Legal Structure of Mutual Funds in India

SEBI (Mutual Fund) Regulations, 1996 as amended till date define “mutual fund” as “a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold-related instruments or real estate assets.”

Key features of a mutual fund that flows from the definition above are:

 It is established as a trust

 It raises money through sale of units to the public or a section of the public

 The units are sold under one or more schemes

 The schemes invest in securities (including money market instruments) or gold or gold-related instruments or real estate assets.

SEBI has stipulated the legal structure under which mutual funds in India need to be constituted. The structure, which has inherent checks and balances to protect the interests of the investors, can be briefly described as follows:

 Mutual funds are constituted as Trusts. Therefore, they are governed by the Indian Trusts Act, 1882.

 The mutual fund trust is created by one or more Sponsors, who are the main persons behind the mutual fund business.

 Every trust has beneficiaries. The beneficiaries, in the case of a mutual fund trust, are the investors who invest in various schemes of the mutual fund.

 The operations of the mutual fund trust are governed by a Trust Deed, which is executed between the sponsors and the trustees. SEBI has laid down various clauses that need to be part of the Trust Deed.

The Trust acts through its trustees. Therefore, the role of protecting the interests of the beneficiaries (investors) is that of the Trustees. The first trustees are named in the Trust Deed, which also prescribes the procedure for change in Trustees.

 In order to perform the trusteeship role, either individuals may be appointed as trustees or a Trustee company may be appointed. When individuals are appointed trustees, they are jointly referred to as ‘Board of Trustees’. A trustee company functions through its Board of Directors.

 Day to day management of the schemes is handled by an Asset Management Company (AMC). The AMC is appointed by the sponsor or the Trustees.

 The trustees execute an investment management agreement with the AMC, setting out its responsibilities.

 Although the AMC manages the schemes, custody of the assets of the scheme (securities, gold, gold-related instruments & real estate assets) is with a Custodian, who is appointed by the Trustees.

 Investors invest in various schemes of the mutual fund. The record of investors and their unit-holding may be maintained by the AMC itself, or it can appoint a Registrar & Transfer Agent (RTA).

Let us understand the various agencies, by taking the example of the constitution of SBI Mutual Fund.