Regulation 18 - Rights and obligations of the trustees - Securities and Exchange Board of India (Mutual Funds) Regulations, 1996

Rights and obligations of the trustees. 18. (1) The trustees and the asset management company shall with the prior approval of the Board enter into an investment management agreement. (2) The investment management agreement shall contain such clauses as are mentioned in the Fourth Schedule and such other clauses as are necessary for the purpose of making investments. (3) The trustees shall have a right to obtain from the asset management company such information as is considered necessary by the trustees. 16 [ **** ] 17 [ **** ] (5) The trustees shall 18 [ approve the policy for empanelment of brokers by the asset management company and shall ] ensure that an asset management company has been diligent in empanelling the brokers, in monitoring securities transactions with brokers and avoiding undue concentration of business with any broker. (6) The trustees shall ensure that the asset management company has not given any undue or unfair advantage to any associates or dealt with any of the associates of the asset management company in any manner detrimental to interest of the unitholders. (7) The trustees shall ensure that the transactions entered into by the asset management company are in accordance with these regulations and the scheme. (8) The trustees shall ensure that the asset management company has been managing the mutual fund schemes independently of other activities and have taken adequate steps to ensure that the interest of investors of one scheme are not being compromised with those of any other scheme or of other activities of the asset management company. (9) The trustees shall ensure that all the activities of the asset management company are in accordance with the provisions of these regulations. (10) Where the trustees have reason to believe that the conduct of business of the mutual fund is not in accordance with these regulations and the scheme they shall forthwith take such remedial steps as are necessary by them and shall immediately inform the Board of the violation and the action taken by them. 4 [(11) Each trustee shall file the details of his transactions of dealing in securities with the Mutual Fund on a quarterly basis 11 [ , within the time and manner as may be specified by the Board from time to time ] .] (12) The trustees shall be accountable for, and be the custodian of, the funds and property of the respective schemes and shall hold the same in trust for the benefit of the unitholders in accordance with these regulations and the provisions of trust deed. (13) The trustees shall take steps to ensure that the transactions of the mutual fund are in accordance with the provisions of the trust deed. (14) The trustees shall 19 [ ensure that the income calculated by the asset management company under sub-regulation (25) of regulation 25 of these regulations is ] in accordance with these regulations and the trust deed. (15) The trustees shall obtain the consent of the unitholders- (a) whenever required to do so by the Board in the interest of the unitholders; or (b) whenever required to do so on the requisition made by three-fourths of the unit- holders of any scheme; or 15 [ (c) when the majority of the trustees decide to wind up a scheme in terms of clause (a) of sub regulation (2) of regulation 39 or prematurely redeem the units of a close ended scheme. ] (d) 5 [* * *] 6 [ 20 [ (15A) The trustees shall ensure that no change in the fundamental attributes of any scheme, the fees and expenses payable or any other change which would modify the scheme and affect the interest of the unit holders is carried out by the asset management company, unless it complies with sub-regulation (26) of regulation 25 of these regulations. ] (16) The trustees shall call for the details of transactions in securities by the key personnel of the asset management company in his own name or on behalf of the asset management company and shall report to the Board, as and when required. (17) The trustees shall quarterly review all transactions carried out between the mutual funds, asset management company and its associates. 12 [ (18)The trustees shall on a quarterly basis review the networth of the asset management company to ensure compliance with the threshold provided in clause (f) of sub-regulation (1) of regulation 21 on a continuous basis ] 21 [ (19) The trustees shall periodically review the service contracts relating to custody arrangements and satisfy themselves that such contracts are executed in the interest of the unit holders. ] (20) The trustees shall ensure that there is no conflict of interest between the manner of deployment of its networth by the asset management company and the interest of the unit- holders. (21) The trustees shall periodically review the investor complaints received and the redressal of the same by the asset management company. (22) The trustees shall abide by the Code of Conduct as specified in 10 [ PART-A of ] the Fifth Schedule. (23) The trustees shall furnish to the Board on a half-yearly basis,- (a) a report on the activities of the mutual fund; (b) a certificate stating that the trustees have satisfied themselves that there have been no instances of self-dealing or front running by any of the trustees, directors and key personnel of the asset management company; (c) a certificate to the effect that the asset management company has been managing the schemes independently of any other activities and in case any activities of the nature referred to in 13 [ clause (b) ] of regulation 24 have been undertaken by the asset management company and has taken adequate steps to ensure that the interests of the unitholders are protected. 8 [(24) The independent trustees referred to in sub-regulation (5) of regulation 16 shall give their comments on the report received from the asset management company regarding the investments by the mutual fund in the securities of group companies of the sponsor.] 9 [(25) Trustees shall exercise due diligence as under: A. General Due Diligence: (i) The Trustees shall be discerning in the appointment of the directors on the Board of the asset management company. (ii) Trustees shall review the desirability or continuance of the asset management company if substantial irregularities are observed in any of the schemes and shall not allow the asset management company to float new schemes. (iii) The Trustee shall ensure that the trust property is properly protected, held and administered by proper persons and by a proper number of such persons. (iv) The Trustee shall ensure that all service providers are holding appropriate registrations from the Board or concerned regulatory authority. (v) The Trustees shall arrange for test checks of service contracts. (vi) Trustees shall immediately report to the Board of any special developments in the mutual fund. B. Specific due diligence: The Trustees shall: (i) obtain internal audit reports at regular intervals from independent auditors appointed by the Trustees, (ii) obtain compliance certificates at regular intervals from the asset management company, (iii) hold meeting of trustees more frequently, (iv) consider the reports of the independent auditor and compliance reports of asset management company at the meetings of trustees for appropriate action, (v) maintain records of the decisions of the Trustees at their meetings and of the minutes of the meetings, (vi) prescribe and adhere to a code of ethics by the Trustees, asset management company and its personnel, (vii) communicate in writing to the asset management company of the deficiencies and checking on the rectification of deficiencies. 22 [ C. The trustees shall also exercise due diligence on such matters as may be specified by the Board from time to time. ] (26) Notwithstanding anything contained in sub-regulations (1) to (25), the trustees shall not be held liable for acts done in good faith if they have exercised adequate due diligence honestly. (27) The independent directors of the trustees or asset management company shall pay specific attention to the following, as may be applicable, namely:- (i) the Investment Management Agreement and the compensation paid under the agreement, (ii) service contracts with 14 [ associates ] -whether the asset management company has charged higher fees than outside contractors for the same services, (iii) selections of the asset management company s independent directors, (iv) securities transactions involving 14 [ associates ] to the extent such transactions are permitted, (v) selecting and nominating individuals to fill independent directors vacancies, (vi) code of ethics must be designed to prevent fraudulent, deceptive or manipulative practices by insiders in connection with personal securities transactions, (vii) the reasonableness of fees paid to sponsors, asset management company and any others for services provided, (viii) principal underwriting contracts and their renewals, (ix) any service contract with the associates of the asset management company.] ************* NOTES:- 1 Substituted by the SEBI (Investment Advise by Intermediaries) (Amendment) Regulations, 2001, w.e.f. 29-5-2001. Prior to its substitution, clause (d) read as under; (d) appointed a compliance officer to comply with regulatory requirement and to redress investor grievances; 2 Inserted by SEBI (Mutual Funds) (Amendment) Regulations, 2009, w.e.f. 8-4-2009. 3 Inserted by SEBI (Investment Advice by Intermediaries) (Amendment) Regulations, 2001, w.e.f. 29-5-2001. 4 Substituted by the SEBI (Mutual Funds) (Amendment) Regulations, 1999, w.e.f. 8-12-1999. Prior to its substitution, sub-regulation (11) read as under; (11) Each trustee shall file the details of his holdings in securities on a half early basis with the trust. 5 Omitted by the SEBI (Mutual Funds) (Second Amendment) Regulations, 2000, w.e.f. 22-5-2000. Earlier second proviso was inserted by SEBI (Mutual Funds) (Amendment) Regulations, 1999, w.e.f. 8-12-1999.. Prior to omission clause (d) read as under; (d) when any change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme or affect the interest of the unitholders is proposed to be carried out unless the consent of not less than three-fourths of the unit holders is obtained: Provided that no such change shall be carried out unless three fourths of the unit holders have given their consent and the unit holders who do not give their consent are allowed to redeem their holdings in the scheme. *[Provided further that in case of an open ended scheme, the consent of the unitholders shall not be necessary if: (i) the change in fundamental attribute is carried out after one year from the date of allotment of units. (ii) (ii) the unitholders are informed about the proposed change in fundamental attribute by sending individual communication and an advertisement is given in 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. (iii) the unitholders are given an option to exit at the prevailing Net Asset Value without any exit load] Explanation: For the purposes of this clause fundamental attributes means the investment objective and terms of a scheme. [* this proviso had been inserted by Amendment Regulations, 1999, as mentioned above]. 6 Inserted by the SEBI (Mutual Funds) (Second Amendment) Regulations, 2000, w.e.f. 22-5-2000. (i) 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 as well as in a newspaper published in the language of region where the Head Office of the mutual fund is situated; and (ii) the unitholders are given an option to exit at the prevailing Net Asset Value without any exit load.] 7 Substituted for continuously by the SEBI (Mutual Funds) (Amendment) Regulations, 1998, w.e.f. 12-1-1998. 8 Inserted by the SEBI (Mutual Funds) (Amendment) Regulations, 1998, w.e.f. 12-1-1998. 9 Inserted by the SEBI (Mutual Funds) (Amendment) Regulations, 1999, w.e.f. 8-12-1999. 10. Inserted vide Notification No. SEBI/LAD-NRO/GN/2020/39 dated 29-10-2020 11. Inserted vide Notification No. SEBI/LAD-NRO/GN/2021/08 dated 04-02-2021 w.e.f. 30th day from the date of their publication in the Official Gazette, that is 04-02-2021 12. Substituted vide Notification No. SEBI/LAD-NRO/GN/2021/08 dated 04-02-2021 w.e.f. 30th day from the date of their publication in the Official Gazette, that is 04-02-2021 before it was read as (18) The trustees shall 7 [quarterly] review the networth of the asset management company and in case of any shortfall, ensure that the asset management company make up for the shortfall as per clause (f) of sub-regulation (1) of regulation 21. 13. Substituted vide Notification No. SEBI/LAD-NRO/GN/2021/08 dated 04-02-2021 w.e.f. 30th day from the date of their publication in the Official Gazette, that is 04-02-2021 before it was read as sub-regulation (2) 14. Substituted vide Notification No. SEBI/LAD-NRO/GN/2021/08 dated 04-02-2021 w.e.f. 30th day from the date of their publication in the Official Gazette, that is 04-02-2021 before it was read as affiliates 15. Substituted vide Notification No. SEBI/LAD-NRO/GN/2022/70 dated 25-01-2022 before it was read as (c) when the majority of the trustees decide to wind up or prematurely redeem the units. 16. Omitted vide Notification No. SEBI/LAD-NRO/GN/2023/134 dated 26-06-2023 w.e.f. 01-01-2024 before it was read as, (4) The trustees shall ensure before the launch of any scheme that the asset management company, has,- (a) systems in place for its back office, dealing room and accounting; (b) appointed all key personnel including fund manager(s) for the scheme(s) and submitted their bio-data which shall contain the educational qualifications, past experience in the securities market with the trustees, within 15 days of their appointment; (c) appointed auditors to audit its accounts; 1 [(d) appointed a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of investors grievances;] (e) appointed registrars and laid down parameters for their supervision; (f) prepared a compliance manual and designed internal control mechanisms including internal audit systems; (g) specified norms for empanelment of brokers and marketing agents; 2 [(h) obtained, wherever required under these regulations, prior in principle approval from the recognised stock exchange(s) where units are proposed to be listed.] 17. Omitted vide Notification No. SEBI/LAD-NRO/GN/2023/134 dated 26-06-2023 w.e.f. 01-01-2024 before it was read as, 3 [(4A) The compliance officer appointed under clause (d) of sub-regulation (4) shall immediately and independently report to the Board any non-compliance observed by him.] 18. Inserted vide Notification No. SEBI/LAD-NRO/GN/2023/134 dated 26-06-2023 w.e.f. 01-01-2024 19. Substituted vide Notification No. SEBI/LAD-NRO/GN/2023/134 dated 26-06-2023 w.e.f. 01-01-2024 before it was read as, be responsible for the calculation of any income due to be paid to the mutual fund and also of any income received in the mutual fund for the holders of the units of any scheme 20. Substituted vide Notification No. SEBI/LAD-NRO/GN/2023/134 dated 26-06-2023 w.e.f. 01-01-2024 before it was read as, (15A) The trustees shall ensure that no change in the fundamental attributes of any scheme or the trust or fees and expenses payable or any other change which would modify the scheme and affects the interest of unitholders, shall be carried out unless,- 21. Substituted vide Notification No. SEBI/LAD-NRO/GN/2023/134 dated 26-06-2023 w.e.f. 01-01-2024 before it was read as, (19) The trustees shall periodically review all service contracts such as custody arrangements, transfer agency of the securities and satisfy itself that such contracts are executed in the interest of the unitholders. 22. Inserted vide Notification No. SEBI/LAD-NRO/GN/2023/134 dated 26-06-2023 w.e.f. 01-01-2024