Question 1

What is the procedure for registering a mutual fund with SEBI?

Accepted Answer

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 certain conditions such as being in the financial services business and possessing positive net worth for the last five years, having net profit in three out of the last five years and possessing the general reputation of fairness and integrity in all business transactions, it is required to complete the remaining formalities for setting up a mutual fund. These include inter alia, executing the trust deed and investment management agreement, setting up a trustee company/board of trustees comprising two- thirds independent trustees, incorporating the asset management company (AMC), contributing to at least 40% of the net worth of the AMC and appointing a custodian. Upon satisfying these conditions, the registration certificate is issued subject to the payment of registration fees of Rs.25.00 lacs For details, see the SEBI (Mutual Funds) Regulations, 1996.

Question 2

What is the annual fee payable by a MF/AMC?

Accepted Answer

A mutual fund shall pay before the 15th April each year an annual fee as specified under for every financial year from the year following the year of registration:          Average Assets under Management (AAUM) as on 31 March   Annual Fee       AAUM up to INR 10,000 crore   0.0015% of the AAUM       Part of AAUM above INR 10, 000 crore   0.0010% of the portion of AAUM in excess of INR 10,000 crore         Subject to a minimum of INR 2, 50,000 and a Maximum of INR 1, 00, 00,000.

Question 3

What is the filing fee for an offer document?

Accepted Answer

The filing fee for an offer document is 0.005% of the amount raised in the new fund offer or by way of private placement, as the case may be, subject to a minimum of INR 2 lakh and a maximum of INR 50 lakh.

Question 4

What are the limitations on the fees and expenses that can be charged to a scheme?

Accepted Answer

The AMC may charge the scheme with investment and advisory fees which shall be fully disclosed in the offer document. In addition to the fees mentioned In point A, the asset management company may charge the scheme with the following recurring expenses, including:   marketing and selling expenses including agent's commission, if any;  brokerage and transaction cost;  registrar services for transfer of units sold or redeemed;  fees and expenses of trustees;  audit fees;  custodian fees;  costs related to investor communication;  costs of fund transfer from location to location;  costs 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;  in case of a gold exchange traded fund scheme, recurring expenses incurred towards storage and handling of gold;  in case of a capital oriented scheme, rating fees;  in case of a real estate MF scheme, insurance premia and costs of maintenance of the real estate assets (excluding costs of development of such assets) over and above the expenses specified in regulation 52 to the extent disclosed in the offer document;  listing fees, in case of schemes listed on a recognised stock exchange;  Such other costs as may be approved by the Board.  Any expense other than those specified above shall be borne by the AMC or trustee or sponsors. The total expenses of the scheme excluding issue or redemption expenses, whether initially borne by the MF or by the AMC, but including the investment management and advisory fee shall be subject to the following limits:   in case of a fund of funds scheme, the total expenses of the scheme including weighted average of charges levied by the underlying schemes shall not exceed 2.50% of the daily net assets of the scheme  in case of an index fund scheme or exchange traded fund, the total expenses of the scheme including the investment and advisory fees shall not exceed 1.5% of the daily net assets;  in case of any other scheme-      on the first INR 100 crore of the daily net assets 2.5%;   on the next INR 300 crore of the daily net assets 2.25%;   on the next INR 300 crore of the daily net assets 2.0%;   on the next INR 300 crore of the daily net assets 2.0%;            In respect of a scheme investing in bonds such recurring expenses shall be lesser by at least 0.25% of the daily net assets outstanding in each financial year.In addition to the limits specified above, the following costs or expenses may be charged to the scheme, namely:    If inflows from such cities are less than the higher of sub-clause (i) or sub- clause (ii), such expenses on daily net assets of the scheme shall be charged on proportionate basis.  Expenses charged under this clause shall be utilised for distribution expenses incurred for bringing inflows from such cities.  The amount incurred as expense on account of inflows from such cities shall be credited back to the scheme in case the said inflows are redeemed within a period of one year from the date of investment.,     brokerage and transaction costs which are incurred for the purpose of execution of trade and is included in the cost of investment, not exceeding 0.12% in case of cash market transactions and 0.05% in case of derivatives transactions; expenses not exceeding of 0.30% of daily net assets, if the new inflows from such cities as specified by the Board from time to time are at least:   30% of gross new inflows in the scheme, or;  15% of the average assets under management (year to date) of the scheme, whichever is higher:   Additional expenses, incurred towards different heads mentioned under A and B above, not exceeding 0.20% of daily net assets of the scheme.Any expenditure in excess of the limits specified above shall be borne by the AMC or by the trustee or sponsors.

Question 5

Is service tax included in the limit of expenses?

Accepted Answer

A. AMC(s) can charge Service Tax, as per applicable taxation laws, to the scheme(s) within the limits prescribed under the Regulations.    B. MFs/AMCs may charge service tax on investment and advisory fees to the scheme in addition to the maximum limit of TER as prescribed in the Regulations.    C. Service tax on other than investment and advisory fees, if any, shall be borne by the scheme within the maximum limit of TER as per the Regulations.    D. Service tax on exit load, if any, shall be paid out of the exit load proceeds and exit load net of service tax, if any, shall be credited to the scheme.    E. Service tax on brokerage and transaction cost paid for execution of trade, if any, shall be within the limit prescribed under the Regulations.

Question 6

What is the duration of validity of SEBI observations on SID?

Accepted Answer

The scheme shall be launched within six months from the date of the issuance of final observations from SEBI. If the AMC intends to launch the scheme at a date later than six months, it shall refile the SID with SEBI along with filing fees.

Question 7

What is the procedure for Change in the Controlling Interest of the Asset Management Company?

Accepted Answer

A. Requirement of Regulations    According to Regulation 22(e) of SEBI (Mutual Funds) Regulations, 1996, no change in the controlling interest of the asset management company can be made unless:-    1. prior approval of the trustees and the Board (i.e. SEBI) is obtained;    2. a written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the Head Office of the mutual fund is situated; and    3. The unitholders are given an option to exit on the prevailing Net Asset Value without any exit load.All the conditions prescribed above are required to be complied with. It is advised that the mutual funds should give at least 30 days time period to the unitholders to exercise the exit option.    B. New Sponsors    In case the applicant proposing to take the control of the mutual fund is not an existing mutual fund registered with SEBI, it should apply to SEBI for registration under SEBI (Mutual Funds) Regulations, 1996. The entire procedure for registration under SEBI (Mutual Funds) Regulations, 1996 is given above under the heading, "What is the procedure for registering a mutual fund with SEBI?" Undertakings by new trustees/Sponsors In case of new sponsors or in case of taking over of the schemes by an existing mutual fund, the undertakings on the following lines are required to be given in the interest of unitholders:    1. Taking full responsibility of the management and the administration of the schemes including the matters relating to the reconciliation of accounts (as if the schemes had been floated by the new trustees on the date of taking over).    2. Assumption of the trusteeship of the assets and liabilities of the schemes including unclaimed dividends and unclaimed redemptions.    3. Assuming all responsibilities and obligations relating to the investor grievances, if any, in respect of the schemes taken over, in accordance with and pursuant to the SEBI (Mutual Funds) Regulations.    C. Disclosures to Unitholders    While seeking the approval of SEBI for change in the controlling interest of the asset management company, the mutual fund handing over the control to another person, should also file the draft letter to be sent to the unitholders.The draft letter to the unitholders should include the following information:    1. The activities of the new sponsor and its financial performance as prescribed in the standard offer document;    2. In case of taking over of the schemes by an existing mutual fund registered with SEBI, the draft letter should also include the condensed financial information of all the schemes in the format prescribed in the standard offer document;    3. The amount of unclaimed redemption and dividend and also the procedure for claiming such amount by the unitholders.    D. Communication by SEBI    While approving the change in controlling interest of the AMC, SEBI may communicate any further observations, as necessary.    E. Revision of Offer Documents    The information given in the offer documents of existing schemes shall be revised and updated pursuant to the change in controlling interest of the mutual fund. Such addendum shall also be filed with SEBI, as required under the SEBI (Mutual Funds) Regulations and Guidelines.    F. Other Situations     In case of any other situation like indirect control of the asset Management Company or change in the promoters of the sponsor, etc, the mutual fund should provide full information to SEBI for advice on the further course of action.In case of any difficulty, SEBI will guide the applicant step by step after getting application for change in the controlling interest of the asset management company. Normally, all replies are sent within 21 working days from the date of getting each communication from the applicant during the process of change in the controlling interest of the asset management company.

Question 8

What is an assured return scheme?

Accepted Answer

Assured return schemes are those schemes that assure a specific return to the unitholders irrespective of performance of the scheme.    A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document.    Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

Scheduled for Investor Awareness Programme

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