Legal Structure of Mutual Funds in India: Comprehensive Study Guide (Part Two)

This section continues the exploration of the legal framework of mutual funds in India, focusing on the operational and service-oriented entities that ensure the fund's day-to-day functionality and regulatory compliance.

The Asset Management Company (AMC): The Operational Core

The Asset Management Company (AMC) is the entity responsible for the actual management and operation of the mutual fund.

• Appointment and Governance: The AMC is appointed by the sponsor or the trustees (if authorized by the trust deed) and must receive approval from SEBI.
• Net Worth Requirement: To ensure financial stability and commitment, the AMC is required to maintain a minimum net worth of Rs. 50 crore.
• Operational Role: The AMC manages all functional aspects, including establishing infrastructure, hiring personnel, providing software, advertising, and interacting with regulators and service providers.

Internal Organization of an AMC

The AMC is structured into several specialized departments to handle the complexities of fund management:

The Custodian: Safeguarding Assets

The Custodian plays a vital role in ensuring that the fund's assets are physically and legally secure.

• Custody of Assets: They hold the actual securities (equities, bonds, etc.) of the various schemes in the fund.
• Transaction Settlement: The custodian settles all purchase and sale transactions by accepting or giving delivery of securities on behalf of the schemes.
• Corporate Actions: They are responsible for tracking and collecting benefits like dividends, bonuses, and rights issues from the companies in which the fund has invested.

Essential External Service Providers

Mutual funds rely on a network of external intermediaries to ensure transparency and efficiency.

1. Registrar and Transfer Agents (RTA)

RTAs maintain the master records of all investors. Their offices often serve as Investor Service Centers (ISCs), handling documentation, processing redemptions, and generating account statements.

2. Auditors

To maintain independence and transparency, the auditor appointed to audit the mutual fund schemes must be different from the auditor auditing the AMC itself.

3. Valuation and Credit Rating Agencies

• Valuation Agencies: AMCs use matrices from agencies like CRISIL and ICRA to arrive at the fair value of non-traded or thinly traded debt securities.
• Credit Rating Agencies: They provide ratings for debt securities, which are critical inputs for fund managers when making investment decisions.

4. Market Infrastructure Entities

• Depositories & DPs: Institutions that hold securities in dematerialised (electronic) form.
• Stock Exchanges: Provide platforms for transacting in fund units; units of close-ended funds and ETFs must be listed here.
• KYC Registration Agencies (KRA): Maintain centralized records to ensure investors are compliant with the Prevention of Money Laundering Act.

5. Collecting Bankers and Distributors

• Collecting Bankers: Appointed by the AMC to maintain the bank accounts into which investor money is deposited.
• Distributors: Individuals or institutions (banks, broking firms) that sell suitable fund units to investors.

Key Takeaways

• AMC Independence: While the sponsor starts the fund, the AMC operates it as a distinct legal entity with a substantial net worth requirement (Rs. 50 crore).
• Separation of Duties: To protect investors, fund accounting (NAV calculation) and custody of assets are handled by different units or entities.
• Regulatory Check: The Compliance Officer is personally responsible for signing due-diligence certificates for new issues.

Important Terms

• Net Asset Value (NAV): The daily value of a fund unit calculated by the fund accounting team.
• Due-Diligence Certificate: A legal confirmation that all regulations were followed during a scheme's launch.
• Registrar and Transfer Agent (RTA): The entity that manages the relationship and records between the investor and the fund.