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TMI BlogSecurities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008.X X X X Extracts X X X X X X X X Extracts X X X X ..... the following shall be substituted, namely:- (q) mutual fund means 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; (b) after clause (s), the following clause shall be inserted, namely:- (sa) real estate mutual fund scheme means a mutual fund scheme that invests directly or indirectly in real estate assets or other permissible assets in accordance with these regulations; (ii) in regulation 7, clause (g) shall be substituted with the following namely:- (g) appointment of custodian in order to keep custody of the securities or gold and gold related instrument or other assets of the mutual fund held in terms of these regulations, and provide such other custodial services as may be authorised by the trustees; (iii) in regulation 26, in sub-regulation (1), after the existing proviso, the following proviso shall be inserted, namely:- Provided further that in case of a real estate mutual fund scheme, the title deed of real estate assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents; (iv) which is legally transferable; (v) which is free from all encumbrances; (vi) which is not subject matter of any litigation; but does not include- I. a project under construction; or II. vacant land; or III. deserted property; or IV. land specified for agricultural use; or V. a property which is reserved or attached by any Government or other authority or pursuant to orders of a court of law or the acquisition of which is otherwise prohibited under any law for the time being in force; (b) real estate valuer means a qualified valuer of real estate assets who has been accredited by a credit rating agency registered with the Board. Applicability 49B. (1) The provisions of this Chapter shall apply to real estate mutual fund schemes. (2) Unless the context otherwise requires, all other provisions of these regulations and the guidelines and circulars issues thereunder shall apply to real estate mutual fund schemes, and trustees and asset management companies in relation to such schemes, except where specific provisions are made in relation thereto under this Chapter. Additional eligibility criteria 49C (1) A Certifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l estate assets or in undertaking real estate development projects, whether listed on a recognized stock exchange in India or not; (b) the balance in other securities; (3) Unless otherwise disclosed in the offer document, no mutual fund shall, under all its real estate mutual fund schemes, invest more than thirty per cent. of its net assets in a single city. (4) No mutual fund shall, under all its real estate mutual fund schemes, invest more than fifteen per cent. of its net assets in the real estate assets of any single real estate project. Explanation: For the purposes of this regulation, single real estate project means a project by a builder in a single location within a city. (5) No mutual fund shall, under all its real estate mutual fund schemes, invest more than twenty five per cent. of the total issued capital of any unlisted company. (6) No mutual fund shall invest more than fifteen per cent of the net assets of any of its real estate mutual fund schemes in the equity shares or debentures of any unlisted company. (7) No real estate mutual fund scheme shall invest in (a) any unlisted security of the sponsor or its associate or group company ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lay down an adequate system of internal controls and risk management. (5) The asset management company shall put in place systems to ensure that all financial transactions are done through banking channels and exclude transactions in cash or unaccounted transactions. (6) The asset management company shall exercise due diligence in maintenance of the assets of a real estate mutual fund scheme and shall ensure that there is no avoidable deterioration in their value. (7) The asset management company shall ensure that the real estate assets held by a real estate mutual fund scheme are adequately insured against impair, damage or destruction. (8) The asset management company shall ensure that the cost of maintenance and insurance of real estate assets is within reasonable limits and that no funds of the scheme are utilized towards development of such assets. (9) The asset management company shall ensure that a real estate valuer certifies compliance with sub-regulation (8) on an annual basis. (10) The asset management company shall ensure that no real estate valuer continues with valuation of particular real estate asset for more than two years and that no such valuer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the criteria for empanelment of real estate brokers. (8) The trustees shall lay down the broad procedure to be followed by the assert management company while transacting in real estate assets. (9) The trustees shall require the asset management company to set up such systems and submit such reports to trustees, as may be necessary for them to effectively monitor the performance and functioning of the real estate mutual fund schemes. (10) The trustees shall include a confirmation on compliance with sub regulation (9) in their half yearly reports made to the Board. Disclosures in offer document and other disclosures 49J. (1) The offer documents of real estate mutual fund schemes shall contain disclosures which are adequate for investors to make informed investment decisions and such further disclosures as may be specified by the Board. (2) The portfolio disclosures and financial results in respect of a real estate mutual fund scheme shall contain such further disclosures as are specified by the Board. (3) Advertisements in respect of real estate mutual fund schemes shall conform to such guidelines as may be specified by the Board. Transactions by empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... characteristics of the real estate asset, its actual and potential uses, and market conditions at the balance sheet date; 2. A real estate asset that is held by a real estate mutual fund scheme shall be valued at fair value. 3. Where a portion of the real estate asset is held to earn rentals or for capital appreciation and if the portions can be sold or leased separately, the real estate mutual fund scheme shall account for the portions separately. Initial Recognition 4. A real estate mutual fund scheme shall recognise a real estate asset if : (a) it is probable that the future economic benefits that are associated with the real estate asset will flow to the real estate mutual fund scheme; and (b) the cost of the asset can be measured reliably. 5. A real estate mutual fund scheme shall evaluate all its real estate asset costs including those incurred initially to acquire a real estate asset and those incurred subsequently to add to, replace part of, or service a real estate asset, at the time they are incurred: Provided that a real estate mutual fund scheme shall not recognise in the carrying amount of a real estate asset the costs of the day-to-day serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction Explanation: An exchange transaction has commercial substance if: (a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred, or (b) the real estate mutual fund scheme-specific value of the portion of the real estate mutual fund scheme s operations affected by the transaction changes as a result of the exchange, and (c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged. For the purpose of determining whether an exchange transaction has commercial substance, the real estate mutual fund scheme-specific value of the portion of the real estate mutual fund scheme s operations affected by the transaction should reflect post-tax cash flows. The result of these analyses may be clear without an real estate mutual fund scheme having to perform detailed calculations. 12. The fair value of an asset for which comparable market transactions do not exist is reliably measurable if (a) the variability in the range of reasonable fair value estimates is not significant for that asset or (b) the probabilities of the various estimate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns since the date of the transactions that occurred at those prices; and (c) discounted cash flow projections based on reliable estimates of future cash flows, supported by the terms of any existing lease and other contracts and (when possible) by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows. vi. In some cases, the various sources listed in the previous paragraph may suggest different conclusions about the fair value of a real estate asset. The reasons for those differences shall be considered, in order to arrive at the most reliable estimate of fair value within a range of reasonable fair value estimates. vii. (a)Where the fair value of the asset is not reliably determinable on a continuing basis, a real estate mutual fund scheme shall measure that real estate asset at cost as per Accounting Standard (AS) 10, Accounting for Fixed Assets. The residual value of the real estate asset shall be assumed to be zero. The real estate mutual fund scheme shall apply AS 10 until disposal of the inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether to recognise a liability and, if so, how to measure it. 15. To determine the fair value of a real estate asset in accordance with the above-mentioned paragraphs, a real estate mutual fund scheme is required to use the services of two independent and approved valuers having recent experience in category of the real estate asset being valued and use the lower of the two valuations. 16. For accounting for rental income on real estate asset, Accounting Standard (AS) 19, Leases, shall be followed. Such income shall be accrued on a daily basis, till the currency of the lease agreements. 17. Where the rental income receivable by a real estate mutual fund scheme in respect of real estate asset, has accrued but has not been received for the period specified by the Board. Further, provision shall be made by debiting to the revenue account the income so accrued in the manner as may be specified by the Board. Derecognition of Real Estate Asset 18. A real estate mutual fund scheme shall derecognise a real estate asset on disposal or when the asset is permanently withdrawn from use and no future economic benefits are expected from its disposal. 19. In determining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, namely: ELEVENTH SCHEDULE ANNUAL REPORT 1. Annual Report The annual report shall contain- (ii) Report of the Board of Trustees on the operations of the various schemes of the fund and the fund as a whole during the year and the future outlook of the fund; (iii) Balance Sheet and Revenue Account in accordance with paras 2, 3 and 4, respectively of this Schedule; (iv) Auditor s Report in accordance with paragraph 5 of this Schedule; (v) Brief statement of the Board of Trustees on the following aspects, namely:- (a) Liabilities and responsibilities of the Trustees and the Settlor; (b) Investment objective of each scheme; (c) Basis and policy of investment underlying the scheme; (d) If the scheme permits investment partly or wholly in shares, bonds, debentures, real estate asset and other scrips or securities whose value can fluctuate, a statement on the following lines: The price and redemption value of the units, and income from them, can go up as well as down with the fluctuations in the market value of its underlying investments in securities or fair value in underlying real estate asset, as the case may be; (e) Comments of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the period from the last interest due date upto the date of purchase, shall not be treated as a cost of purchase, but shall be treated to Interest Recoverable Account. Similarly, interest received at the time of sale for the period from the last interest due date upto the date of sale must not be treated as an addition to sale value but shall be credited to Interest Recoverable Account. v. In determining the holding cost of investments and the gains or loss on sale of investments, the average cost method shall be followed. vi. Transactions for purchase or sale of investments shall be recognised as of the trade date and not as of the settlement date, so that the effect of all investments traded during a financial year are recorded and reflected in the financial statements for that year. Where investment transactions take place outside the stock market, for example, acquisitions through private placement or purchases or sales through private treaty, the transaction shall be recorded, in the event of a purchase, as of the date on which the scheme obtains in enforceable obligation to pay the price or, in the event of a sale, when the scheme obtains an enforceable right to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count and the difference between the purchase price and the par value, if positive, should be debited to reserves and, if negative, should be credited to reserves. In case of such schemes launched prior to the commencement of the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 2008 a proportionate part of the unamortised initial issue expenses shall also be transferred to the reserves so that the balance carried forward on that account is proportional to the number of units remaining outstanding. xii. The cost of investments acquired or purchased shall, inter alia, include brokerage, stamp charges and any charge customarily included in the broker s bought note. In respect of privately placed debt instruments any front-end discount offered shall be reduced from the cost of the investment. xiii. Underwriting commission shall be recognised as revenue only when there is no devolvement on the scheme. Where there is devolvement on the scheme, the full underwriting commission received and not merely the portion applicable to the devolvement shall be reduced from the cost of the investment. (b) For investments in real estate assets- Following accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary. (v) The Balance Sheet shall disclose the per-unit net asset value (NAV) as at the end of the accounting year. (vi) As in case of companies, the Balance Sheet shall give against each item, the corresponding figures as at the end of the preceding accounting year. (vii)(A) The notes to the balance sheet should disclose the following information regarding investments:- (a)all investments shall be grouped under the major classification given in the balance sheet; (b) under each major classification, the total value of investments falling under each major industry group (which constitutes not less than 5% of the total investment in the major classification) shall be disclosed together with the percentage thereof in relation to the total investment within the classification; (c) a full list of investments of the scheme shall be made available for inspection with the Asset Management Company; (d) the basis on which management fees have been paid to the Asset Management Company and the computation thereof; (e) if brokerage, custodial fees or any other payment for services are paid to or payable to any entity in which the Asset Management Company or its major ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Less: Distributed to unitholders 80 Transfer to reserve 5 (85) 20 (vii)(B) In respect of real estate asset, the following additional disclosures shall be made in the balance sheet: (a). a reconciliation between the carrying amounts of real estate investment properties at the beginning and end of the period, showing the following: 1. Additions resulting from purchase during the period; 2. Additions resulting from acquisitions through business combinations; 3. Deletions resulting from sales during the period; 4. Deletions resulting from disposal through business combinations; 5. Net gain or loss from fair value adjustments; 6. Other changes. (b) the method and significant assumptions applied in determining the fair value of each real estate investment asset including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the real estate mutual fund scheme should disclose) because of the nature of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, expenditure and surplus of the mutual fund. These particulars shall contain information enumerated in Annexure 2 of this Schedule. (ii) If profit on sale of investments including real estate asset shown in the Revenue Account includes profit/loss on inter-scheme transfer of investments including real estate asset within the same mutual fund the aggregate of such profit recognised as realised, shall be disclosed separately without being clubbed with the profit/loss on sale of investments to third parties. (iii) Unprovided depreciation in value of investments in securities representing the difference between their aggregate market value and their carrying cost shall be disclosed by way of a note forming part of the Revenue Account. Conversely, unrealised profit on investment representing the difference between their aggregate market value and carrying cost, shall be disclosed by way of note to accounts. However, if investments are marked to market, depreciation may not be provided. (iv) The Revenue Account shall indicate the appropriation of surplus by way of transfer to reserves and dividend distributed. (v)(A) The following disclosures shall also be made in the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, amortisation and charges, per unit; (d) net income, per unit; (e) unrealised appreciation/depreciation in value of investments, per unit; (f) if the units are traded or repurchased/resold, the highest and the lowest prices per unit during the year and the price-earning ratio ; (g) per unit, ratio of expenses to average net assets by percentage; (h) per unit, ratio of gross income to average net assets by percentage (excluding transfer to revenue account from past year s reserve but including unrealised appreciation on investments) ; (i) per unit NAV. ANNEXURE 1A [Refer para 3] Contents of schemewise Balance Sheet ASSETS SIDE OF THE BALANCE SHEET: I. The assets of the balance sheet shall be grouped into the following categories: - Investments - Deposits - Other Current Assets - Fixed Assets II. INVESTMENTS: (a) The following types of investment in securities shall be separately disclosed: (i) Equity shares; (ii) Preference shares; (iii) Privately placed debentures/bonds; (iv) Debentures and Bonds listed/awaiting listing on the recognised stock exchange; (v) Calls paid in advance; (vi) Term Loans; (vii) Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and provisions Current liabilities: - Sundry creditors; - Interest payable on loans; - Contract for purchase of investments in securities; - Bank account overdrawn as per books; - Unclaimed distributed income; - Others. Provisions: - Provisions for loss/depreciation in value of investments in securities (separately with reference to each type of investment in securities) (optional, if marked to market); - Provision for doubtful deposits; - Provision for outstanding any accrued income considered doubtful; - Provision for gratuity; - Provision for staff welfare fund; - Proposed income distributed on initial capital and unit-capital; - Other provisions. VI. Contingent liabilities - Disclosure should be made of all contingent liabilities, showing separately :- (i) Underwriting commitments; (ii) Uncalled liability on partly paid shares; (iii) Other commitments; and (iv) Others (specifying details). ANNEXURE 2 [Refer para 4] Contents of revenue account - Dividend; Interest; Rental (lease) income - Profit on sale/redemption of investments in securities (other than inter-scheme transfer/sale); Profit on s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be signed by the schemewise fund manager/s and the Board of Trustees, and reported upon by the Auditors. The financial statements of the scheme should be approved at a meeting of the Board of Directors of the Asset Management Company and also at a meeting of the trustees or in the case of a trustee company by the Board of Directors of the trustee company. C. B. BHAVE CHAIRMAN SECURITIES AND EXCHANGE BOARD OF INDIA [ADVT III/IV/69-ZB/2008/Exty.] Footnotes: (1) The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the Principal Regulations were published in the Gazette of India on December 9, 1996 vide S.O. No. 856(E). (2) The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 were subsequently amended (a) on April 15, 1997 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1997 vide S.O. No.327(E). (b) on January 12, 1998 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1998 vide S.O. No.32(E). (c) on December 08, 1999 by the Securities and Exchange Board of India (Mutual Funds) (Amendment) Regulations, 1999 vide S.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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