Like Banking & Insurance up to the Nineties of the last century, Mutual Fund industry in India was set up and functioned exclusively in the State monopoly represented by the Unit Trust of India. This monopoly was diluted in the Eighties by allowing Nationalised Banks, and Insurance Companies (LIC & GIC) to set up their institutions under the Indian Trusts Act to transact mutual fund business, allowing the Indian Investor the option to choose between different service-providers. Unit Trust was a statutory corporation governed by its own incorporating Act. There was no separate Regulatory Authority upto the time SEBI was made a statutory authority in 1992. But it was only in the year 1993, when Government took a policy decision to deregulate Indian Economy from Government Control and to transform it market oriented, that the Industry was opened to competition from private and foreign players. By the year 2000 there came to be established in the market 34 Mutual funds offering a variety of about 200 schemes, mobilising a gross investment of Rs.81000 crores.

The fast growing industry is regulated by the Securities and Exchange Board of India (SEBI) since inception of SEBI as a statutory body. SEBI initially formulated "SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1993" Providing detailed procedure for establishment, registration, constitution, management of Trustees, Asset Management Company, about schemes/products to be designed, about investment of funds collected, general obligation of MFs, about Inspection, audit etc. Based on experience gained and feedback received from the market SEBI revised the guidelines of 1993 and issued fresh Guidelines in 1996 titled "SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1996". The said regulations as amended from time to time is in force even today. The salient features of these Regulatory measures are discussed in subsequent articles.

The SEBI Mutual Fund Regulations contain ten chapters and twelve schedules. Chapters containing material subjects relating to regulation and conduct of business by Mutual Funds (i.e.chapters II to VII are discussed in the subsequent pages. Chapter I relates to definition of legal terms and other preliminary matters. Chapter VIII relates to powers of SEBI for inspection and audit of Mutual Funds, while Chapter IX deals with "Offences & Penalties"(Procedure for Action In Case of Default). Chapter X deals with Miscellaneous Issues like "Saving" & "Repeal" clauses etc. You may visit SEBI website and access the original Regulations in case of need. The Table of Contents of the Regulations are given hereunder

Chapter I: Preliminary
Chapter II: Registration of Mutual Fund
Chapter III: Constitution and Management of Mutual Fund and Operation of Trustees, Etc
Chapter IV: Constitution and Management of Asset Management Company and Custodian
Chapter V: Schemes of Mutual Fund
Chapter VI: Investment Objectives and Valuation Policies
Chapter VII: General Obligations
Chapter VIII: Inspection and Audit
Chapter IX: Procedure for Action In Case of Default
Chapter X: Miscellaneous
Schedule I: Forms
Form A - Application for the Grant of Registration of Mutual Fund
Form B - Certificate of Registration
Form C - Trusteeship of The Mutual Fund
Form D - Asset Management Company
Schedule II: Fees
Schedule III: Contents of The Trust Deed
Schedule IV: Contents of The Investment Agreement
Schedule V: Code of Conduct
Schedule VI: Advertisement Code
Schedule VII: Restrictions on Investments
Schedule VIII: Investment Valuation Norms
Schedule IX: Accounting Policies and Standards
Schedule X: Initial Issue Expenses
Schedule XI: Annual Report
Schedule XII: Half Yearly Financial Results

An applicant proposing to sponsor a mutual fund in India must submit an application in Form A along with a fee of Rs.25,000. The application is examined and once the sponsor satisfies the prescribed eligibility criteria the registration certificate is issued subject to the payment of registration fees of Rs.25.00 lacs.

For the purpose of grant of a certificate of registration, the applicant has to fulfil the following, namely:-

1. the sponsor should have a sound track record and general reputation of fairness and integrity in all his business transactions;

   Explanation: For the purposes of this clause "sound track record" shall mean the sponsor should,-

   1. be carrying on business in financial services for a period of not less than five years; and

   2. the networth is positive in all the immediately preceding five years; and

   3. the networth in the immediately preceding year is more than the capital contribution of the sponsor in the asset management company; and

   4. (iv) the sponsor has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year.

(aa) the applicant is a fit and proper person]

2. in the case of an existing mutual fund, such fund is in the form of a trust and the trust deed has been approved by the Board;

3. the sponsor has contributed or contributes atleast 40% to the networth of the asset management company;

    Provided that any person who holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor and will be required to fulfil the eligibility criteria specified in these regulations;

4. the sponsor or any of its directors or the principal officer to be employed by the mutual fund should not have been guilty of fraud or has not been convicted of an offense involving moral turpitude or has not been found guilty of any economic offence.

5. appointment of trustees to act as trustees for the mutual fund in accordance with the provisions of the regulations;

6. appointment of asset management company to manage the mutual fund and operate the scheme of such funds in accordance with the provisions of these regulations;

7. appointment of a custodian in order to keep custody of the securities and carry out the custodian activities as may be authorised by the trustees.

The registration granted to a mutual fund under regulation 9, shall be subject to the following terms and conditions:-

1. the trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations;

2. the mutual fund shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect;

3. the mutual fund shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by it;

4. payment of fees as specified in the regulations and the Second Schedule.(Rs.25 Lacs)

A mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908 (16 of 1908) executed by the sponsor in favour of the trustees named in such an instrument.

1. The trust deed shall contain such clauses as are mentioned in the Third Schedule and such other clauses which are necessary for safeguarding the interests of the unit holders.

2. No trust deed shall contain a clause which has the effect of-

   1. limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unit holders; or

   2. (ii) indemnifying the trustees or the asset management company for loss or damage caused to the unit holders by their acts of negligence or acts of commissions or omissions.

Qualification prescribed for selection of persons as Trustees, Dutie/obligations of Trustees and Code of Conduct prescribed are discussed in the next article