to Investment Style/Strategy of the Index e.g.: Nifty 50 Index
    iii. For Hybrid and Solution Oriented Schemes:
    There would be a single benchmark, i.e., Broad Market Benchmark wherever available or bespoke to be created for schemes, which would then be applicable across industry.
    iv. For Thematic / Sectoral schemes:
    There would be a single benchmark as characteristics of the schemes are already tapered according to the theme/sector.
    v. For Index Funds and Exchange Traded Funds (ETFs):
    There would be a single benchmark as these schemes replicate an underlying index.
    vi. For Fund of Funds Schemes (FoFs):
    Similar to Index Fund and ETFs, if a FoF scheme is investing in a single fund, then benchmark of the underlying scheme shall be used for corresponding FoF. However, in case a FoF scheme invests in multiple schemes, then Broad
    Market Index shall be applied.
    vii. For Other Schemes:
    Depending on underlying asset allocation, Broad Market benchmark may be arrived at.
  3. AMFI is advised to publish:
    (a) Benchmarks intended to be used by AMCs as first tier benchmarks within a period of one month from the date of issuance of this circular.
    (b) Benchmarks intended to be used as first tier benchmark by AMCs for open ended debt schemes as per the Potential Risk Class Matrix on or before December 1, 2021.
  4. The second tier Benchmark is optional and shall be decided by the AMCs according to Investment Style/Strategy of the Index.
    Applicability of the circular
  5. The framework specified by AMFI as referred at para 3(a) above shall come into force with effect from December 1, 2021 and the framework specified by AMFI as referred at para 3(b) above shall come into force with effect from January 1, 2022.

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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.

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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.

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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.

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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

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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

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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.

  1. 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:

  1. 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

  1. 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
  2. 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/

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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.

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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

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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

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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.

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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.

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