SBS FINANCE

Project Report on Investment Analysis and Portfolio Management

Group No: 6

Submitted By:Jugal Aswani (MM1113507) Tanvi Verma (MM1113455) Tripti Shreshtha (MM1113458) Vrinda Mahana(MM1113462)
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INDEX

CHAPTER No. I II III IV

TOPIC OVERVIEW OF MUTUAL FUNDS REGULATION OF MUTUAL FUNDS LEGISLATIONS OF SEBI FUNCTIONS BIBLIOGRAPHY

PAGE No. 3 6 21 33

CHAPTER-I

INTRODUCTION OF MUTUAL FUNDS

A mutual fund company pools the money from many investors and invests it for them in a collection of securities by purchasing stocks, bonds, money markets and/or other securities. Various investors have different investment preferences. In order to accommodate these preferences, mutual funds mobilize different pools of money. Each such pool of money is called a mutual fund scheme.

A. Features of Mutual Funds:

1) Wealth Maximization: Assist investors in earning an income or building their wealth, by participating in the opportunities available in various securities and markets. 2) Professional Management: Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds. 3) Affordable Portfolio Diversification: Units of a scheme give investors exposure to a range of securities held in the investment portfolio of the scheme. Thus, even a small investment of Rs 5,000 in a mutual fund scheme can give investors a diversified investment portfolio. 4) Economies of Scale: The pooling of large sums of money from so many investors makes it possible for the mutual fund to engage professional managers to manage the investment. Further, the higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service providers. 5) Liquidity: Investors in a mutual fund scheme can recover the value of the moneys invested, from the mutual fund itself. Depending on the structure of the mutual fund scheme, this would be possible, either at any time, or during specific intervals, or only on closure of the scheme. 6) Tax Deferral: Mutual funds offer options, whereby the investor can let the money grow in the scheme for several years. By selecting such options, it is possible for the investor to defer the tax liability. 7) Regulatory Comfort: The regulator, Securities & Exchange Board of India (SEBI) has mandated strict checks and balances in the structure of mutual funds and their activities.

B. Types of Mutual Funds:

1) Open-ended funds are open for investors to enter or exit at any time, even after the NFO. 2) Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, postNFO in a stock exchange. This is done through a listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. 3) Interval funds combine features of both open-ended and close ended schemes. They are largely close-ended, but become open ended at pre-specified intervals. 4) Actively managed funds are funds where the fund manager has the flexibility to choose the investment portfolio, within the broad parameters of the investment objective of the scheme. 5) Passive funds invest on the basis of a specified index, whose performance it seeks to track. Thus, a passive fund tracking the BSE Sensex would buy only the shares that are part of the composition of the BSE Sensex. Such schemes are also called index schemes. 6) Equity Schemes: A scheme might have an investment objective to invest largely inequity shares and equity-related investments like convertible debentures. Such schemes are called equity schemes. 7) Debt Schemes: Schemes with an investment objective that limits them to investments in debt securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt funds.

8) Hybrid Funds: Hybrid funds have an investment charter that provides for a reasonable level of investment in both debt and equity.

9) Gold Funds: These funds invest in gold and gold-related securities. 10) Real Estate Funds: They take exposure to real estate. Such funds make it possible for small investors to take exposure to real estate as an asset class. Although permitted by law, real estate mutual funds are yet to hit the market in India. 11) Commodity Funds: Commodities, as an asset class, include: Food crops like wheat and chana Spices like pepper and turmeric Fibres like cotton Industrial metals like copper and aluminium Energy products like oil and natural gas Precious metals (bullion) like gold and silver 12) International Funds: These are funds that invest outside the country. 13) Fund of Funds: These are the fund that invests in another Fund.

C. Key Constituents of a Mutual Fund

1)

Sponsors: The application to SEBI for registration of a mutual fund is made by the sponsor/s. Thereafter, the sponsor invests in the capital of the AMC. Since sponsors are the main people behind the mutual fund Operation.

2) Trustee: The trustees ensure that the mutual fund complies with all the regulations, and protects the interests of the unit-holders. 3) AMC: Asset Management Company performs day to day operations of asset management. It therefore arranges for the requisite offices and infrastructure, engages employees, provides for the requisite software, handles advertising and sales promotion, and interacts with regulators and various service providers.AMC receives investment management and advisory fees. 4) Custodian: The custodian has custody of the assets of the fund. As part of this role, the custodian needs to accept and give delivery of securities for the purchase and sale transactions of the various schemes of the fund. The Custodian is appointed by the mutual fund. A custodial agreement is entered into between the trustees and the custodian. All custodians need to register with SEBI. 5) RTA: Registrar and Transfer Agent maintain investor records. The appointment of RTA is done by the AMC. The AMC can choose to handle this activity in house. All RTAs need to register with SEBI. 6) Auditors: Auditors are responsible for the audit of accounts. Accounts of the schemes need to be maintained independent of the accounts of the AMC. While the scheme auditor is appointed by the Trustees, the AMC auditor is appointed by the AMC. 7) Fund Accountants: The fund accountant performs the role of calculating the NAV, by collecting information about the assets and liabilities of each scheme. The AMC can either handle this activity in-house, or engage a service provider. 8) Distributors: Distributors have a key role in selling suitable types of units to their clients i.e. the investors in the schemes. Distributors need to pass the prescribed certification test, and register with AMFI. 9) Collecting Bankers: The investors moneys go into the bank account of the scheme they have invested in. These bank accounts are maintained with collection bankers who are appointed by the AMC.

CHAPTER-II REGULATION OF MUTUAL FUNDS

A. Preliminary
Securities and Exchange Board of India regulates Mutual funds, Depository, custodians and registrars & transfer agents in the country. SEBI (Mutual Funds) Regulation, 1996 requires all Asset Management Companies and Trustees to abide by the Code of Conduct as specified in the Fifth Schedule to the Regulation.

B. Registration of Mutual Fund

1. Application for registration of a mutual fund shall be made to the Board in by the sponsor. 2. Every application for registration shall be accompanied by non-refundable application fee of Rs.25,000. 3. An application, which is not complete in all respects, shall be liable to be rejected. Provided that, before rejecting any such application, the applicant shall be given an opportunity to complete such formalities within such time as may be specified by the Board. 4. Eligibility criteria For the purpose of grant of a certificate of registration, the applicant has to fulfil the following, namely: a) 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, i) ii) Be carrying on business in financial services for a period of not less than five years; and The net worth is positive in all the immediately preceding five years; and contribution of the sponsor in the asset management company; and 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 . b) 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; c) The sponsor has contributed or contributes at least 40% to the net worth 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;. iii) The net worth in the immediately preceding year is more than the capital

d) 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. e) Appointment of trustees to act as trustees for the mutual fund in accordance with the provisions of the regulations; f) 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; g) Appointment of a custodian in order to keep custody of the securities and carry out the 5. custodian activities as may be authorised by the trustees. The registration granted to a mutual fund shall be subject to the following terms and conditions: a. The trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations; b. 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; c. 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. 6. Where the sponsor does not satisfy the eligibility criteria, the Board may reject the application and inform the applicant of the same. 7. The Board may register the mutual fund and grant a certificate on the applicant paying the registration fee of Rs.2,500,000 8. A mutual fund shall pay before the 15th April each year a service fee of Rs. 250,000 for every financial year from the year following the year of registration. The Board may not permit a mutual 9. fund that has not paid service fee to launch any scheme.

C. Constitution and Management of Mutual Fund and Operation of Trustees

1. Trust Deed to be registered under the Registration Act 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. 2. Disqualification from being appointed as trustees 1. A mutual fund shall appoint trustees in accordance with these regulations. 2. No person shall be eligible to be appointed as a trustee unless1. He is a person of ability, integrity and standing; and 2. Has not been found guilty of moral turpitude; and 3. Has not been convicted of any economic offence or violation of any securities laws. 3. An asset management company or any of its officers or employees shall not be eligible to act as a trustee of any mutual fund. 4. No person who is appointed as a trustee of a mutual fund can be appointed as a trustee of any other mutual fund unless 1. Such a person is an independent trustee referred to in sub-regulation (5); and 2. Prior approval of the mutual fund of which he is a trustee has been obtained for such an appointment. 5. Two thirds of the trustees shall be independent persons and shall not be associated with the sponsors or be associated with them in any manner whatsoever] 6. In case a company is appointed as a trustee then its directors can act as trustees of any other trust provided that the object of the trust is not in conflict with the object of the mutual fund. 3. Approval of the Board for appointment of trustee 1. No trustee shall initially or any time thereafter be appointed without prior approval of the Board. 2. The existing trustees of any mutual fund may form a trustee company to act as a trustee with the prior approval of the Board.

D. Constitution and Management of Asset Management Company and Custodian

1. The application for the approval of the asset management company shall be made. 2. Appointment of an asset management company a) The sponsor or, if so authorised by the trust deed, the trustee shall, appoint an asset management company, which has been approved by the Board. b) The appointment of an asset management company can be terminated by majority of the trustees or by seventy five per cent of the unit-holders of the scheme. c) Any change in the appointment of the asset management company shall be subject to prior approval of the Board and the unit holders. 3. Eligibility criteria for appointment of asset management company a) The directors of the asset management company need to be persons having adequate professional experience in finance and financial services related field. b) The directors as well as key personnel of the AMC should not have been found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws. c) Key personnel of the AMC should not have worked for any asset management company or mutual fund or any intermediary during the period when its registration was suspended or cancelled at any time by SEBI. d) Prior approval of the trustees is required, before a person is appointed as director on the board of the AMC. e) Further, at least 50% of the directors should be independent directors i.e. not associate of or associated with the sponsor or any of its subsidiaries or the trustees. f) The AMC needs to have a minimum net worth of Rs10 crore. g) An AMC cannot invest in its own schemes, unless the intention to invest is disclosed in the Offer Document. Further, the AMC cannot charge any fees for the investment. h) The appointment of an AMC can be terminated by a majority of the trustees, or by 75% of the Unit-holders. However, any change in the AMC is subject to prior approval of SEBI and the Unit-holders. 4. Terms and conditions to be complied with a) The asset management company shall forthwith inform the Board of any material change in the information or particulars previously furnished, which have a bearing on the approval granted by it. b) No appointment of a director of an asset management company shall be made without prior approval of the trustees. c) The asset management company undertakes to comply with these regulations. 5. Appointment of Custodian a) The mutual fund shall appoint a custodian to carry out the custodial services for the schemes of the fund and sent intimation of the same to the Board within fifteen days of the appointment of the custodian. b) The SEBI regulations provide that if the sponsor or its associates control 50% or more of the shares of a custodian, or if 50% or more of the directors of a custodian represent the interest of the sponsor or its associates, then that custodian cannot appointed for the mutual fund operation of the sponsor or its associate or subsidiary company. The custodian also tracks corporate actions such as dividends, bonus and rights in companies where the fund has invested. c) All custodians need to register with SEBI.

E. Schemes of Mutual Fund 1. Procedure for launching of schemes I. II. No scheme shall be launched by the asset management company unless such scheme is approved by the trustees and a copy of the offer document has been filed with the Board. Every mutual fund shall along with the offer document of each scheme pay filing fees.

2. Disclosures in the offer document I. II. III. The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision. The Board may in the interest of investors require the asset management company to carry out such modifications in the offer document as it deems fit. In case no modifications are suggested by the Board in the offer document within 21 working days from the date of filing, the asset management company may issue the offer document. IV. No one shall issue any form of application for units of a mutual fund unless the form is accompanied by the memorandum containing such information as may be specified by the Board. V. VI. The asset management company shall provide an option to the unit holder to nominate. Where the units are held by more than one person jointly, the joint unit holders may together nominate a person in whom all the rights in the units shall vest in the event of death of all the joint unit holders. 3. Advertisement material I. II. Advertisements in respect of every scheme shall be in conformity with the Advertisement Code and shall be submitted to the Board within 7 days from the date of issue. The advertisement for each scheme shall disclose investment objective for each scheme.

4. Misleading statements The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false. 5. Listing of close ended schemes Every close ended scheme shall be listed in a recognized stock exchange within six months from the closure of the subscription. 6. Repurchase of close ended schemes I. II. The asset management company may at its option repurchase or reissue the repurchased units of a close ended scheme. The units of close ended scheme may be converted into open ended scheme, i. ii. If the offer document of such scheme discloses the option and the period of such conversion; or The unit holders are provided with an option to redeem their units in full.

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7. Offering Period No scheme of a mutual fund other than the offering period of any equity linked savings schemes shall be open for subscription for more than 45 days. 8. Allotment of Units and refunds of moneys I. The asset management company shall specify in the offer document, a. The minimum subscription amount it seeks to raise under the scheme; and b. In case of over subscription the extent of subscription it may retain. Provided that where the asset management company retains the over subscription referred to in clause (b), all the applicants applying up to five thousand units shall be given full allotment subject to the oversubscription mentioned in clause (b). II. The mutual fund and asset management company shall be liable to refund the application money to the applicants, a. If the mutual fund fails to receive the minimum subscription amount. b. If the moneys received from the applicants for units are in excess of subscription.

IV.

Unit certificates or Statement of Accounts The asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme.

V.

Transfer of units An unit certificate unless otherwise restricted or prohibited under the scheme, shall be freely transferable by act of parties or by operation of law.

VII.

Guaranteed returns No guaranteed return shall be provided in a scheme, Unless such returns are fully guaranteed by the sponsor or the asset management company.

VIII.

Winding up A close-ended scheme shall be wound up on the expiry of duration fixed in the scheme on the redemption of the units unless it is rolled-over for a further period.

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F. Investment Objectives and Valuation Policies

1) Investment Objective The moneys collected under any scheme of a mutual fund shall be invested only in transferable securities in the money market or in the capital market or in privately placed debentures or securitised debts. Provided that moneys collected under any money market scheme of a mutual fund shall be invested only in money market instruments in accordance with directions issued by the Reserve Bank of India; Provided further that in case of securitised debts such fund may invest in asset backed securities and mortgaged backed securities. 2) Investment and Borrowing Restriction 1. 2. The mutual fund having an aggregate of securities which are worth Rs.10 crores or more, shall subject to settle their transactions only through dematerialised securities. The mutual fund shall not borrow except to meet temporary liquidity needs of the mutual funds for the purpose of repurchase, redemption of units or payment of interest or dividend to the unit holders. Provided that the mutual fund shall not borrow more than 20% of the net asset of the scheme and the duration of such a borrowing shall not exceed a period of six months. 3. 4. The mutual fund shall not advance any loans for any purpose. The mutual fund may lend securities in accordance with the Stock Lending Scheme of the Board. 3) Derivatives Trading The funds of a scheme shall not in any manner be used in option trading or in short selling or carry forward transactions. Provided that mutual funds shall enter into derivatives transactions in a recognised stock exchange for the purpose of hedging and portfolio balancing, in accordance with the guidelines issued by the Board. 4) Underwriting of Securities Mutual funds may enter into underwriting agreement after obtaining a certificate of registration in terms of the Securities and Exchange Board of India (Underwriters) Rules and Securities and Exchange Board of India (Underwriters) Regulations, 1993 authorising it to carry on activities as underwriters. Explanation: 1. 2. For the purpose of these regulations, the underwriting obligation will be deemed as if investments are made in such securities. The capital adequacy norms for the purpose of underwriting shall be the net asset of the scheme. Provided that the underwriting obligation of a mutual fund shall not at any time exceed the total net asset value of the scheme.

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5)

Method of valuation of investments Every mutual fund shall compute and carry out valuation of its investments in its portfolio and publish the same in accordance with the valuation norms specified by SEBI.

6)

Computation of Net Asset Value 1. 2. 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. The Net Asset Value of the scheme shall be calculated and published at least in two daily newspapers at intervals of not exceeding one week.

7)

Pricing of Units 1. The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors. 2. 3. The mutual fund, in case of open ended scheme, shall at least once a week publish in a daily newspaper of all India circulation, the sale and repurchase price of units. While determining the prices of the units, the mutual fund shall ensure that the repurchase price is not lower than 93% of the Net Asset Value and the sale price is not higher than 107% of the Net Asset Value. Provided that the repurchase price of the units of a close ended scheme shall not be lower than 95% of the Net Asset Value: 4. The price of units shall be determined with reference to the last determined Net Asset Value.

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G. General Obligations

1. To maintain proper books of accounts and records, etc. I. Every asset management company for each scheme shall keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the fund and intimate to the Board the place where such books of accounts, records and documents are maintained. II. III. Every asset management company shall maintain and preserve for a period of 8 years its books of accounts, records and documents. The asset management company shall follow the accounting policies and standards as specified so as to provide appropriate details of the scheme wise disposition of the assets of the fund at the relevant accounting date and the performance during that period together with information regarding distribution or accumulation of income accruing to the unit holder in a fair and true manner. 2. Financial year The financial year for all the schemes shall end as of March 31 of each year. The asset management company shall follow the accounting policies and standards as specified so as to provide appropriate details of the scheme wise disposition of the assets of the fund at the relevant accounting date and the performance during that period together with information regarding distribution or accumulation of income accruing to the unit holder in a fair and true manner. 3. Limitation on fees and expenses on issue of schemes I. II. All expenses should be clearly identified and appropriated in the individual schemes. The Asset Management Company may charge the mutual fund with investment and advisory fees which are fully disclosed in the offer document subject to the following namely: a. One and a quarter of one per cent of the weekly average net assets outstanding in each accounting year for the scheme concerned, as long as the net assets do not exceed Rs. 100 crores, and b. One per cent of the excess amount over Rs. 100 crores, where net assets so calculated exceed Rs. 100 crores. III. For schemes launched on a no load basis, the asset management company shall be entitled to collect an additional management fee not exceeding 1% of the weekly average net assets outstanding in each financial year. IV. In addition to the fees, the asset management company may charge the mutual fund with the following expenses namely: a. Initial expenses of launching schemes. b. Recurring expenses including:i. Marketing and selling expenses including agents' commission, if any;

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ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. V. VI.

Brokerage and transaction cost; Registrar services for transfer of units sold or redeemed; Fees and expenses of trustees; Audit fees; Custodian fees; and Costs related to investor communication; Costs of fund transfer from location to location; Cost of providing account statements and dividend/redemption cheques and warrants; Insurance premium paid by the fund; Winding up costs for terminating a fund or a scheme; Costs of statutory advertisements; Such other costs as may be approved by the Board.

Any expense other than those specified shall be borne by the asset Management Company or trustee or sponsors. The total expenses of the scheme excluding issue or redemption expenses, whether initially borne by the mutual fund or by the asset management company, but including the investment management and advisory fee shall be subject to the following limits: a. On the first Rs. 100 crores of the average weekly net assets 2.5% b. On the next Rs. 300 crores of the average weekly net assets 2.25% c. On the next Rs. 300 crores of the average weekly net assets 2.0% d. On the balance on the assets 1.75%

4. Dispatch of warrants and proceeds Every mutual fund and asset management company shall, I. II. III. IV. Dispatch to the unit holders the dividend warrants within 30 days of the declaration of the dividend. Dispatch the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase. In the event of failure to dispatch the redemption or repurchase proceeds within the period, the asset management company shall be liable to pay interest to the unit holders. Notwithstanding payment of such interest to the unit holders, the asset management company may be liable for penalty for failure to dispatch the redemption or repurchase proceeds within the stipulated time. 5. Annual Report Every mutual fund or the asset management company shall prepare in respect of each financial year an annual report and annual statement of accounts of the schemes and the fund as specified. 6. Auditor's Report I. II. Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company. An auditor shall be appointed by the trustees.

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III. IV.

The auditor shall forward his report to the trustees and such report shall form part of the Annual Report of the mutual fund. The auditor's report shall comprise of the following: a. A certificate to the effect that:i. ii. He has obtained all information and explanations which, to the best of his knowledge and belief, were necessary for the purpose of the audit; The balance sheet and the revenue account give a fair and true view of the scheme, state of affairs and surplus or deficit in the Fund for the accounting period to which the Balance Sheet or, as the case may be the Revenue Account relates. iii. The statement of account has been prepared in accordance with accounting policies and standards as specified.

7. Annual Report to be forwarded to the Board Every mutual fund shall within six months from the date of closure of each financial year forward to the Board a copy of the Annual Report and other information including details of investments and deposits held by the mutual fund so that the entire scheme wise portfolio of the mutual funds is disclosed to the Board. 8. Disclosures to the investors The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep them informed about any information, which may have an adverse bearing on their investments.

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H. Inspection and Audit

1. Board's right to inspect and investigation The Board may appoint one or more persons as inspecting officer to undertake the inspection of the books of accounts, records, documents and infrastructure, systems and procedures or to investigate the affairs of a mutual fund, the trustees and asset management company. 2. Notice before inspection and investigation I. II. Before ordering an inspection or investigation the Board shall give not less than ten days notice to the mutual fund, asset management company or trustees. Where the Board is satisfied that in the interest of the investors no such notice should be given, it may, by an order in writing direct that such inspection or investigation be taken up without such notice. III. During the course of inspection or investigation, the mutual fund, trustees or asset management company against whom the inspection or investigation is being carried out shall be bound to discharge his obligations. 3. Obligations on inspection and investigation I. It shall be the duty of the mutual fund, trustees or asset management company whose affairs are being inspected or investigated, and of every director, officer and employee thereof, to produce to the inspecting officer such books, accounts, records, and other documents in its custody or control and furnish him such statements and information relating to the activities as mutual funds, trustees or asset management company, as the inspecting officer may require, within such reasonable period as the inspecting officer may specify. II. The mutual fund, trustees or asset management company shall allow the inspecting officer to have a reasonable access to the premises occupied by it or by any other person on its behalf and also extend reasonable facility for examining any books, records, documents, and computer data in the possession of the mutual fund, trustees and asset management company or such other person and also provide copies of documents or other materials which in the opinion of the inspecting officer are relevant for the purpose of the inspection. III. The inspecting officer, in the course of inspection or investigation, shall be entitled to examine or record the statements of any director, officer, or employee of the mutual fund, trustees and asset Management Company. IV. It shall be the duty of every director, officer, or employee of the mutual fund, asset Management Company or trustee to give to the inspecting officer all assistance in connection with the inspection or investigation, which the inspecting officer may reasonably require.

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4. Submission of report to the Board The inspecting officer shall, as soon as possible, on completion of the inspection or investigation submit a report to the Board.. 5. Appointment of Auditor Without prejudice to the provisions of regulation 55, the Board shall have the power to appoint an auditor to inspect or investigate, as the case may be, into the books of accounts or the affairs of the mutual fund, trustee or asset management company: 6. Payment of inspection fees to the Board The Board shall be entitled to recover expenses including fees paid to the auditors as may be incurred by it for the purposes of inspecting the books of accounts, records and documents of the mutual fund, the trustees and the asset management company.

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I.

Procedure for Action in Case of Default

2. Liability for action in case of default A mutual fund which I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. 3. Action The Board may initiate action for suspension or cancellation of registration who fails to exercise due diligence or to comply with the obligations. Contravenes any of the provisions of the Act and these regulations, Fails to furnish any information or furnishes wrong information relating to its activity as a mutual fund as required under these regulations; Fails to submit periodical returns as required under these regulations; Does not co-operate in any inquiry or inspection conducted by the Board; Fails to comply with any directions of the Board issued under the provisions of the Act or the regulations; Fails to resolve the complaints of the investors or fails to give a satisfactory reply to the Board in this behalf; Indulges in unfair trade practices in securities: Is guilty of misconduct or improper or unprofessional conduct specified in the Fifth. Asset Management Company fails to maintain the net worth as specified. Fails to pay fees. Violates the conditions of registration. Mutual fund, Asset Management Company or trustees of that mutual fund does not carry out its obligations as specified in these regulations.

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J. AMFI: Association of Mutual Fund in India

AMCs in India are members of AMFI, an industry body that has been created to promote the interests of the mutual funds industry. 1) Objectives of AMFI: To define and maintain high professional and ethical standards in all areas of operation of mutual fund industry. To recommend and promote best business practices and code of conduct to be followed by members and others engaged in the activities of mutual fund and asset management including agencies connected or involved in the field of capital markets and financial services. To interact with the Securities and Exchange Board of India (SEBI) and to represent to SEBI on all matters concerning the mutual fund industry. To represent to the Government, Reserve Bank of India and other bodies on all matters relating to the Mutual Fund Industry. To develop a cadre of well trained Agent distributors and to implement a program of training and certification for all intermediaries and others engaged in the industry. To undertake nationwide investor awareness program so as to promote proper understanding of the concept and working of mutual funds. To disseminate information on Mutual Fund Industry and to undertake studies and research directly and/or in association with other bodies.

2)

AMFI Code of Ethics (ACE) : The AMFI Code of Ethics sets out the standards of good practices to be followed by the Asset Management Companies in their operations and in their dealings with investors, intermediaries and the public. The AMFI Code has been drawn up schedule, to encourage standards for the benefit of investors in the mutual fund industry.

3) AMFI Guidelines & Norms for Intermediaries (AGNI): AMFI has also framed a set of guidelines and code of conduct for intermediaries, consisting of individual agents, brokers, distribution houses and banks engaged in selling of mutual fund products SEBI has made it mandatory for intermediaries to follow the Code of Conduct. In the event of breach of the Code of Conduct by an intermediary the following sequence of steps is provided for: Write to the intermediary (enclosing copies of the complaint and other documentary evidence) and ask for an explanation within 3 weeks. In case explanation is not received within 3 weeks, or if the explanation is not satisfactory, AMFI will issue a warning letter indicating that any subsequent violation will result in cancellation of AMFI registration. If there is a proved second violation by the intermediary, the registration will be cancelled, and intimation sent to all AMCs The intermediary has a right of appeal to AMFI.

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CHAPTER-III LEGISLATION GOVERNING SEBI FUNCTIONS

A. PRELIMINARY
This Act may be called the Securities and Exchange Board of India Act, 1992. It extends to the whole of India. It shall be deemed to have come into force on the 30th day of January, 1992.

B. ESTABLISHMENT OF THE SECURITIES AND EXCHANGE BOARD OF INDIA

a) Establishment and incorporation of Board

With effect from such date as the Central Government may, by notification, appoint, there shall be established, for the purposes of this Act, a Board by the name of the Securities and Exchange Board of India. The Board shall be a body corporate by the name aforesaid, having perpetual succession and a common seal, with power subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued. The head office of the Board shall be at Bombay. The Board may establish offices at other places in India.

b) Management of the Board

The Board shall consist of the following members, namely:(a) a Chairman; (b) two members from amongst the officials of the of the Central Government dealing with Finance and administration of the Companies Act, 1956. (c) one member from amongst the officials of the Reserve Bank; [(d) five other members of whom at least three shall be the whole-time members] to be appointed by the central Government.

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(2) The general superintendence, direction and management of the affairs of the Board shall vest in a Board of members, which may exercise all powers and do all acts and things which may be exercised or done by the Board. (3) Save as otherwise determined by regulations, the Chairman shall also have powers of general superintendence and direction of the affairs of the Board and may also exercise all powers and do all acts and things which may be exercised or done by that Board. (4) The Chairman and members shall be appointed by the Central Government and the members nominated by the Central Government. (5) The Chairman and the other members (1) shall be persons of ability, integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge or experience of law, finance, economics, accountancy, administration or in any other discipline which, in the opinion of the Central Government, shall be useful to the Board.

c) Removal of member from office

The Central Government shall remove a member from office if he (a) is, or at any time has been, adjudicated as insolvent; (b) is of unsound mind and stands so declared by a competent court; (c) has been convicted of an offence which, in the opinion of the Central Government, involves a moral turpitude; (d) has, in the opinion of the Central Government, so abused his position as to render his continuation in office detrimental to the public interest: Provided that no member shall be removed under this clause unless he has been given a reasonable opportunity of being heard in the matter.

d) Meetings
The Board shall meet at such times and places, and shall observe such rules of procedure in regard to the transaction of business at its meetings (including quorum at such meetings) as may be provided by regulations. The Chairman or, if for any reason, he is unable to attend a meeting of the Board, any other member chosen by the members present from amongst themselves at the meeting shall preside at the meeting. All questions which come up before any meeting of the Board shall be decided by a majority votes of the members present and voting, and, in the event of an equality of votes, the Chairman, or in his absence, the person presiding, shall have a second or casting vote.

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e) Vacancies, not to invalidate proceedings of Board

No act or proceeding of the Board shall be invalid merely by reason of (a) any vacancy in, or any defect in the constitution of, the Board; or (b) any defect in the appointment of a person acting as a member of the Board; or (c) any irregularity in the procedure of the Board not affecting the merits of the case.

f) Officers and employees of the Board

The Board may appoint such other officers and employees as it considers necessary for the efficient discharge of its functions under this Act. The term and other conditions of service of officers and employees of the Board appointed shall be such as may be determined by regulations.

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C. TRANSFER OF ASSETS, LIABILITIES, ETC., OF THE EXISTING SECURITIES AND EXCHANGE BOARD TO THE BOARD

Transfer of assets, liabilities, etc., of existing Securities and Exchange Board to the Board
On and from the date of establishment of the Board,(a) any reference to the existing Securities and Exchange Board in any law other than this Act or in any contract or other instrument shall be deemed as a reference to the Board; (b) all properties and assets, movable and immovable, of, or belonging to, the existing Securities and Exchange Board, shall vest in the Board; (c) all rights and liabilities of the existing Securities and Exchange Board shall be transferred to, and be the rights and liabilities of, the Board; (d) without prejudice to the provisions of clause; Notwithstanding anything contained in the Industrial Disputes Act, 1947(14 of 1947), or in any other law for the time being in force, absorption of any employee by the Board in its regular service under this section shall not entitle such employee to any compensation under that Act or other law and no such claim shall be entertained by any court, tribunal or other authority.

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D. POWERS AND FUNCTIONS OF THE BOARD Functions of Board

(1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. (2) regulating the business in stock exchanges and any other securities markets; (3) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner; (4) issuing commissions for the examination of witnesses or documents.]

Powers
1) Power to issue directions (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market; or 2) Investigation Where the Board has reasonable ground to believe that (a)the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or (b)any intermediary or any person associated with the securities market has violated any of the provisions of the Act or the rules or the regulations made or directions issued by the Board thereunder,

E. REGISTRATION CERTIFICATE Registration of stock brokers, sub-brokers, share transfer agents, etc.
No stock-broker, sub- broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the the Act: No depository,custodian of securities, foreign institutional investor, credit rating agency or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act: No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations

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F. PROHIBITION OF MANIPULATIVE AND DECEPTIVE DEVICES, INSIDER TRADING AND SUBSTANTIAL ACQUISITON OF SECURITIES OR CONTROL Prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control
No person shall directly or indirectly (a) use or employ, in connection with the issue, purchase or sale of any securities listed or proposed to be listed on a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made there under.; (b) Employ any device, scheme or artifice to defraud in connection with issue or dealing in securities which are listed or proposed to be listed on a recognized stock exchange; (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognized stock exchange, in contravention of the provisions of this Act or the rules or the regulations made there under.; (d) Engage in insider trading; (e) deal in securities while in possession of material or non-public information or communicate such material or non-public information to any other person, in a manner which is in contravention of the provisions of this Act or the rules or the regulations made thereunder;

G. FINANCE, ACCOUNTS AND AUDIT Grants by the Central Government

The Central Government may, after due appropriation made by Parliament by law in this behalf, make to the Board grants of such sums of money as that Government may think fit for being utilised for the purposes of this Act.

Fund
There shall be constituted a Fund to be called the Securities and Exchange Board of India General Fund and there shall be credited thereto(a) all grants, fees and charges received by the Board under this Act; (b) all sums received by the Board from such other sources as may be decided upon by the Central Government. .

Accounts and Audit

The Board shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in such form as may be prescribed by the Central Government in consultation with the Comptroller and Auditor- General of India. The accounts of the Board shall be audited by the Comptroller and Auditor-General of India at such intervals as may be specified by him and any expenditure incurred in connection with such audit shall be payable by the Board to the Comptroller and Auditor-General of India.

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H. PENALTIES AND ADJUDICATION

Penalty for failure to furnish information, return: If any person, who is required (a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; (b) to file any return or furnish any information, books or other documents within the time specified there for in the regulations, fails to file return or furnish the same within the time specified there for in the regulations, he shall be liable to penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; (c) to maintain books of accounts or records, fails to maintain the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. Penalty for certain defaults in case of mutual funds.If any person, who is (a) required under this Act or any rules or regulations made thereunder to obtain a certificate of registration from the Board for sponsoring or carrying on any collective investment scheme, including mutual funds, sponsors or carries on any collective investment scheme, including mutual funds, without obtaining such certificate of registration, he shall be liable to a penalty of one lakh rupees for each day during which he sponsors or carries on any such collective investment scheme including mutual funds, or one crore rupees, whichever is less. (b) registered with the Board as a collective investment scheme, including mutual funds, for sponsoring or carrying on any investment scheme, fails to comply with the terms and conditions of certificate of registration, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less. (c) registered with the Board as a collective investment scheme, including mutual funds, fails to make an application for listing of its schemes as provided for in the regulations governing such listing, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees , whichever is less. Penalty for failure to observe rules and regulations by an asset management company Where any asset management company of a mutual fund registered under this Act, fails to comply with any of the regulations providing for restrictions on the activities of the asset management companies, such asset management company shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

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Penalty for non-disclosure of acquisition of shares and take-overs.If any person, who is required under this Act or any rules or regulations made there under, fails to,(i) disclose the aggregate of his shareholding in the body corporate before he acquires any shares of that body corporate; or (ii) make a public announcement to acquire shares at a minimum price; (iii)make a public offer by sending letter of offer to the shareholders of the concerned company; or (iv) make payment of consideration to the shareholders who sold their shares pursuant to letter of offer. he shall be liable to a penalty twenty-five crore rupees or three times the amount of profits made out of such failure, whichever is higher. Penalty for fraudulent and unfair trade practices - If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher. Penalty for contravention where no separate penalty has been provided - Whoever fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board thereunder for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

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Power to adjudicate
For the purpose of adjudging,the Board shall appoint any of its officers not below the rank of a Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty. Factors to be taken into account by the adjudicating officer -While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely: (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the repetitive nature of the default. Salary and allowances and other terms and conditions of service of Presiding Officers - The salary and allowances payable to and the other terms and conditions of service (including pension, gratuity and other retirement benefits) of the Presiding Officer and any other Member of a Securities Appellate Tribunal] shall be such as may be prescribed: Provided that neither the salary and allowances nor the other terms and conditions of service of the Presiding Officer and other Members of a Securities Appellate Tribunal shall be varied to their disadvantage after appointment.

Resignation and removal - The Presiding Officer or any other Member of a Securities Appellate Tribunal may, by notice in writing under his hand addressed to the Central Government, resign his office: (1)The Presiding Officer or any other Member shall, unless he is permitted by the Central Government to relinquish his office sooner, continue to hold office, until the expiry of three months from the date of receipt of such notice or until a person duly appointed as his successor enters upon his office or until the expiry of his term of office, whichever is the earliest. (2) The Presiding Officer or any other Member of a Securities Appellate Tribunal shall not be removed from his office except by an order by the Central Government on the ground of proved misbehaviour or incapacity after inquiry made by a Judge of the Supreme Court, in which the Presiding Officer or any other Member concerned has been informed of the charges against him and given a reasonable opportunity of being heard in respect of these charges. (3) The Central Government may, by rules, regulate the procedure for the investigation of misbehaviour or incapacity of The Presiding Officer or any other Member.

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Procedure and powers of the Securities Appellate Tribunal

(1) The Securities Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908(5 of 1908), but shall be guided by the principles of natural justice and, subject to the other provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to regulate their own procedure including the places at which they shall have their sittings. (2) Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code(45 of 1860), and the Securities Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973. . Presiding Officer, Members and staff of Securities Appellate Tribunals to be public servants - The Presiding Officer, Members and other officers and employees of a Securities Appellate Tribunal shall be deemed to be public servants within the meaning of the Indian Penal Code

Power of Central Government to supersede the Board

If at any time the Central Government is of opinion(a) that on account of grave emergency, the Board is unable to discharge the functions and duties imposed on it by or under the provisions of this Act; or (b) that circumstances exist which render it necessary in the public interest so to do. Appeals Any person aggrieved by an order of the Board made, before the commencement of Securities Laws,] under this Act, or the rules or regulations made there under may prefer an appeal to the Central Government within such time as may be prescribed. No appeal shall be admitted if it is preferred after the expiry of the period prescribed therefore: Provided that an appeal may be admitted after the expiry of the period prescribed therefore if the appellant satisfies the Central Government that he had sufficient cause for not preferring the appeal within the prescribed period. Every appeal made under this section shall be made in such form and shall be accompanied by a copy of the order appealed against and by such fees as may be prescribed. Savings Nothing in this Act shall exempt any person from any suit or other proceedings which might, apart from this Act, be brought against him. Protection of action taken in good faith No suit, prosecution or other legal proceedings shall lie against the Central Government or Board or any officer of the Central Government or any member, officer or other employee of the Board for anything which is in good faith done or intended to be done under this Act or the rules or regulations made there under.

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Offences Without prejudice to any award of penalty by the Adjudicating Officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations made thereunder, he shall be punishable with imprisonment for a term which may extend to ten years, or with fine, which may extend to twenty-five crore rupees or with both. (2) If any person fails to pay the penalty imposed by the Adjudicating Officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one month, but which may extend to ten years or with fine, which may extend to twenty-five crore rupees or with both. Composition of certain offences Notwithstanding anything contained in the Code of Criminal Procedure, , any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending. Exemption from tax on wealth and income Notwithstanding anything contained in the Wealth Tax Act, 1957, the Income Tax Act, 1961,or any other enactment for the time being in force relating to tax on wealth, income, profits or gains (a) the Board; (b) the existing Securities and Exchange Board from the date of its constitution to the date of establishment of the Board, shall not be liable to pay wealth-tax, income-tax or any other tax in respect of their wealth, income, profits or gains derived. Cognizance of offences by courts No court shall take cognizance of any offence punishable under this Act or any rules or regulations made there under, save on a complaint made by the Board. No court inferior to that of [a Court of Session] shall try an offence punishable under this Act. Offences by companies Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: (2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

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Power to make rules The Central Government may, by notification, make rules for carrying out the purposes of this Act. In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:(a) the term of office and other conditions of service of the Chairman and the members under sub-section (1) of section 5; (b) the additional functions that may be performed by the Board under section 11; (c) the manner in which the accounts of the Board shall be maintained (d) the manner of inquiry (e) the salaries and allowances and other terms and conditions of service of the Presiding Officers, Members and other officers. Power to make regulations The Board may by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely:(a) the times and places of meetings of the Board and the procedure to be followed at such meetings including quorum necessary for the transaction of business; (b) the terms and other conditions of service of officers and employees of the Board. Rules and regulations to be laid before Parliament Every rule and every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or regulation or both Houses agree that the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule or regulation. Repeal and saving (1) The Securities and Exchange Board of India Ordinance, 1992 is hereby repealed. (2) Notwithstanding such repeal, anything done or any action taken under the said Ordinance , shall be deemed to have been done or taken under the corresponding provisions of this Act.

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CHAPTER IV BIBLIOGRAPHY

1) 2) 3) 4) 5)

www.sebi.gov.im www.appuonline.com www.moneycontrol.com www.nseindia.com www.amfiindia.com

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