[Analysis] SEBI’s Amended Mutual Fund Norms | Strengthening Transparency, Governance & Investor Protection

Table of Contents

1. Introduction
2. Newly introduced definitions of “Liquid net worth” and “Net Asset Value” [Regulation 2]
3. Revised Eligibility Criteria for Sponsors; redefines the meaning of ‘sound track record’ [Regulation 7]
4. SEBI notifies the new eligibility criteria if the sponsor doesn’t satisfy the ‘sound track record’ criteria [Regulation 7]
5. Sponsors are now permitted to disassociate from the AMCs and the mutual fund [Newly introduced Regulation 7C]
6. Chairperson of the board of directors of trustee company shall be an independent director [Regulation 16]
7. Obligations and Responsibilities for Asset Management Companies (AMCs) and their Board of Directors [Regulation 25]
8. Frequency of Board meetings for Trustee Company and AMC [Newly introduced Regulation 25A]
9. AMC to obtain mandatory ‘in-principle’ approval from recognized stock exchange for listing units of mutual fund scheme [Regulation 31A]
10. Mandatory execution of listing agreement by AMC for listing units of mutual fund scheme on recognized stock exchanges [Regulation 31B]
11. Strengthening Investment objectives of mutual funds; incorporate funds from ESG Schemes [Regulation 43]
12. Investment in Corporate Debt Market Development Fund [Newly introduced Regulation 43A]
13. SEBI eliminates the provision of the ‘Underwriting of Securities’ [Regulation 46]
14. Now, an Asset Management Company (AMC) designated for valuation of investments in Mutual Fund Schemes [Regulation 47]
15. Transition from ‘Mutual Fund’ to ‘Asset Management Company’ in the computation of Net Asset Value [Regulation 48]
16. SEBI defines the inclusive definition for the ‘associate or group company’ [Schedule VII]

1. Introduction

The Securities and Exchange Board of India (SEBI) plays a crucial role in regulating and supervising the securities market in the country. In its continuous efforts to enhance transparency, protect investors’ interests, and promote the healthy functioning of the mutual fund industry, SEBI frequently introduces amendments to its regulations.

The SEBI vide Notification No. SEBI/LAD-NRO/GN/2023/134, Dated June 26, 2023 has introduced the amendments in the SEBI (Mutual Funds) Regulations, 1996. The amendment focuses on the newly introduced definitions of “Liquid net worth” and “Net Asset Value”, the introduction of a new meeting requirement for the BODs of trustee companies and asset management companies including their committees, etc.

The key highlights of the amendment are as follows –

2. Newly introduced definitions of “Liquid net worth” and “Net Asset Value” [Regulation 2]

SEBI has introduced new definitions in regulation 2 of the SEBI (Mutual Funds) Regulations, 1996, which now define “Liquid net value” and “Net Asset Value” respectively.

“Liquid networth” means the networth deployed in liquid assets which are unencumbered and shall include cash, money market instruments, Government Securities, Treasury bills, Repo on Government securities and any other like instruments as specified by the Board from time to time.

On the other hand, “NAV” or “Net Asset Value” shall mean the value computed in the manner provided in regulation 48 (1) of these regulations.

As per regulation 48 (1), every mutual fund shall compute the Net Asset Value of each scheme by dividing the net assets of the scheme by the number of units outstanding on the valuation date.

3. Revised Eligibility Criteria for Sponsors; redefines the meaning of ‘sound track record’ [Regulation 7]

Extant Norms

As per Regulation 7, the sponsor should have a sound track record and general reputation of fairness and integrity in all business transactions, which is one of the primary criteria for eligibility.

Earlier, the conditions for a “sound track record” included the requirement for the sponsor to have profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year.

Amended Norms

Now, in addition to the existing conditions, the sponsor shall have net profit after providing for depreciation, interest and tax in each of the immediately preceding five years.

Further, the Sponsor shall now have an average net annual profit after depreciation, interest and tax during the immediately preceding five years of at least Rs 10 crore.

Impact

The requirement of profitability in each of the preceding five years emphasizes the need for consistent financial success. Moreover, the introduction of the minimum average net annual profit further highlights the financial strength of sponsors.

These changes may exclude potential sponsors who have experienced occasional losses or fluctuating profits in the past, even if they possess other qualities such as fairness and integrity in their business transactions.

4. SEBI notifies the new eligibility criteria if the sponsor doesn’t satisfy the ‘sound track record’ criteria [Regulation 7]

Extant Norms

Earlier, if the requirements of the “sound track record” were not fulfilled, the applicant was required to have a minimum net worth of Rs. 100 crore.

Amended Norms

Now, if the requirements of the “sound track record” are not satisfied, the sponsor shall:

• Adequately capitalize the asset management company to ensure that its net worth is not less than Rs. 150 crore; and
• Ensure that the initial shareholding equivalent to capital contributed to the asset management company to the extent of not less than Rs 150 crore, is locked in for a period of five years; and
• Appoint experienced personnel in an asset management company, with the total combined experience of Chief Executive Officer, Chief Operating Officer, Chief Risk Officer, Chief Compliance Officer and Chief Investment Officer being at least thirty years; and
• Ensure that in case of acquisition of an existing asset management company, the sponsor shall have a minimum positive liquid net worth equal to the incremental capitalization required to ensure minimum capitalization of the asset management company. Further, the positive liquid net worth of the sponsor or the funds tied up by the sponsor should be to the extent of aggregate par value or market value of the shares proposed to be acquired, whichever is higher; and
• Ensure that in case of acquisition of a stake in an existing asset management company, the shareholding equivalent to at least Rs 150 crore shall be locked in for five years; and
• Ensure that other conditions in this regard as specified by the Board from time to time are adhered to.

Impact

The present amendments aim to strengthen the asset management industry by ensuring adequate capitalization, long-term commitment from sponsors, and the presence of experienced professionals.

By raising the bar for entry and operation in the sector, the amended norms seek to promote stability, investor protection, and sound governance practices in asset management companies.

5. Sponsors are now permitted to disassociate from the AMCs and the mutual fund [Newly introduced Regulation 7C]

A new regulation 7C has been introduced, allowing the sponsor to disassociate from the asset management company and the mutual fund subject to certain conditions as specified by the Board.

If the sponsor disassociates itself, the asset management company of the existing mutual fund may act as a sponsor of the same mutual fund. In the event of disassociation, the shareholding for any shareholder in the asset management company must be below 10%.

Further, in the event of the sponsor disassociating itself from the asset management company and the mutual fund, the board of directors of such asset management company shall have at least two-thirds independent directors.

Impact

The amendment grants sponsors increased flexibility in managing their association with AMCs and mutual funds. They now have the option to disassociate themselves from these entities, subject to certain conditions.

6. Chairperson of the board of directors of trustee company shall be an independent director [Regulation 16]

A new regulation 16(7) has been introduced. Now, in case a company is appointed as the trustee of a mutual fund, the Chairperson of the board of directors of that trustee company shall be an independent director.

Impact

Regulation 16(7) aims to strengthen the governance of mutual funds and improve investor protection. This step promotes transparency, accountability, and the best interests of investors.

7. Obligations and Responsibilities for Asset Management Companies (AMCs) and their Board of Directors [Regulation 25]

Regulation 25 specifies the obligations of the asset management company. New sub-regulations have been added to this regulation, which outline the obligations of the BODs of the asset management company, the reporting obligations of the compliance officer in AMC, the constitution of a Unit Holder Protection Committee by AMC, the responsibility of AMC in the calculation of income for mutual fund unit holders and provisions regarding the protection of unit holder interests.

These measures aim to enhance transparency, governance, and investor protection within the asset management industry.

8. Frequency of Board meetings for Trustee Company and AMC [Newly introduced Regulation 25A]

A new regulation, 25A has been inserted, stating that the board of directors of the trustee company and the asset management company, along with their committees, must convene meetings at a frequency specified by the Board. This regulation emphasizes the importance of regular meetings to ensure effective governance and decision-making within the companies involved.

9. AMC to obtain mandatory ‘in-principle’ approval from recognized stock exchange for listing units of mutual fund scheme [Regulation 31A]

Existing Norms

As per Regulation 31A, a mutual fund intending to list units of its scheme on a recognized stock exchange must obtain in-principle approval from the recognized stock exchanges in the manner specified by the exchange.

Amended Norms

As per the amended norms, for the listing of units of any scheme of a mutual fund on the recognized stock exchange, the asset management company (AMC) of that mutual fund is now required to take all the necessary steps and obtain in-principle approval from the exchanges in the manner specified by them.

Impact

The amendment shifts the responsibility of obtaining in-principle approval for listing mutual fund scheme units on recognized stock exchanges from the mutual fund itself to the AMC. This change ensures that the AMC take all necessary steps, streamlining the listing process and promoting efficient interaction between AMCs and stock exchanges.

10. Mandatory execution of listing agreement by AMC for listing units of mutual fund scheme on recognized stock exchanges [Regulation 31B]

Existing Norms

As per Regulation 31B (1) of Mutual Funds Regulations, every mutual fund desirous of listing units of its schemes on a recognized stock exchange must execute an agreement with the stock exchange.

Amended Norms

As per the amended norms, before listing units of any scheme of mutual funds on the recognized stock exchanges, the asset management company of that mutual fund is required to execute an agreement with exchanges.

Impact

This change ensures that the AMC enters into an agreement with the exchanges before listing, promoting clarity, accountability, and streamlined processes in the listing of mutual fund scheme units.

11. Strengthening Investment objectives of mutual funds; incorporate funds from ESG Schemes [Regulation 43]

Regulation 43 deals with the investment objectives where the mutual fund may invest the money collected under various schemes. A new sub-regulation has been added to this regulation which states that money collected under Environmental, Social and Governance (ESG) schemes must be invested in the manner specified by the Board.

This enhances the investment objectives of mutual funds by specifically addressing the allocation of funds collected under ESG schemes. This measure promotes consistency and accountability in investing ESG funds, fostering sustainable investment practices within the mutual fund industry.

12. Investment in Corporate Debt Market Development Fund [Newly introduced Regulation 43A]

A new regulation 43A has been inserted to the regulations. The new regulation introduces the concept of the ‘Investment in Corporate Debt Market Development Fund’.

As per this regulation, mutual funds are required to invest a certain percentage of their net assets in the units of the corporate debt market development fund. The specific percentage to be invested by each category of mutual fund schemes may be determined by the Board.

Further, asset management companies of the mutual funds are also required to invest such a percentage of assets under management as specified by the Board in the units of the corporate debt market development fund.

Impact

The mandatory investment in the ‘corporate debt market development fund’ stimulates market development, increases liquidity and stability, and boosts investor confidence.

13. SEBI eliminates the provision of the ‘Underwriting of Securities’ [Regulation 46]

As per Regulations 46, the Mutual funds may enter into an underwriting agreement after obtaining a certificate of registration in terms of the SEBI (Underwriters) Rules and SEBI (Underwriters) Regulations, 1993 authorising it to carry on activities as underwriters. Now, the same has been omitted by the SEBI with the present amendment.

14. Now, an Asset Management Company (AMC) designated for valuation of investments in Mutual Fund Schemes [Regulation 47]

Existing Norms

Every mutual fund is required to ensure that the asset management company computes and carries out the valuation of investments made by its schemes in accordance with the investment valuation norms specified in the Eighth Schedule, and publishes the same.

Amended Norms

Now, the asset management company is required to compute and carry out the valuation of investments made by the schemes of mutual funds in accordance with the investment valuation norms specified in the Eighth Schedule, and publishes the same.

Impact

This amendment emphasizes the clear responsibility of AMC to compute and carry out the valuation of investments. This measure enhances transparency, boosts investor confidence and fosters a more accountable environment with Mutual Fund Schemes.

15. Transition from ‘Mutual Fund’ to ‘Asset Management Company’ in the computation of Net Asset Value [Regulation 48]

Existing Norms

As per Regulation 48, every mutual fund must compute the Net Asset Value of each scheme by dividing the net assets of the scheme by the number of units outstanding on the valuation date. The NAV of the scheme should be calculated on a daily basis and disclosed in the manner specified by the Board.

Amended Norms

As per the amended norms, the term “mutual fund” shall be replaced with “asset Management Company”. Consequently, the asset management company is now responsible for calculating the Net Asset Value of each scheme by dividing the net assets of the scheme by the number of units outstanding on the valuation date. Various other transitions from ‘Mutual Fund’ to ‘Asset Management Company’ were made.

Impact

There is now a more inclusive and consistent approach to NAV calculation across different investment products. Asset management companies are now responsible for computing NAV for all the investment schemes they manage.

16. SEBI defines the inclusive definition for the ‘associate or group company’ [Schedule VII]

Amended Norms

A new proviso to clause 9(c) of Schedule VII, which pertains to restrictions on investment has been introduced. Now, for the private equity funds, pooled investment vehicles or pooled investment funds acting as a sponsor of mutual funds, the associate or group company has been expanded to include:

• Associate or group company of the manager of any pooled investment vehicle; or
• Investee companies in which the shareholding of 10% or more is held by the schemes or funds managed by the manager of the pooled investment vehicle; or
• Any investee company in which the pooled investment vehicle holds more than 10% shareholding or where the directors of the pooled investment vehicle or corporate sponsor have representation on the board or the right to nominate representatives on the board.

Impact

The impact of the amended norms is focused on enhancing transparency, governance, and investor protection within the mutual fund industry. The broader definition of associate or group company ensures comprehensive oversight of entities associated with the manager of a pooled investment vehicle. This promotes accountability, mitigates conflicts of interest, and fosters a robust regulatory framework, ultimately safeguarding the interests of investors.