SEBI board adopts amendments to mutual fund regulations

The Securities and Exchange Board of India (SEBI) has adopted revisions to the SEBI (Mutual Funds) Regulations, 1996, to improve the regulatory environment for Asset Management Companies (AMCs). 

  • These revisions require AMCs to implement institutional tools to discourage possible market abuse, such as front-running, in response to recent market regulator observations.

What are mutual funds?

  • A mutual fund is a collection of assets managed by a professional fund manager.
  • It is a trust that collects money from a group of individuals with similar financial goals and invests it in stocks, bonds, money market instruments, and/or other assets.
  • And the income / profits created by this collective investment are dispersed equally among the participants after subtracting appropriate fees and levies, using a scheme’s “Net Asset Value” or NAV.
  • SEBI controls mutual funds under the SEBI (Mutual Funds) Regulations 1996. 

Categories of mutual funds:

  1. An actively managed fund is a mutual fund scheme in which the fund manager “actively” manages the portfolio and constantly analyses it, determining which stocks to buy/sell/hold and when, based on professional judgement and analytical study.
  2. A passively managed fund, on the other hand, simply tracks a market index; that is, in a passive fund, the fund manager remains inactive or passive in the sense that he or she does not use his or her judgement or discretion to decide which stocks to buy/sell/hold, but instead replicates / tracks the scheme’s benchmark index in exactly the same proportion. 

Fund Structure

  • Mutual funds in India operate under a three-tier structure, comprising the
  1. Asset Management Company (AMC),
  2. Trustees, and
  3. Custodians.
  • The AMC administers the fund’s investments, the Trustees supervise its administration, and the Custodians protect its assets.

Key highlights of the latest update:

  • Institutional Mechanism: AMCs must adopt strengthened surveillance systems, internal controls, and escalation mechanisms to detect and handle certain forms of wrongdoing, such as front-running, insider trading, and the abuse of sensitive information. 
  • Whistleblower Mechanism: To promote transparency, AMCs must include a whistleblower mechanism.
  • SEBI has exempted face-to-face conversations during market hours from the obligation to record all communication by dealers and fund managers. This exception will be applicable after AMCs have implemented the institutional mechanism.
  • Prudential standards for Passive Schemes: SEBI has simplified prudential standards for passive schemes, enabling equity passive funds to invest up to the weightage of constituents in the underlying index, with a 35% cap on participation in sponsor group firms. 

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