Tag Archives: mutual funds

overseas investment limits for MFs

SEBI has vide its circular dated 3rd June, 2021 enhanced the overseas investment limits for mutual funds as follows:

  1. they can make overseas investments subject to a maximum of US$1 billion per mutual fund subject to an industry limit of USD$7 billion;
  2. in overseas exchange traded fund, they can make investment of US$ 300 million per mutual fund subject to an industry limit of US$1 billion.

The earlier limits were US$600 million (per mutual fund) and US$200 million (for exchange traded fund) respectively. The overall industry limits are the same.

In respect of investment limits to be disclosed in the scheme documents at the time of NFO as specified in Para 2.2 of the aforesaid circular, and the investment limits on ongoing schemes as specified in Para 2.3 of the aforesaid circular, such limits would henceforth be soft limits for the purpose of reporting only by Mutual Funds on monthly basis in the format prescribed vide SEBI circular dated November 5, 2020.

The aforesaid circular referred to above is the Para 1 of SEBI Circular No. SEBI/HO/IMD/DF3/CIR/P/2020/225 dated
November 05, 2020 which is here i.e.

https://www.sebi.gov.in/legal/circulars/nov-2020/circular-on-enhancement-of-overseas-investment-limits-for-mutual-funds_48090.html

https://www.sebi.gov.in/legal/circulars/jun-2021/circular-on-enhancement-of-overseas-investment-limits_50415.html

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distribution of mutual funds/ insurance – IFSC

IFSCA has issued a circular dated 3rd May, 2021 giving guidelines to Finance Company/ Finance Unit in IFSC for distribution of mutual funds and insurance products. Read on.

  1. This circular shall apply to all FC/FU as the case may be, registered with the Authority under section 3 of IFSCA (Finance Company) Regulations, 2021 and who intends to undertake the above mentioned activities. Further, the circular shall remain applicable as amended by the Authority from time to time.

B. General Guidelines:

  1. The following guidelines shall be adhered to for undertaking activities as specified in the circular:
    (i) The activities shall be carried out on fee basis, without any risk participation.
    (ii) All employees dealing with mentioned activities shall possess the requisite qualification as per industry best practices. There shall be a system of continuous development and training (internal as well as external) of such employees so that they may understand the complexity of the product.
    (iii) There shall be standardized system of assessing the need/ suitability of products for a customer and the process of initiation/ transaction as well as the functions of the marketing and operational staff shall be segregated.
    (iv)There shall be a Board approved policy encompassing the model of distribution such investment products to be adopted, issues of customer appropriateness, suitability, customer compensation, grievance redressal arrangements and marketing and distribution of such products (which shall, inter alia specifically consider the issue of addressing mis-selling).
    (v) The FC/FU shall not follow any restrictive practices or link the sale of its investment products to any other products offered by it.
    (vi)It shall be prominently stated in all publicity material, if any, distributed by the FC/FU that the purchase by a FC/FU’s customer of any investment products is purely voluntary, and is not linked to availment of any other facility from the FC/FU.
    (vii) The third party product issuer shall be a regulated financial entity.
    (viii) There shall be a Code of Conduct for the sales personnel who shall adhere to the same.
    (ix)The fact that the FC/FU is only acting as an agent shall be clearly brought to the notice of the customer.
    (x) No incentive (cash or non-cash) shall be linked directly or indirectly to the sale/income received from marketing/distribution services of such investment products. The staff of the FC/FU shall not be permitted to receive any incentive (cash or non-cash) directly from the third party issuer. FC/FU must ensure that there is no violation of the above in the incentive structure to staff.

(xi)FC/FUs shall disclose in the ‘Notes to Accounts’ to their Balance Sheet, the details of fees/remuneration received in respect of marketing and distribution function undertaken by them.
C. Guidelines on distribution of mutual funds units

  1. In addition to the general guidelines as above, an FC/FU shall also adhere to the following guidelines while undertaking distribution of mutual fund products:
    (i) The investors’ applications for purchase/sale of mutual fund units shall be forwarded to the mutual funds/registrars/transfer agents.
    (ii) The purchase of units shall be at the customers’ risk without the FC/FU guaranteeing any assured return.
    (iii) No mutual fund units shall be acquired from the secondary market or bought back from a customer for selling it to other customers.
    (iv)Extension of credit facility to individuals against the security of mutual fund units shall be in accordance with the extant instructions on advances against shares/debentures and units of mutual funds.
    (v) A FC/FU holding custody of mutual fund units on behalf of its customers shall keep the investments of the customers distinct from its own investments. FC/FUs shall put in place adequate and effective control mechanisms in this regard.
    D. Guidelines on distribution of insurance products
  2. In addition to the general guidelines as above, an FC/FU shall also adhere to the following guidelines while undertaking distribution of insurance products:
    (i) FC/FU shall necessarily undertake a customer need assessment prior to sale of insurance products.
    (ii) The FC/FU shall comply with provisions of IRDAI (International Financial Services Centre Insurance Intermediary Offices) Guidelines, 2019 No. IRDA/RI/GDL/MISC/012/01/2019, dated January 16,2019 and any other Regulation/ Circular/Guidelines issued by the Authority from time to time.
    (iii) It shall be ensured that performance assessment and incentive structure for staff is not violative of IRDAI (Payment of Commission or Remuneration or Reward to Insurance Agents and Insurance Intermediaries) Regulations ,2016 as amended from time to time

Finance Company and Finance Unit derive their meanings from the main act i.e. The International Financial Services Centre Authority Act, 2019 which stipulates that finance company is a financial institution set up in IFSC to carry on business in financial services in IFSC in securities, mutual funds, insurance, deposits, credit arrangements etc. Finance Unit is the branch unit of the said financial institution set up in accordance with these regulations.

For more details please go to https://ifsca.gov.in/

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reporting formats for mutual funds

SEBI circular dated 12th April, 2021 wherein they have revised the reporting format for mutual funds. Read on.

A. Pursuant to regulatory revamp exercise of SEBI (Mutual Funds) Regulations, 1996 (hereinafter called as “MF Regulations”) and various circulars issued thereunder, a circular no. SEBI/HO/IMD/DF2/CIR/P/2021/024 dated March 04, 2021 has been issued. Further, based on the consultation with industry the formats for the following reports i.e. reports to be submitted by AMCs to Trustees, by AMCs to SEBI and by Trustees to SEBI have been reviewed and
revised as under:

  1. Reporting by AMCs to Trustees
    1.1.Bi-monthly Compliance Certificate (BCC)
    In partial modification to the SEBI circular No. MFD/CIR/09/014/2000 dated January 5, 2000, the Compliance Certificate to be submitted by the AMC to the Trustees on a Bi-monthly basis shall be discontinued.
    1.2.Half yearly Compliance Certificate (HYCC) by AMC to Trustees
    In partial modification to the SEBI circular No. MFD/CIR/09/014/2000 dated January 5, 2000, the Compliance Certificate to be submitted by the AMC to the Trustees on an half yearly basis shall be discontinued. The contents of both BCC and HYCC have been suitably incorporated in the Quarterly Report by AMC to Trustees.
    1.3.Quarterly Report by AMC to Trustees (QR)
    The AMC shall submit QR to the trustees, as required in sub-regulation (4) of Regulation 25 of MF Regulations, on its activities and the compliance with MF Regulations and various circulars issued thereunder. The format of QR is prescribed at Annexure I. The same shall be submitted by AMC to Trustees by 21st calendar day of succeeding month for the quarters ending March, June, September and December.
  2. Reporting by AMCs to SEBI
    2.1.Compliance Test Report by AMC to SEBI (CTR)

    To synchronize the frequency of submission of the CTR and QR, SEBI circulars No. MFD/CIR/5/360/2000 dated July 4, 2000, SEBI/ IMD/CIR No. 11 /36222/2005 dated March 16, 2005 and SEBI/IMD/CIR NO 6/98057/07 dated July 5, 2007 have been modified to the extent that, instead of exceptional reporting, complete CTR shall be submitted by
    AMC to SEBI on a quarterly basis, by 21st calendar day of succeeding month for the quarters ending March, June, September and December. The revised format of CTR is prescribed at Annexure II.
  3. Reporting by Trustees to SEBI
    3.1.Half Yearly Trustee Report by Trustees to SEBI (HYTR)
    a) In partial modification to the SEBI circular No. MFD/CIR/09/014/2000 dated January 5, 2000, the HYTR containing the broad coverage of report of trustees to SEBI has been revised & prescribed at Annexure III.
    b) Trustees, shall submit corrective steps taken with respect to the noncompliance reported in the HYTR.
    c) Trustees shall continue to submit HYTR for the half year ending September and March within two month from the end of the half year.
    B. Applicability
  4. For QR and CTR reports, the circular shall come into effect for reporting from the quarter ending June, 2021;
  5. For HYTR report, the circular shall come into effect for reporting from the halfyear ended March, 2021;
  6. BCC and HYCC shall be discontinued subsequent to the effective date of the QR report as mentioned at paragraph B(1) above.

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mutual funds

SEBI has vide its detailed circular dated 4th March, 2021 revamped quite a lot of procedural formalities/ documentation etc. with respect to mutual funds.

These can be broadly classified into : – Gross Exposure Limits, Investment Pattern, Procedure for change in control of AMC, Go Green Initiatives, AMC annual report to unit holders, filing of AIR by mutual funds, investment in securities by employees of AMCs and trustees of mutual funds, advertisement, disclosure of performance of mutual funds, undertaking from trustees for new scheme document, key personnel of AMC, updation of scheme information document (SID) and key information memorandum (KIM), disclosure of votes cast by mutual funds, dividend distribution procedure, postal ballot, exit period for unit holders, models of payments and despatch, timelines for issuance of CAS etc.

In Gross exposure limits, it says : – “The cumulative gross exposure through equity, debt, derivative positions (including commodity and fixed income derivatives), repo transactions and credit default swaps in corporate debt securities, Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), other permitted securities/assets and such other securities/assets as may be permitted by the Board from time to time should not exceed 100% of the net assets of the scheme.”

On Investment Pattern : – The tentative portfolio break-up of Equity, Debt, Money Market Instruments, other permitted securities and such other securities as may be permitted by the Board from time to time with minimum and maximum asset allocation, while retaining the option to alter the asset allocation for a short term period on defensive considerations.

On annual report for unit holders : – “The annual report containing accounts of the AMC should be displayed on the websites of the mutual funds immediately after approval in Annual General Meetings within a period of four months, from the date of closing of the financial year. It should also be mentioned in the annual report of mutual fund schemes that the unitholders, if they so desire, may request for the annual report of the AMC. Further, the annual report of AMCs shall be displayed on their websites in machine readable format.

On annual information return by mutual funds : – “Mutual funds are required to submit the Annual Information Return (AIR)
under section 285 BA of the Income Tax Act, and various guidelines notified by Central Board of Direct Taxes (CBDT). As per this requirement, Trustees of Mutual Funds or such other person managing the affairs of the Mutual Funds (as may be duly authorized by the trustees in this behalf) have to report specified financial transactions through electronic medium to Income Tax
Department giving PAN of the transacting parties in an Annual Information Return (AIR).”

On disclosure of votes cast by mutual funds : – “AMCs shall be required to make disclosure of votes cast on their website (in
machine readable spreadsheet format) on a quarterly basis, within 10 working days from the end of the quarter as per the format enclosed. A detailed report in this regard along with summary thereof shall also be disclosed on their website. The format for disclosure of vote cast by Mutual Funds in respect of resolutions passed in general meetings of the investee companies and the
format for presenting summary of votes cast by Mutual Funds is placed as Annexure B. Further, AMCs shall provide the web link in their annual reports regarding the disclosure of voting details.”

On Auditor of a mutual fund: – “The auditor of a mutual fund, appointed in terms of Regulation 55 (1) of MF Regulations shall be a firm, including a limited liability partnership, constituted under the LLP Act, 2008.”

All other changes, you can read from the link given below

https://www.sebi.gov.in/legal/circulars/mar-2021/circular-on-mutual-funds_49393.html

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voting by mutual funds

SEBI has vide its circular dated 5th March, 2021 advised the mutual funds holding shares in listed companies to mandatorily vote in respect of certain resolutions. What action will be taken against those mutual funds not voting on the said resolutions has not been specified but the fund managers/ decision makers have to report on a quarterly basis to their trustees that they voted in the best interest of the unit holders of their schemes. The trustees in turn will have to submit a half yearly report to the SEBI in this regard.

This will be applicable from 1st April, 2021 onwards in respect of the identified list of resolutions. But in respect of all the resolutions, the mutual funds will have to mandatorily vote but after 1st April, 2022 onwards. The identified list of resolutions are :

a) Corporate governance matters, including changes in the state of incorporation. merger and other corporate restructuring, and anti-takeover provisions.
b) Changes to capital structure, including increases and decreases of capital and preferred stock issuances.
c) Stock option plans and other management compensation issues.
d) Social and corporate responsibility issues.
e) Appointment and Removal of Directors.
f) Any other issue that may affect the interest of the shareholders in general and interest of the unit-holders in particular.

ii. Related party transactions of the investee companies (excluding own group companies). For this purpose, “Related Party Transactions” shall have same meaning as assigned to them in clause (zc) of Sub-Regulation (1) of Regulation (2) of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015.

https://www.sebi.gov.in/legal/circulars/mar-2021/circular-on-guidelines-for-votes-cast-by-mutual-funds_49405.html

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uniformity in applicability of NAV

SEBI circular dated 31st December 2020 on the subject follows,

  1. In terms of paragraph 1 of SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2020/175 dated September 17, 2020, the uniform applicability of NAV in respect of purchase of units of mutual fund schemes upon realization of funds, was to come into effect from January 1, 2021.
  2. Upon consideration of the subsequent representation received from AMFI regarding operational challenges, it has been decided to extend the date of applicability of the aforementioned provision to February 1, 2021.

B. Trade Execution and Allocation:

  1. In partial modification to paragraph 2 on ‘Trade Execution and Allocation’ of SEBI Circular No. SEBI/ HO/ IMD/DF2/CIR/P/2020/175 dated September 17, 2020, the following has been decided:
    i. Clause a) of paragraph 2.2.1 on orders pertaining to equity and equity related instruments of the aforesaid circular is modified as under:
    “(1) AMCs shall use an automated Order Management System (hereinafter referred to as ‘OMS’), wherein the orders for equity and equity related instruments of each scheme shall be placed by the fund manager(s) of the respective schemes. However, a fund manager may authorize an employee of the AMC for order placement on his behalf, subject to adherence to the following:

    a. The order instructions to such employee by the fund manager shall be through electronic mode i.e. either through e-mail or other electronic utility, wherein schemewise audit trail of such orders starting from the
    instruction of the fund manager is maintained along with time stamping of each stage of the process.
    b. The employee placing the order shall be bound by the same requirements of maintaining confidentiality and the code of conduct as applicable to the fund manager in this regard i.e. in respect of order
    placement.
    (2) Further, the orders in case of arbitrage transactions, stock lending and borrowing transactions, passive schemes (such as Index Funds and ETFs) and schemes investing primarily based on pre-defined rules and models, where the discretion of the fund manager is not required for placement of order, is not mandated to be placed through OMS, subject to the following:
    a. The AMC shall document and demonstrate that no judgement and discretion of the fund manager is required for placement of such orders.
    b. The AMCs shall ensure that orders in breach of applicable regulatory limits and allocation limits as specified in Scheme Information Documents (SIDs), should not be placed and executed.
    c. The fund manager shall provide the schemewise details as required for order placement such as value of transaction(s), nature of transaction(s), etc. to the dealer.
    d. The schemewise audit trail of placement of orders (including the information provided by the fund manager), order execution and trade allocation shall be maintained along with time stamping of each stage of the process.
    (3) At all points of time, the responsibility associated with order placement shall continue to vest with the fund manager.”
    ii. Clause d) of Paragraph 2.2.1 of the aforesaid circular is modified as under:
    “All orders of fund manager(s) shall be received by dedicated dealer(s) responsible for order placement and execution. However, in case of orders for arbitrage transactions, stock lending and borrowing transactions, passive schemes (such as Index Funds and ETFs) and schemes investing
    primarily based on pre-defined rules and models, the requirement of a dedicated dealer shall not be mandatory.”

    iii. Paragraph 2.3.2 of the aforesaid circular is modified as under:
    “Audit trail of activities as detailed in paragraph 2.2.1 related to order placement, trade execution and allocation shall be available in the system. Further, there should be time stamping with respect to order placed by fund manager (or the order placed by the employee of the AMC authorized by the fund manager), order placed by dealer, order execution and trade allocation in the OMS. The audit trail and time stamping of all other orders (including orders through RFQ platform) not placed through OMS shall also
    be adequately maintained.
    C. All other conditions specified in SEBI circular dated September 17, 2020 shall remain unchanged.

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flexi cap fund

https://www.sebi.gov.in/legal/circulars/nov-2020/circular-on-introduction-of-flexi-cap-fund-as-a-new-category-under-equity-schemes_48108.html

Introduction of a new category called “Flexi Cap Fund” under Equity schemes for mutual funds.

SEBI vide circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06,
2017, has issued guidelines regarding categorization and rationalization of
Mutual Fund Schemes.

In order to give more flexibility to the mutual funds and on the basis of the recommendations of Mutual Fund Advisory Committee (MFAC), a new
category named “Flexi Cap Fund” under Equity Schemes has been made available with the following scheme characteristics.

The AMC have to ensure that a suitable benchmark is adopted for the Flexi Cap Fund. For easy identification by investors and in order to bring uniformity in names of schemes for a particular category across Mutual Funds, the scheme name shall be the same as the scheme category.

Mutual Funds have been given the option to convert an existing scheme into a Flexi Cap Fund subject to compliance with the requirement for change in fundamental attributes of the scheme in terms of Regulation 18(15A) of SEBI (Mutual Funds) Regulations, 1996.

Scheme under the aforesaid mentioned new category can be launched with
effect from the date of this circular.

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overseas investment limits for mutual funds

SEBI circular dated 5th November, 2020 regarding enhancement in overseas limits for mutual funds.

  1. In partial modification to clause 1(b) of SEBI Circular No. SEBI/IMD/CIR
    No.7/104753/08 dated September 26, 2007 and clause 2 of SEBI Circular
    SEBI/IMD/CIR No.2/122577/08 dated April 08, 2008, it has been decided by SEBI to enhance the investment limits per Mutual Fund as follows:
    1.1. Mutual Funds can make overseas investments subject to a maximum of US $ 600 million per Mutual Fund, within the overall industry limit of US $ 7 billion.
    1.2. Mutual Funds can make investments in overseas Exchange Traded
    Fund (ETF(s)) subject to a maximum of US $ 200 million per Mutual
    Fund, within the overall industry limit of US $ 1 billion.
  2. The allocation methodology of the aforementioned limits shall be as follows:
    2.1. In case of overseas investments specified at Para 1.1, US $ 50 million
    would be reserved for each Mutual Fund individually, within the overall
    industry limit of US $ 7 billion.
    2.2. New Fund Offers (NFOs): Mutual Funds launching new schemes
    intending to invest in Overseas securities / Overseas ETFs shall ensure
    that the scheme documents shall disclose the intended amount that
    they plan to invest in Overseas securities / Overseas ETFs subject to
    maximum limits specified at Para 1, as the case maybe. Such limits
    disclosed in scheme documents will be valid for a period of six months
    from the date of closure of NFO. Thereafter the unutilized limit, if any,
    shall not be available to the Mutual Fund for investment in Overseas
    securities / Overseas ETFs and shall be available towards the unutilized
    industry wide limits. Further investments should follow the norms for
    ongoing schemes.
    2.3. Ongoing Schemes: For all ongoing schemes that invest or are allowed
    to invest in Overseas securities / Overseas ETFs, an investment
    headroom of 20% of the average AUM in Overseas securities /
    Overseas ETFs of the previous three calendar months would be
    available to the Mutual Fund for that month to invest in Overseas
    securities / Overseas ETFs subject to maximum limits specified at Para
    1, as the case maybe.
  3. Further, Mutual Funds shall report the utilisation of overseas investment limits on monthly basis, within 10 days from end of each month. The format for reporting is given at Annexure A of the circular.
  4. The circular shall come into force with immediate effect.

https://www.sebi.gov.in/legal/circulars/nov-2020/circular-on-enhancement-of-overseas-investment-limits-for-mutual-funds_48090.html

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inter scheme transfer of securities

SEBI circular dated 8th October, 2020 on the subject, which is self explanatory.

Presently, transfers of securities from one scheme to another scheme in the same mutual fund is allowed only if such transfers are done at the prevailing market price for quoted instruments on spot basis and the securities so transferred are in conformity with the investment objective of the scheme to which such transfer has been made. In order to ensure that such Inter Schemes Transfers (ISTs) of securities are in conformity with the
above objective, the following additional safeguards have been prescribed:

  1. In case of Close Ended Schemes, IST purchases would be allowed within “three” business days of allotment pursuant to New Fund Offer (NFO) and thereafter, no ISTs shall be permitted to/from Close Ended Schemes.
  2. In case of Open Ended Schemes, ISTs may be allowed in the following scenarios:
    a) For meeting liquidity requirement in a scheme in case of unanticipated redemption pressure:
    AMCs shall have an appropriate Liquidity Risk Management (LRM) Model at scheme level, approved by trustees, to ensure that reasonable liquidity requirements are adequately provided for. Recourse to ISTs for managing liquidity will only be taken after the following avenues for raising liquidity have been attempted and exhausted:
    I. Use of scheme cash & cash equivalent
    II. Use of market borrowing
    III. Selling of scheme securities in the market
    IV. After attempting all the above, if there is still a scheme level liquidity deficit, then out of the remaining securities, outward ISTs of the optimal mix of low duration paper with highest quality shall be effected.
    The use of market borrowing before ISTs will be optional and Fund Manager may at his discretion take decision on borrowing in the best interest of unitholders. The option of market borrowing or selling of security as mentioned at para .2.a.II & 2.a.III above may be used in any combination and not necessarily in the above order. In case option of market borrowing and/or selling of security is not used, the reason for the same shall be recorded with evidence.
    b) For Duration/ Issuer/ Sector/ Group rebalancing
    I. ISTs shall be allowed only to rebalance the breach of regulatory limit.
    II. ISTs can be done where any one of duration, issuer, sector and group balancing is required in both the transferor and transferee schemes. Different reasons cannot be cited for transferor and transferee schemes except in case of transferee schemes is being a Credit Risk scheme.
    III. In order to guard against possible mis-use of ISTs in Credit Risk scheme, trustees shall ensure to have a mechanism in place to negatively impact the performance incentives of Fund Managers, Chief Investment Officers (CIOs), etc. involved in process of ISTs in Credit Risk scheme, in case the security becomes default grade after the ISTs within a period of one year. Such negative impact on performance shall mirror the existing mechanism for performance incentives of the AMC.
  3. No ISTs of a security shall be allowed, if there is negative news or rumors in the mainstream media or an alert is generated about the security, based on internal credit risk assessment in terms of clause F of SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 01,
    2019 during the previous four months.
  4. AMC shall ensure that Compliance Officer, Chief Investment Officer and Fund Managers of transferor and transferee schemes have satisfied themselves that ISTs undertaken are in compliance with the regulatory requirements. “Template” (Annexure – A) and documentary evidence in this regard shall be maintained by the AMC for all ISTs.
  5. If security gets downgraded following ISTs, within a period of four months, Fund Manager of buying scheme has to provide detailed justification /rationale to the trustees for buying such security.
  6. The circular shall be applicable with effect from January 1, 2021.

https://www.sebi.gov.in/legal/circulars/oct-2020/circular-on-guidelines-on-inter-scheme-transfers-of-securities_47817.html

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dividend option plan – mutual funds

SEBI circular dated 5th October, 2020 on the subject.

  1. Please refer to Ninth and Eleventh Schedule of SEBI (Mutual Funds)
    Regulations, 1996 and SEBI circular No. SEBI/IMD/CIR No 18 / 198647 /2010 dated March 15, 2010, which provide the accounting policies to be followed for determining distributable surplus and accounting the sale and repurchase of units in the books of the Mutual Fund.
  2. The aforesaid regulatory requirements, inter-alia, mandates that when units are sold, and sale price (NAV) is higher than face value of the unit, a portion of sale price that represents realized gains shall be credited to an Equalization Reserve Account and which can be used to pay dividend.
  3. There is a need to clearly communicate to the investor that, under dividend option of a Mutual Fund Scheme, certain portion of his capital (Equalization Reserve) can be distributed as dividend.
  4. Based on the recommendations of Mutual Funds Advisory Committee (MFAC), it is decided to stipulate the following:
    4.1.All the existing and proposed Schemes of Mutual Funds shall name /
    rename the Dividend option(s) in the following manner:

  1. 4.2.Offer documents shall clearly disclose that the amounts can be
    distributed out of investors capital (Equalization Reserve), which is part of sale price that represents realized gains. Further, AMCs shall ensure that the said disclosure is made to investors at the time of subscription of
    such options/plans.
    4.3.AMCs shall ensure that whenever distributable surplus is distributed, a clear segregation between income distribution (appreciation on NAV) and capital distribution (Equalization Reserve) shall be suitably disclosed in the Consolidated Account Statement provided to investors as required
    under Regulation 36(4) of SEBI (Mutual Funds) Regulations, 1996 and
    SEBI Circular No. CIR/MRD/ DP/ 31/2014 dated November 12, 2014.
  2. The aforesaid changes shall not be treated as Fundamental Attribute Change in terms of Regulation 18 (15A) of SEBI (Mutual Funds) Regulations, 1996.
  3. All other conditions specified in this regard shall remain unchanged.

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mutual funds – NAV

SEBI circular dated 17th September, 2020 on the subject.

  1. Uniformity in applicability of Net Asset Value (NAV) across various schemes upon realization of funds
    1.1. In partial modification to SEBI Circular No. SEBI/IMD/DF/21/2012 dated September 13, 2012, it has been decided that in respect of purchase of units of mutual fund schemes (except liquid and overnight schemes), closing NAV of the day shall be applicable on which the funds are available for utilization irrespective of the size and time of receipt of such application.
    1.2. The existing provision on NAV applicability for liquid and overnight funds and cut-off timings for all schemes shall remain unchanged.
  2. Trade Execution and Allocation
    2.1. It has been decided that AMCs shall put in place a written down policy which inter-alia detail the specific activities, role and responsibilities of various teams engaged in fund management, dealing, compliance, risk management, back-office, etc., with regard to order
    placement, execution of order, trade allocation amongst various schemes and other related matters.

    2.2. The aforesaid policy shall ensure that all the schemes and its investors are treated in a fair and equitable manner. Further, the policy shall be approved by the Board of AMC and the trustees and they shall ensure compliance with the following:
    2.2.1. For orders pertaining to equity and equity related instruments:
    a) AMCs shall use an automated Order Management System (hereinafter referred to as ‘OMS’), wherein the orders for equity and equity related instruments of each scheme shall be placed by the fund manager(s) of the respective schemes.
    b) In case a fund manager is managing multiple schemes, the fund manager shall necessarily place scheme wise order.
    c) All regulatory limits and allocation limits as specified in SID shall be in-built in the OMS to ensure that orders in breach of such limits are not accepted by the OMS. AMCs may further place soft limits for internal control and risk management based on its internal policy. Further, any change in limits specified in OMS shall be subject to the approval of
    Compliance and Risk Officer.
    d) All orders of fund manager(s) shall be received by dedicated dealer(s) responsible for order placement and execution.
    e) The internal policy of AMC may also provide certain scenarios within the regulatory limits, wherein, prior approval of Compliance or Risk Officer would be required through OMS before the order is received by the dealer.
    2.2.2. Requirements with respect to investments in all instruments:
    a) AMC shall ensure that the dealing desk is suitably staffed and comply with the following:
    i. All conversations of the dealer shall be only through the dedicated recorded telephone lines.
    ii. No mobile phones or any other communication devices other than the recorded telephone lines shall be allowed inside the dealing room.
    iii. Restricted access to internet facilities on computers and other devices inside the dealing room. It shall be used for activities related to trade execution only.
    iv. No sharing of information by dealer through any mode, except for trade execution under the approved internal policy.
    b) Orders by dealer can be placed either for each scheme individually or pooled on the basis of orders from multiple schemes. The trade allocation policy of the AMCs shall inter-alia detail (i) specific situations (not generic) wherein the orders by dealers shall be placed for each scheme individually or pooled from multiple schemes, (ii) the timeline to
    be considered for pooling of orders in case of multiple schemes.
    c) In case of pooled orders, post allocation of trades shall be on pro-rata basis as per the size of the order placed. The said allocation shall be based on weighted average price.
    The policy shall clearly include scenarios / situations (e.g. redemption pressure) in which deviation from the allotment of units on pro-rata basis would be permissible, if at all.
    Further, the deviations shall be on account of exigency only and require prior written approval of Chief Investment Officer, Risk Officer and the Compliance Officer with detailed rationale for such deviation.
    d) In case of scenarios, wherein, the mutual funds are required to place certain margins / collaterals in order to execute certain transactions, the policy shall include details on how such margins / collaterals shall be segregated / placed from amongst various schemes, without affecting the interest of investors of any scheme.
    2.3. Monitoring of Compliance
    2.3.1. AMC shall have a system based monitoring mechanism to ensure compliance with the requirements under paragraph 2.2.1 and 2.2.2.
    2.3.2. Audit trail of activities related to order placement, trade execution and allocation shall be available in the system. Further, there should be time stamping with respect to order placed by fund manager, order placed by dealer, order execution and trade allocation.

    2.3.3. Any non-compliance and all material information in this regard shall be reported to trustees on quarterly basis. Trustees shall inform the same to SEBI in their half yearly trustee report.
  3. Applicability:
    The circular shall be applicable with effect from January 1, 2021.

https://www.sebi.gov.in/legal/circulars/sep-2020/circular-on-mutual-funds_47574.html

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faqs on Indian Stamp Act amendments

Frequently Asked Questions (FAQs) on Indian Stamp Act, 1899 Amendments and Rules made thereunder

  1. Why amendments in the Indian Stamp Act, 1899 have been made?
    Answer: The amendments have been carried out with respect to securities market transactions. The present system of collection of stamp duty on securities market transactions has led to multiple rates for the same instrument, resulting in jurisdictional disputes and multiple incidences of duty, thereby raising the transaction costs in the securities market and hurting capital formation.
  2. What is the basic framework being created through the amendments to the Indian Stamp Act, 1899?
    Answer: Through the said amendments, the Central Government has created the legal and institutional mechanism to enable States to collect stamp duty on securities market instruments at one place by one agency (through the Stock Exchanges or Clearing Corporations authorised by the Stock Exchange or by the Depositories) on one instrument. A mechanism for appropriate sharing the stamp duty with relevant State Government based on State of domicile of the buying client has also been included. In the extant scenario, stamp duty was payable by both seller and buyer whereas in the new system it is levied only on one side (payable either by the buyer or by the seller but not by both, except in case of certain instrument of exchange where the stamp duty shall be borne by both parties in equal proportion).
  3. What are the expected key benefits of amendments in the Indian Stamp Act, 1899?
    Answer: The amendments in the Indian Stamp Act, 1899 and Rules made thereunder will facilitate ease of doing business and will bring in uniformity and affordability of the stamp duty on securities across States and thereby build a pan-India securities market. Further, cost of collection would be minimised while revenue productivity is enhanced. Further, this system will help develop equity markets and equity culture
    across the length and breadth of the country, ushering in balanced regional development.
  4. The amended provisions of the Stamp Act and Rules made thereunder will come into force from which date?
    Answer: The amended provisions of the Indian Stamp Act, 1899 brought through Finance Act, 2019 and Rules made thereunder shall come into force w.e.f 1st July,
  5. What all instruments are covered under Part AA of Chapter II of the amended Stamp Act and the Rules made thereunder?
    Answer: Each security is charged with a duty as specified in Schedule I of the amended Stamp Act. Securities are defined to include all those instruments specified in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956; a “derivative” as defined in clause (a) of Section 45U of the Reserve Bank of India Act, 1934; a certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity up to one year as the Reserve Bank of India may specify from time to time; repo on corporate bonds; and any other instrument declared by the Central Government, by notification in the Official Gazette, to be securities for the purposes of this Act.
  6. Who will collect the Stamp Duty on behalf of the State Government?
    Answer: The stamp-duty on sale of securities, transfer of securities and issue of securities shall be collected on behalf of the State Government by the Stock Exchange or Clearing Corporation authorized or Depositories (authorized collecting agents). The Central Government has also notified the Clearing Corporation of India Limited (CCIL) and the Registrars to Issue and / or Share Transfer Agents to act as collecting agents.
  7. What is the manner of collection of stamp duty under new system?
    Answer: For all exchange based secondary market transactions in securities, Stock Exchanges shall collect the stamp duty; and for off-market transactions (which are made for a consideration as disclosed by trading parties) and initial issue of securities happening in demat form, Depositories shall collect the stamp duty.
  8. When and how will the stamp duty be transferred to each State?
    Answer: The collecting agents shall within three weeks of the end of each month and in accordance with the Rules made in this behalf by the Central Government, transfer the stamp-duty collected to the State Government where the residence of the buyer is located and in case the buyer is located outside India, to the State Government having the registered office of the trading member or broker of such buyer and in case where there is no such trading member of the buyer, to the State Government having the registered office of the participant. The collecting agent shall transfer the collected stamp-duty in the account of concerned State Government with the Reserve Bank of India or any scheduled commercial bank, as informed to the collecting agent by the
    Reserve Bank of India or the concerned State Government.
  9. What would be the fees for the collecting agent?
    Answer: The collecting agent may deduct 0.2 per cent of the stamp-duty collected on behalf of the State Government towards facilitation charges before transferring the same to such State Government.
  10. How the State Government will communicate regarding stamp duty matter?
    Answer: The State Government shall appoint a nodal officer for all official communications with the principal officers (appointed representatives of collecting agents) for the purposes of collection of stamp-duty in accordance with stamp duty Rules.
  11. What if collecting agents fails to transfer the duty to the State Government within the time period specified in the Stamp Act and Rules made thereunder?
    Answer: The collecting agents have to transfer collected stamp duty to the State Government within three weeks of the end of each month. Any collecting agent who fails to collect the stamp duty or fails to transfer stamp duty to the State Government within fifteen days of the expiry of the time specified, shall be punishable with fine which shall not be less than one lakh rupees, but which may extend up to one per cent of the collection or transfer so defaulted.
  12. Will any information be provided to the State Government in respect of the stamp duty collected?
    Answer: The collecting agent shall submit a return of stamp-duty collected on various transactions to the State Government including details of defaulters in the prescribed format on a monthly basis to be furnished manually or electronically within seven days of the succeeding month. Further, the collecting agent shall furnish a consolidated return of stamp-duty collected during a financial year manually or electronically on or before the 30th June immediately following that financial year to the concerned State Government and the Accountant General of each State. The State Government may provide an online facility by which a collecting agent shall upload State wise monthly and yearly returns. Further, if a collecting agent fails to submit details of transactions to the Government or submits a document or makes a declaration which is false or which such person knows or believes to be false, shall be punishable with fine of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
  13. Can collecting agents utilise amount collected on behalf of States for any other purpose?
    Answer: The stamp-duty collected on behalf of the State Government shall not be utilized by any collecting agent for any other purpose and shall be transferred to the State Government along with interest earned on such amount, if any.
  14. Who will collect the stamp duty in case of private placements/ e-IPOs through Stock Exchange platform?
    Answer: As per section 9A(1)(c), stamp duty shall be collected by the Depository on any creation or change in the records of a Depository, pursuant to issue of securities. This should be followed even in case of private placements/ e-IPOs through stock exchange platform.
  15. Whether stamp duty is applicable on bonus issue of shares?
    Answer: In case of bonus issue, there is no consideration which means bonus shares are issued free to existing shareholders. Section 21 of the Amended Indian Stamp Act read with sub-section 16B of Section 2 clearly indicates that stamp duty is to be collected on market value which is based on price or consideration involved.
  16. Whether stamp duty is applicable on units of Mutual Fund?
    Answer: Sub-Section 23A of Section 2 of the Indian Stamp Act, 1899 defines securities as including securities defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (SCRA). Further, it may be noted that clause (h)(id) of Section 2 of SCRA, 1956, which defines “securities” includes “units or any other such instrument issued to the investors under any mutual fund scheme” under its ambit. Therefore, units of Mutual Fund Schemes are to be considered as securities for the purpose of applicability of stamp duty also
  17. Which section of amended Indian Stamp Act, 1899 (section 9A or 9B) is applicable for Mutual Funds for the purposes of collection and transfer of stamp duty to States/UTs?
    Answer: Since RTI and/or STA of Mutual Funds have been declared as Depositories under the Stamp Act vide gazette notification dated 8th Jan, 2020, the entire mutual fund business gets covered under Section 9A of the Indian Stamp Act. Section 9B is not applicable to them. RTAs have to function like a Depository in respect of collection of Stamp Duty on issue and sale or transfer of mutual funds in SoA form. The extant Stamp Rules applies to them as well i.e. the operational clause for them is Section 9A and not 9B of the Indian Stamp Act.
  18. Who will collect and transfer the Stamp duty to States in case of transactions in units of Mutual Funds and AIFs in Statement of Account/ Physical (non-demat form)?
    Answer: To provide for collection of Stamp Duty on transactions in mutual fund and AIF units in the statement of account/physical (non-demat) form, RTI and/or STA have been notified (vide Gazette Notification dated 8th January, 2020) as a “Depository” for the limited purposes of acting as a “collecting agent” under the said Act and the Rules made thereunder. Accordingly, for non-demat Mutual Fund and
    AIF transactions, collection of stamp duty by RTAs shall be governed by the provisions of Section 9A(1)(b) and 9A(1)(c) and the transfer of stamp duty to the respective States shall be governed by the provisions of Section 9A (4). Thus, the transfer of collected stamp duty to respective States/UTs by RTAs also is governed by buyer-based principle as covered in Section 9A(4) and not on the basis of registered office of the issuer.
  19. Who will collect the Stamp duty in case of Mutual Fund and AIF transactions (sale, transfer and issue of units in demat mode) through recognized Stock Exchange or Depository?
    Answer: As clear from the Act that in case of Mutual Fund and AIF transactions (sale, transfer and issue of units in demat mode) through recognized Stock Exchange or Depository as defined under SCRA, 1956 and Depositories Act, 1996 respectively, the respective Stock Exchange/ authorized Clearing Corporation or a Depository is already empowered to collect stamp duty as per Amended Indian Stamp Act and Rules made thereunder.
  20. On transfer of units of Mutual Funds and AIFs held in physical form stamp duty is to be collected from the transferor. As these transfers happen outside the purview of RTAs what will be process of collection and remittance of stamp duty?
    Answer: Stamp duty has to be collected and remitted only by collecting agents (RTA for physical units and Depositories for demat units). Where Mutual Fund and AIF units are issued in physical form, stamp duty has to be collected and remitted by RTA. Accordingly, when the transferee approaches RTA for effecting the transfer in their books, RTA will be collecting the stamp duty from the transferor before effecting the transfer which will then be remitted to the state of domicile of the transferee.
  21. How stamp duty is calculated in case of issuance of Mutual fund Units?
    Answer: Stamp duty is imposed on the value of units excluding other charges like service charge, AMC fee, GST etc. If the units are issued for Rs.1 crore then Rs.500 would be the stamp duty to be remitted to States.
  22. Whether switching in Mutual fund attract stamp duty?
    Answer: The issue of fresh units in the switched scheme would also attract stamp duty even though there is no physical consideration paid or transfer of ownership. This is because the new units are deemed to have been purchased with the NAV realized from the sale of earlier units.
  23. Whether stamp duty is applicable on redemption of Mutual Fund units?
    Answer: Redemption is not liable to duty as it is neither a transfer nor an issue nor a sale.
  24. Whether stamp duty will be charged on off-market transfer of securities without consideration such on gift, legacy transfer etc.?
    Answer: No. Section 21 of the Amended Indian Stamp Act read with sub-section 16B of Section 2 clearly indicates that stamp duty is to be collected on market value which is based on price or consideration involved.
  25. Whether stamp duty is applicable at multiple levels of a single transaction (on account of procedural requirements) and to which State Government the stamp duty amount be transferred in such cases?
    Answer: It should be ensured that double incidence of stamp duty doesn’t occur on any transaction. Where, before being credited in the buyer’s demat account, the securities are transferred from the demat accounts of issuer to clearing corporation, member, etc., the stamp duty shall be transferred to the State Government where the residence of the buyer is located.
  26. Whether stamp duty will be applicable in case of creation of segregated portfolio?
    Answer: No. Since no consideration is received from the investors and the mechanism is only to facilitate mutual funds to deal with liquidity risk leading to equal treatment of all investors, issuance of units in segregated portfolio is not liable to stamp duty.
  27. Whether stamp duty will be applicable in case of conversion of holding from Dematerialisation into Statement of Account (SoA) form and vice versa?
    Answer: No. Conversion of existing mutual fund units held in SoA mode to demat mode or vice-versa does not tantamount to issuance or transfer of mutual fund units and it only reflects the change in mode of holding without any change in beneficiary ownership. Accordingly, stamp duty is not applicable on such conversions.
  28. What are the stamp duty rates being implemented through the Amended Indian Stamp Act?
    Stamp Duty Rates w.e.f. 1st July 2020
    Instrument Rate
    Issue of Debenture 0.005%
    Transfer and Re-issue of debenture 0.0001%.
    Issue of security other than debenture 0.005%
    Transfer of security other than debenture on delivery basis; 0.015%
    Transfer of security other than debenture on non-delivery basis 0.003%
    Derivatives––
    (i) Futures (Equity and Commodity) 0.002%
    (ii) Options (Equity and Commodity) 0.003%
    (iii) Currency and Interest Rate Derivatives 0.0001%
    (iv) Other Derivatives 0.002%
    Government Securities 0%
    Repo on Corporate Bonds 0.00001%

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clarification re asset allocation of multi cap funds

SEBI clarification dated 13th September, 2020 regarding asset allocation of multi cap funds. Gist of SEBI circular follows

SEBI’s 2017 circular on scheme categorization sought to achieve two objectives:

  • True to Label schemes: The portfolio should reflect the name of the scheme and the name of the scheme should correctly reflect the nature of the portfolio.
  • Comparison with an appropriate benchmark: The scheme performance should be disclosed to the investors vis a vis an appropriate benchmark.
    For example, Large Cap schemes could have a benchmark of Sensex or Nifty 50 and at least 80% of the portfolio should be invested in Large Cap stocks. Multi Cap schemes had flexibility in terms of allocation to Large, Mid and Small Cap stocks. However, it has recently been observed that some Multi Cap Schemes have skewed portfolios, with over 80% of investment in large cap stocks akin to Large Cap schemes, and some Multi Cap schemes have near zero or insignificant asset allocation to small cap companies.
    Considering the above, in order to achieve the objectives of True to Label and Appropriate Benchmark, a need was felt to review the scheme characteristics of Multi Cap schemes and take necessary steps to clearly distinguish Multi Cap schemes from other category of schemes.
    In this context, SEBI has issued a circular dated September 11,2020 on Multi Cap schemes of Mutual Funds, requiring them to invest a minimum of 25% each in Large, Mid and Small Cap stocks, with the balance 25% giving flexibility to the fund manager.
    Some sections of media have reported various views on the circular and various conclusions in respect of the same are being drawn. SEBI would like to clarify that Mutual Funds have many options to meet with the requirements of the circular, based on the preference of their unit holders. Apart from rebalancing their portfolio in the Multi Cap schemes, they could inter-alia facilitate switch to other schemes by unit holders, merge their Multi Cap scheme with their Large Cap scheme or convert their Multi Cap scheme to another scheme category, for instance Large cum Mid Cap scheme.
    SEBI is conscious of market stability and therefore has given time to the Mutual Funds till January 31, 2021 to achieve compliance with the circular, through its preferred route of which rebalancing of the portfolio is only one such route.
    It is reiterated that to achieve the desired objective of True to Label and Appropriate Benchmarking, SEBI will examine proposals of the industry, if any, received in this regard.

https://www.sebi.gov.in/media/press-releases/sep-2020/clarification-pursuant-to-circular-dated-september-11-2020-regarding-asset-allocation-of-multi-cap-schemes-of-mutual-funds_47546.html

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asset allocation of multi cap funds

SEBI circular dated 11th September, 2020 wherein the asset allocation for multi cap funds has been partially modified. Gist of circular follows

SEBI vide circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06,
2017, has issued guidelines regarding categorization and rationalization of
Mutual Fund Schemes.

  1. In this regard, in order to diversify the underlying investments of Multi Cap Funds across the large, mid and small cap companies and be true to label, it has been decided to partially modify the scheme characteristics of Multi Cap Fund at sr. no. 1 of point A of Annexure of the aforesaid circular as under:
    Minimum investment in equity & equity related instruments -75% of total assets in the following manner:
    o Minimum investment in equity & equity related instruments of large
    cap companies – 25% of total assets
    o Minimum investment in equity & equity related instruments of mid
    cap companies – 25% of total assets
    o Minimum investment in equity & equity related instruments of small
    cap companies – 25% of total assets
    2.1.All the existing Multi Cap Funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e. January 2021.
  2. All other conditions specified in aforesaid circular dated October 06, 2017 shall remain unchanged.

Copy of SEBI circular can be accessed here

https://www.sebi.gov.in/legal/circulars/sep-2020/circular-on-asset-allocation-of-multi-cap-funds_47542.html

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debt & money market securities

SEBI circular dated 1st September, 2020 regarding debt & money market securities transactions disclosure by mutual funds. Gist of circular is given below.

  1. SEBI vide circular no.Cir/IMD/DF/6/2012 dated February 28, 2012 prescribed format to disclose all details of debt and money market securities transacted (including inter scheme transfers) in its schemes portfolio on daily basis with a time lag of 30 days.
  2. In order to further enhance transparency, it is now decided that the details of debt and money market securities transacted (including inter scheme transfers) in its schemes portfolio shall be disclosed on daily basis with a time lag of 15 days in a revised format as prescribed in Annexure A.
  3. The above disclosure shall be in a comparable, downloadable (spreadsheet) and machine readable format.
  4. This circular shall come in to effect from October 01, 2020

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