How to form a Mutual Fund

Given below are the requirements, procedure and regulations involved during the formation of a Mutual Fund

Main requirements under SEBI (Mutual Funds) Regulations, 1996:

The following are the eligibility criteria for grant of a certificate of registration as per regulation 7 of SEBI (Mutual Funds Regulations) 1996 (Please see SEBI web site www.sebi.gov.in)

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

(ii) the net worth is positive in all the immediately preceding five years; and

(iii) the net worth in the immediately preceding year is more than the capital 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.

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

(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 atleast 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;

(d)  the sponsor or any of its directors or the principle officer to be employed by the

mutual fund should not have been guilty of fraud or has not been convicted of an offence 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 custodian activities as may be authorised by the trustees.

Application for Registration:

An applicant should apply for registration in form A prescribed under Schedule I of SEBI (Mutual Funds) Regulations 1996. It may be noted here that as per the proviso to Reg. 7 (c) of the Regulations, 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 apply in Form A. 

While applying, please ensure that the main objects of the memorandum of the sponsor company permit it to carry on mutual fund activities. An applicant should also submit the following additional information for the sponsor as well as for the other shareholders in the proposed asset management company.

1.     A complete list of your group/associate companies registered with SEBI in any capacity, also indicate the capacity in which they are registered and the SEBI Registration number.  In case of foreign sponsors, details of registration of sponsor/any of its associate / group companies with any regulatory agency abroad (You may also refer to SEBI (Mutual Funds) Regulations for the definition of ‘associates’, ‘group’ and ‘control’.)

2.     Whether any of the sponsor or its group/associate companies are listed in any of the recognised stock exchange(s) in India. If so, please furnish the details.

3.     Whether there have been any instances of violation of or  non-adherence to any securities related regulations and whether any action has been taken against you or any of your associate/group companies in this regard, by a regulatory agency in India or abroad; (please provide the following information)

(a)       Top 10 monetary penalties in case of foreign entities and all monetary penalties in case of Indian entities, imposed against the sponsor or any associate of the sponsor (for irregularities/ violations in the financial services sector or for defaults in respect of shareholders / debenture holders and depositors, by by any financial regulatory body or government authority or settlement arrived with any financial regulatory body during the last five years and details thereof. Penalties awarded for economic offences may be disclosed only in case of sponsor.

(b)       Details of all cases of suspensions and cancellation of certificate of registration (for irregularities/ violations in financial services sector or for defaults in respect of shareholders, debenture holders and depositors) of the sponsor or any associate of the sponsor shall be disclosed for the last 10 years.

All disclosures on penalties and action taken as per (a) and (b) above against foreign entities may be limited to the jurisdiction of the country where the principal activities (in terms of income/ revenue) of the sponsors/ associate companies are carried out or where the headquarter is situated.

4.     Declaration in terms of Regulation 7(d) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 that your sponsor company or any of your directors have not been found guilty of fraud or have not been convicted of an offence involving moral turpitude or have not been found guilty of any economic offence. If there are such cases, full details should be provided.

5.     (a) Details of registration of your company/associate/group companies, which are registered/ required to be registered with Reserve Bank of India (RBI) as a Banking company or Non Banking Finance Company or in any other capacity.

(b) Details of disciplinary action taken by RBI against you or any of your group/associate companies.  Please also inform us in case there is any default in repayment of deposits by you or any of your group / associate companies.

(c)  Details of the RBI approval, if any required, for the purpose of sponsoring a mutual fund.

6.     Whether any of the directors or employees of your company or your group / associate companies were ever associated with any organisation as a director or an employee against whom SEBI had initiated action of suspension or cancellation of certificate of registration or initiated any other action under the provisions of SEBI Act or launched any prosecution for acts committed during their association. If so, please furnish details.

Communication by SEBI:

SEBI will examine the application and a communication will be sent to you about your eligibility status. If you are found eligible, you will be required to undertake the following steps: 

1.      Incorporation of the Asset Management Company and the Trustee Company/Board of trustees:

For this purpose, you may submit two copies of the completed Memorandum and Articles of Association of the Asset Management Company and the Trustee Company for our forwarding to the Registrar of Companies.

Please ensure that these documents contain a clause that “notwithstanding anything mentioned in these documents, only those activities will be carried out which are permitted under the SEBI (Mutual Funds) Regulations.  All the provisions of the SEBI (Mutual Funds) Regulations, 1996 and the Guidelines issued from time to time shall be applicable.”

Please also indicate the address of the ROC where these companies would be incorporated.

2.      Auditor’s certificate:

After incorporation of the AMC and the Trustee Company, please submit a certificate from a Chartered Accountant certifying that:

(a)   The sponsor has contributed at least 40% to the net worth of the AMC (Regulation 7 (c).

(b)   The AMC has a net worth of not less than Rupees Ten Crore (Rupees 100 min), as required under regulation 21 (1) (f) of SEBI (Mutual Funds) Regulations, 1996 (the net worth should be furnished in the following format):

Paid-up capital                                                                                   _________

Plus free reserves of the company                                                       _________

less miscellaneous expenditure to the extent not written-off                  _________

less accumulated losses, if any                                                            _________

Less intangible assets, if any.                                                              _________

TOTAL NETWORTH                                                                      _________

3.      Filing of executed copies of Trust Deed and Investment Management       Agreement.

Please file executed copies of trust deed and Investment Management Agreement along with a check list clearly mentioning where you have incorporated the clauses of contents of the trust deed and Investment Management agreement as per third schedule and fourth schedule of SEBI (Mutual Funds) Regulations.

4.   Setting up of Infrastructure by the Applicant

After complying with the above requirements, a detailed note on the infrastructure facilities available with the Asset Management Company should be sent to SEBI, providing the following specific details:

(a)   Details of the office premises and address.

(b)   Organisation chart of the AMC, clearly specifying the responsibilities of various personnel. 

(c)   Profile of the key personnel including the fund managers and equity research personnel. 

(d)   Justification of adequacy of personnel in fund management, equity research and other operational areas considering the expected size of mutual fund. At what stage, the number of key personnel will be reviewed, should be indicated.

(e)   Systems support in terms of hardware and software.

(f)     Arrangement made for investor services.

(g)   Establishing the financial viability of sponsoring a Mutual Fund giving details of            expected size of mutual fund over a period of time,

(h)   Internal systems and control procedures developed to check insider trading and front running.

(i)     Size of funds which the AMC feels competent to manage and the expertise available with the sponsor/AMC etc.

(j)      Whether the compliance manual has been prepared to ensure that all provisions of SEBI (Mutual Funds) Regulations and Guidelines are complied with. (All guidelines issued to mutual funds are available on SEBI web site).

(k)   Submission of completed Form C and Form D, providing details of trustee company and AMC, as given in First Schedule of SEBI (Mutual Funds) Regulations.

(l)      Bio-data of the directors of the trustee company and the AMC in the prescribed format (Please refer to SEBI circular dated December 20, 2001 available on web site).

(m) Bio data of key personnel in hard and soft copies (Please refer to SEBI circular dated May 7,1997)

(n)   Any other information relevant for application for registration.

5.  Grant of Certificate of Registration

Once all above requirements have been complied with and requisite fees as per Second Schedule of Regulations has been paid, SEBI will grant certification of registration as a mutual fund and will approve AMC. SEBI may also conduct infrastructure inspection of the applicant before grant of certificate of registration.