Why in the news?

• The Securities & Exchange Board of India (SEBI) has recently approved amendments to SEBI (Mutual Funds) Regulations, 1996, aimed at enhancing the regulatory framework for Asset Management Companies (AMCs).
  • These amendments mandate AMCs to establish institutional mechanisms to deter potential market abuse, including front-running, following recent instances observed by the market regulator.

What are Mutual Funds?

• A mutual fund is a pool of money managed by a professional Fund Manager.
• It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.
• And the income / gains generated from this collective investment is distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV.
• SEBI regulates mutual funds through the SEBI (Mutual Funds) Regulations, 1996.

Categories of Mutual Funds:

1. An actively managed fund is a mutual fund scheme in which the fund manager “actively” manages the portfolio and continuously monitors the fund’s portfolio, deciding on which stocks to buy/sell/hold and when, using his/her professional judgement, backed by analytical research.
2. A passively managed fund, by contrast, simply follows a market index, i.e., in a passive fund , the fund manager remains inactive or passive inasmuch as, he/she does not use his/her judgement or discretion to decide as to which stocks to buy/sell/hold , but simply replicates / tracks the scheme’s benchmark index in exactly the same proportion.

Fund Structure

• Mutual funds in India operate under a three-tier structure, comprising the

1. Asset Management Company (AMC),
2. Trustees, and
3. Custodians.

• The AMC manages the fund’s investments, the Trustees oversee the operations, and the Custodians safeguard the fund’s assets.

Key highlights of the recent update:

• Institutional Mechanism: AMCs are required to implement enhanced surveillance systems, internal controls, and escalation processes to identify and address specific types of misconduct, such as front-running, insider trading, and misuse of sensitive information.
• Whistleblower Mechanism: To foster transparency, AMCs are mandated to have a whistleblower mechanism.
• Recording of Communication: SEBI has exempted face-to-face interactions during market hours from the requirement of recording all communication by dealers and fund managers. This exemption will be effective upon the implementation of the institutional mechanism by AMCs.
• Prudential Norms for Passive Schemes: SEBI has streamlined prudential norms for passive schemes, allowing equity passive schemes to invest up to the weightage of constituents in the underlying index, subject to a 35% cap on investment in sponsor group companies.

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