Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1999. - S.O. No.1223(E) - SEBI/LE/21876/99 - SEBI

SECURITIES AND EXCHANGE BOARD OF INDIA NOTIFICATION Mumbai, the 08 th December, 1999 S.O.1223(E).- In exercise of the powers conferred by sub-section (1) of section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following regulation further to amend the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, namely: I. 1. These regulations may be called the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1999. 2. They shall come into force on the date of their publication in the Official Gazette. II. In the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, (hereinafter referred to as the said regulations),- 1. In regulation 2, for clause (y) the following clause be substituted, namely; (y) Trustees mean the Board of Trustees or the Trustee Company who hold the property of the Mutual Fund in trust for the benefit of the unitholders. 2. In regulation 18, (a) for sub-regulation (11), the following sub-regulation shall be substituted, namely; (11) Each trustee shall file the details of his transactions of dealing in securities with the Mutual Fund on a quarterly basis, (b) in sub-regulation (15), in clause (d), the following proviso shall be inserted after the existing proviso and before the explanation, namely: 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) 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 we given an option to exit at the prevailing Net Asset Value without any exit load. (c) after sub-regulation (24), the following sub-regulations (25), (26) and (27) shall be inserted, namely; (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 of 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 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. (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 affiliates - whether the asset management company has charged higher fees than outside contractors for the same services. (iii) selection of the asset management company s independent directors (iv) securities transactions involving affiliates 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. 2. In Regulation 21, in sub-regulation (1), in clause (f), for the existing explanation, the following explanation shall be substituted, namely: Explanation : For the purposes of this clause, net worth means the aggregate of the paid up capital and free reserves of the asset management company after deducting therefrom miscellaneous expenditure to the extent not written off or adjusted or deferred revenue expenditure, intangible assets and accumulated losses. 3. In Regulation 22, in clause (e), the following proviso shall be added, namely : Provided that in case of an open ended scheme, the consent of the unitholders shall not be necessary if: (i) the change in control takes place after one year from the date of allotment of units. (ii) the unitholders are informed about the proposed change in the controlling interest of asset management company by sending individual communication 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. (iii) the unitholders are given an option to exit at the prevailing Net Asset Value without any exit load. 4. In Regulation 24, in sub-regulation (2), the words portfolio management services , shall be inserted after the words in the nature of and before the words management and advisory . 5. In Regulation 25, in sub-regulation (8), the following proviso shall be added, after the existing proviso, namely : Provided further that the mutual funds shall disclose at the time of declaring half-yearly and yearly results; (i) any underwriting obligations undertaken by the schemes of the mutual funds with respect to issue of securities associate companies, (ii) devolvement, if any, (iii) subscription by the schemes in the issues lead managed by associate companies (iv) subscription to any issue of equity or debt on private placement basis where the sponsor or its associate companies have acted as arranger or manager. 6. In regulation 45, a proviso shall be added, namely;- Provided that mutual funds shall enter into derivatives transactions in a recognized stock exchange for the purpose of hedging and portfolio balancing, in accordance with the guidelines issued by the Board. 7. In the Third Schedule, after clause 19, the following clauses 20, 21 and 22 shall be inserted, namely: 20. The trust deed shall state that a meeting of the trustees shall be held at least once in every three months and at least four such meetings shall be held in every year. 21. The trust deed shall specify the quorum for a meeting of the trustees. Provided that the quorum for a meeting of the trustees shall not be constituted unless one independent trustee or director is present at the meeting. 22. The trust deed shall state that the minimum number of trustees shall be four. 8. In Fifth Schedule, after existing clause 7, the following new clauses 8, 9 and 10 shall be added, namely: 8. Trustees and the asset management company shall maintain high standards of integrity and fairness in all their dealings and in the conduct of their business 9. Trustees and the asset management company shall render at all limes high standards of service, exercise due diligence, ensure proper care and exercise independent professional judgement. 10. The asset management company shall not make any exaggerated statement, whether oral or written, either about their qualifications or capability to render investment management services or their achievements. 9. In Sixth Schedule, (i) in clause 6, the following sentence shall be added at the end, namely: Any advertisement that makes claims about the performance of the fund shall be supported by relevant figures. (ii) in clause 12, the following sentence shall be added at the end, namely: Any advertisement containing information regarding performance. NAV, yield or returns shall give such data for the past three years, wherever applicable. (iii) after existing clause 14, the following clauses 14A and 14B shall be added, namely: 14A. Any advertisement reproducing or purporting to reproduce any information contained in a offer document shall reproduce such information in full and disclose all relevant facts and not be restricted to select extracts relating to that item which could be misleading. 4B. No celebrities shall form part of the advertisement. 10. In the Seventh Schedule, (i) for the existing clause 1, the following clauses 1 and 1A, shall be substituted, namely: 1. A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer which are rated not below investment grade by a credit rating agency authorised to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset management company. Provided that such limit shall not be applicable for investments in government securities and money market instruments . 1A. A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme. All such investments shall be made with the prior approval of the Board of Trustees and the Board of asset management company. (ii) in clause 6, a proviso shall be added, namely: Provided that mutual funds shall enter into derivatives transactions in a recognized stock exchange for the purpose of hedging and portfolio balancing, in accordance with the guidelines issued by the Board. (iii) in clause 9 - (a) the word scheme shall be added after the words mutual fund and before the words shall make , (b) the words of all the schemes of a mutual fund shall be deleted. (iv) after the existing clause 9, the following new clauses 10 and 11 shall be added, namely: 10. No mutual fund scheme shall invest more than 10 per cent of its NAV in the equity shares or equity related instruments of any company. Provided that, the limit of 10 per cent shall not be applicable for investments in index fund or sector or industry specific scheme . 11. A mutual fund scheme shall not invest more than 5% of its NAV in the equity shares or equity related investments in case of open ended scheme and 10% of its NAV in case of close ended scheme . [F.No. SEBI/LE/21876/99] D.R. MEHTA, Chairman Foot Note: (1) The principal regulation, SEBI (Mutual Funds) Regulations, 1996, was issued under S.O. No. 856(E), dated December 6, 1996 published in the Gazette of India, Part II, Section 3(ii), dated December 9, 1996. (2) SEBI (Mutual Funds) Regulations, 1996 was subsequently amended by the SEBI (Mutual Funds) (Amendment) Regulations, 1997, issued under S.O. NO. 327 (E), published in Gazette of India dated April 15, 1997. (3) SEBI (Mutual Funds) Regulations, 1996 was subsequently amended by the SEBI (Mutual Funds) (Amendment) Regulations, 1998, issued under S.O. No. 32(E), published in the Gazette of India dated January 12, 1998.