Trustee

The trustees have a critical role in ensuring that the mutual fund complies with all the regulations,
and protects the interests of the unit-holders.
The SEBI Regulations stipulate that:
Every trustee has to be a person of ability, integrity and standing.

A person who is guilty of moral turpitude cannot be appointed as a trustee.

A person convicted of any economic offence or violation of any securities law cannot be
appointed as trustee.

No AMC and no director (including independent director), officer, employee of an AMC shall
be eligible to be appointed as a trustee of a mutual fund.

No person who is appointed as a trustee of a mutual fund shall be eligible to be appointed as

trustee of any other mutual fund.

Prior approval of SEBI needs to be taken, before a person is appointed as Trustee.

The sponsor will have to appoint at least 4 trustees. If a trustee company has been appointed, then
that company would need to have at least 4 directors on the Board. Further, at least two-thirds of
the trustees / directors on the Board of the trustee company would need to be independent trustees
i.e. not associated with the sponsor in any way.
SEBI expects Trustees to perform a key role in ensuring legal compliances and protecting the
interest of investors. Accordingly, various General Due Diligence and Special Due Diligence
responsibilities have been assigned to them. The rights and responsibilities include the following:
• The trustees shall enter into an Investment Management Agreement with the AMC that will
define the functioning of the AMC in making and managing the mutual fund’s investments.
• The trustees have the right to seek any information they require from the AMC to facilitate
meeting their responsibilities as trustees.
• The trustees shall ensure before the launch of any scheme that all the key personnel and
associates such as fund managers, compliance officer, R&T agent, auditors and others have been
appointed and all systems are in place.
• The trustees shall periodically review the service contracts entered into for custody arrangements,
transfer agency and others and ensure they are in the interest of the unitholders and that all service
providers are registered with SEBI.
• The trustees shall ensure that all transactions entered into by the AMC are in compliance with the
regulations and the scheme’s objectives and intent.
• The trustees shall ensure that the interests of the unitholders are not compromised in any of the
AMC’s dealings with brokers, other associates and even unitholders of other schemes.
• If the trustees believe that the conduct of the business of the mutual fund is contrary to the
provisions of the regulations, then they must take corrective action and inform SEBI of the same.
• The trustees shall not permit a change in the fundamental attributes of the scheme, the trust or
fees and expenses or any other change that will affect the interests of the unit holders unless a
written communication is sent to each unitholder notice is given in the newspaper with national
circulation and the unitholders are given the option to exit at NAV without paying an exit load.
• The trustees have to file details of their securities dealings on a quarterly basis with the mutual
fund.
On a quarterly basis the trustees shall review the transactions of the mutual fund with the AMC
and its associates. They shall also review the net worth of the AMC on a quarterly basis and ensure
that any shortfall is made up.
• The trustees shall periodically review the investor complaints received and their redressal by the
AMC.
• The trustees shall ensure that the trust property is properly protected, held and administered.
• The trustees shall obtain and consider the reports of the auditors and compliance officers in their
periodic meetings and take action as required.
• The trustees shall file half-yearly reports to SEBI.

2.2.3 Asset Management Company (AMC)

Day to day operations of mutual fund is handled by the AMC. The sponsor or, the trustees if so
authorized by the trust deed, shall appoint the AMC with the approval of SEBI.
As per SEBI regulations:
The directors of the asset management company need to be persons having adequate
professional experience in finance and financial services related field.

The directors as well as key personnel of the AMC should not have been found guilty of moral
turpitude or convicted of any economic offence or violation of any securities laws.

Key personnel of the AMC should not have worked for any asset management company or
mutual fund or any intermediary during the period when its registration was suspended or
cancelled at any time by SEBI.

Prior approval of the trustees is required, before a person is appointed as director on the board of
the AMC.
Further, at least 50 percent of the directors should be independent directors i.e. not associate of or
associated with the sponsor or any of its subsidiaries or the trustees.
The AMC needs to have a minimum net worth of Rs. 50 crore.
A change in the controlling interest of the AMC can be made only with the prior approval of the
trustees and SEBI. A written communication about the change in the controlling interest of the
AMC is sent to each unitholder 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. The unitholders are given the option to exit at NAV
without paying an exit load. 39

2.3 Other Service Providers

2.3.1 Custodian
The custodian has custody of the assets of the fund. As part of this role, the custodian needs to
accept and give delivery of securities for the purchase and sale transactions of the various schemes
of the fund. Thus, the custodian settles all the transactions on behalf of the mutual fund schemes.
All custodians need to register with SEBI under the SEBI (Custodian of Securities) Regulations
1996. The Custodian is appointed by the trustees. A custodial agreement is entered into between
the trustees and the custodian.
The SEBI regulations provide that if the sponsor or its associates control 50 percent or more of the
shares of a custodian, or if 50 percent or more of the directors of a custodian represent the interest
of the sponsor or its associates, then, unless certain specific conditions are fulfilled, that custodian
cannot be appointed for the mutual fund operation of the sponsor or its associate or subsidiary
company.
An independent custodian ensures that the securities are indeed held in the scheme for the benefit
of investors – an important control aspect.
The AMC is responsible for conducting the activities of the mutual fund. It therefore arranges for
the requisite offices and infrastructure, engages employees, provides for the requisite software,
handles advertising and sales promotion, and interacts with regulators and various service
providers.
The AMC has to take all reasonable steps and exercise due diligence to ensure that the investment
of funds pertaining to any scheme is not contrary to the provisions of the SEBI regulations and the
trust deed. Further, it has to exercise due diligence and care in all its investment decisions.
The appointment of an AMC can be terminated by a majority of the trustees, or by 75 percent of
the Unit-holders. However, any change in the AMC is subject to prior approval of SEBI and the
Unit-holders.
Operations of AMCs are headed by a Managing Director, Executive Director or Chief Executive
Officer. Some of the other officers in AMC’s are as follows:
Chief Investment Officer (CIO) is responsible for overall investments of the fund. Fund
managers assist the CIO. As per SEBI regulations, every scheme requires a fund manager, though
the same fund manager may manage multiple schemes.
Securities Analysts support the fund managers through their research inputs. As will be
discussed later, these analysts come from two streams—Fundamental Analysis and Technical
Analysis. Some mutual funds also have an economist to analyse the economy.
Securities Dealers help in putting the transactions through the market. The mutual fund
schemes’ sale and purchase of investments are executed by the dealers in the secondary market.
Chief Marketing Officer (CMO) is responsible for mobilizing money under the various schemes.
Direct Sales Team (who generally focus on large investors), Channel Managers (who manage the
distributors) and Advertising & Sales Promotion Team support the CMO.
Chief Operations Officer (COO) is tasked with the day-to-day administration and operations of
the AMC. Typically, the COO reports directly to the CEO and is considered second in command.

Compliance Officer needs to ensure all the legal compliances. In the offer documents of new
issues, the Compliance Officer signs a due-diligence certificate to the effect that all regulations
have been complied with, and that all the intermediaries mentioned in the offer document have the
requisite statutory registrations and approvals. In order to ensure independence, the Compliance
Officer reports directly to the head of the AMC. Further, he works closely with the Trustees on
various compliance and regulatory issues.
AMCs are required to invest seed capital of 1 percent of the amount raised subject to a maximum
of Rs.50 lakh in all the growth option of the mutual fund schemes (excluding close-ended
schemes) through the lifetime of the scheme

The custodian also tracks corporate actions such as dividends, bonus and rights in companies
where the fund has invested.
2.3.2 Registrars and Transfer Agents (RTA)
The Registrars and Transfer Agents (RTA) maintain investor records. Their offices in various
centers serve as Investor Service Centers (ISCs), which perform a useful role in handling the
documentation of investors. The functions of the RTA includes processing of purchase and
redemption transactions of the investor and dealing with the financial transactions of receiving
funds for purchases and making payments for redemptions, updating the unit capital of the scheme
to reflect these transactions, updating the information in the individual records of the investor,
called folios, keeping the investor updated about the status of their investment account and
information related to the investment.
The appointment of RTA is done by the AMC. It is not compulsory to appoint a RTA. The AMC
can choose to handle this activity in-house. All RTAs need to register with SEBI.
2.3.3 Auditors
Auditors are responsible for the audit of accounts.
Accounts of the mutual fund schemes need to be maintained independent of the accounts of the
AMC.
The auditor appointed to audit the mutual fund scheme accounts needs to be different from the
auditor of the AMC. 41 While the scheme auditor is appointed by the Trustees, the AMC auditor is
appointed by the AMC.
2.3.4 Fund Accountants
The fund accountant performs the role of calculating the NAV, by collecting information about the assets
and liabilities of each scheme. The AMC can either handle this activity in-house, or engage a service
provider. There is no need for a registration with SEBI to perform this function.
2.3.5 Distributors
Distributors have a key role in selling suitable types of units to their clients i.e. the investors in the
schemes of mutual funds with whom they are empanelled. A distributor can be empanelled with more
than one mutual fund. Distributors can be individuals or institutions such as distribution companies,
broking companies and banks.
Distributors need to pass the prescribed certification test (NISM-Series- V-A: Mutual Fund Distributors
(MFD) Certification Examination), and register with AMFI. Regulatory aspects of their role and, some of
the distribution and channel management practices are covered later.
2.3.6 Collecting Bankers
The investors’ money go into the bank account of the scheme they have invested in. These bank accounts
are maintained with collection bankers who are appointed by the AMC.
Leading collection bankers make it convenient to invest in the schemes by accepting applications of
investors in most of their branches. Payment instruments against applications handed over to branches of
the AMC or the RTA need to be banked with the collecting bankers, so that the money is available for
investment by the scheme. Thus, the banks enable collection and payment of funds for the schemes.
Through this kind of a mix of constituents and specialized service providers, most mutual funds maintain
high standards of service and safety for investors.
2.3.7 KYC Registration Agencies (KRA)
To do away with multiple KYC formalities with various intermediaries, SEBI has mandated a unified KYC for
the securities market through KYC Registration Agencies (KRA) registered with SEBI. Any new investor,
Joint holders, Power of Attorney holders, Donors and Guardian (in case of minors) have to comply with
the KYC formalities. In-Person Verification (IPV) by a SEBI-registered intermediary is compulsory for all
investors. However, the investor needs to get IPV done by only one SEBI-registered intermediary (broker,
depository, mutual fund distributor etc.). This IPV will be valid for transactions with other SEBI-registered
intermediaries too.
Distributors who have a valid NISM-Series-V-A: Mutual Fund Distributors certificate and a valid AMFI
Registration Number (ARN) can carry out the In-person verification if they have completed the Know Your
Distributor (KYD) process. 42
2.3.8 Central KYC (cKYC)
KYC refers to Central KYC (Know Your Customer), an initiative of the Government of India. The aim of this
initiative is to have a structure in place which allows investors to complete their KYC only once before
interacting with various entities across the financial sector. cKYC is managed by CERSAI (Central Registry of
Securitization Asset Reconstruction and Security Interest of India), which is authorized by the Government
of India to function as the Central KYC Registry (cKYCR). The objective of cKYCR is to reduce the burden of
producing KYC documents and getting those verified every time when the investor deals with a financial
entity for the first time. Thus, cKYCR will act as centralized repository of KYC records of investors in the
financial sector with uniform KYC norms and inter-usability of the KYC records across the sector.
Besides the information asked in KYC from the client, cKYC requires certain additional information from
the client like investor’s maiden name, mother’s name, FATCA information etc. The intent behind this is to
know and understand the new people entering the markets in a much better manner and to curb the
money laundering problem at the root itself.
To get cKYC done, one may approach a financial intermediary regulated by RBI, SEBI, IRDAI or PFRDA like a
bank, a NBFC, a stock broker, AMC, a distributor or an Insurance company. After filling the cKYC form,
copies of required documents have to be attached. The form and documents are then checked for
completeness and correctness by the intermediary by performing an in-person verification (IPV). After the
successful completion of this process, an investor is allotted a 14 digit KYC Identification Number (KIN).
Thereafter the investor is said to be KYC Compliant. The KIN is allotted to an eligible application within 4-5
working days by CERSAI.
2.3.9 Payment Aggregators
Payment Aggregators such as Tech Process, Bill Desk etc. are service providers that facilitate payment
processing in the online market place. Payment aggregators enable the users to make the payments
online through their existing bank account in a secured and a convenient manner.
Aggregators allow mutual fund houses to accept credit card and bank transfers without having to setup a
merchant account with the banks. The aggregator provides the means for facilitating payment from the
consumer via credit cards or bank transfer to the mutual fund. The mutual fund is paid by the aggregator.

Due Diligence Process by AMCs for Distributors of Mutual Funds

SEBI has mandated AMCs to put in place a due diligence process to regulate distributors who qualify any
one of the following criteria:
a. Multiple point presence (More than 20 locations)
b. AUM raised over Rs. 100 crore across industry in the non-institutional category but including high
networth individuals (HNIs)
c. Commission received of over Rs. 1 Crore p.a. across industry
d. Commission received of over Rs. 50 Lakhs from a single mutual fund

At the time of empanelling distributors and during the period i.e. review process, mutual funds/AMCs have
to undertake a due diligence process to satisfy ‘fit and proper’ criteria that incorporate, amongst others, the
following factors:
a. Business model, experience and proficiency in the business.
b. Record of regulatory/statutory levies, fines and penalties, legal suits, customer compensations made;
causes for these and resultant corrective actions taken.
c. Review of associates and subsidiaries on above factors.
d. Organizational controls to ensure that the following processes are delinked from sales and relationship
management processes and personnel:
i.) Customer risk / investment objective evaluation.
ii.) MF scheme evaluation and defining its appropriateness to various customer risk categories.

In this respect, customer relationship and transactions shall be categorized as:

a. Advisory – where a distributor represents to offer advice while distributing the product, it will be subject
to the principle of ‘appropriateness’ of products to that customer category. Appropriateness is defined as
selling only that product categorization that is identified as best suited for investors within a defined upper
ceiling of risk appetite. No exception shall be made.
b. Execution Only – in case of transactions that are not booked as ‘advisory’, it shall still require:
i. If the distributor has information to believe that the transaction is not appropriate for the customer, a
written communication be made to the investor regarding the unsuitability of the product. The
communication shall have to be duly acknowledged and accepted by investor.
ii. A customer confirmation to the effect that the transaction is ‘execution only’ notwithstanding the
advice of inappropriateness from that distributor be obtained prior to the execution of the transaction.
iii. That on all such ‘execution only’ transactions, the customer is not required to pay the distributor
anything other than the standard flat transaction charges.
c. There shall be no third categorization of customer relationship / transaction.
d. While selling mutual fund products of the distributors’ group/affiliate/associates, the distributor shall
make disclosure to the customer regarding the conflict of interest arising from the distributor selling such
products.

Compliance and risk management functions of the distributor shall include review of defined management
processes for:
a. The criteria to be used in review of products and the periodicity of such review.
b. The factors to be included in determining the risk appetite of the customer and the investment
categorization and periodicity of such review.

Other kind of due diligence performed are:

i. Review of transactions, exceptions identification, escalation and resolution process by internal audit.
ii. Recruitment, training, certification and performance review of all personnel engaged in this business.
iii. Customer on-boarding and relationship management process, servicing standards, enquiry / grievance
handling mechanism.
iv. Internal / external audit processes, their comments / observations as it relates to MF distribution
business.
v. Findings of ongoing review from sample survey of investors.

Mutual funds/AMCs may implement additional measures as deemed appropriate to help achieve greater
investor protection.