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Streamlining the Mutual Funds industry

Published: 01 Feb 2018

The Securities Exchange Board of India (SEBI) announced a garden-fresh ruling in relation to mutual funds placing a 10 percent cross-shareholding cap in mutual funds with the object of sidestepping potential conflict of interest in the management of mutual funds by asset management companies.

A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people and invests their money in stocks, bonds and other securities.

The following are the key policy changes in relation to mutual funds:

·       Promoters of the UTI Asset Management Company (AMC) are required to reduce their shareholding pattern by 10% in the next one year.

·       Any shareholder owning 10% of shareholding in any AMC will be prohibited from retaining 10% or more stake in another mutual fund house operating in the country.

·       No sponsor of a mutual fund, its associates, group-company and its AMC will be authorized to hold 10% or more stake in a rival AMC.

·       Mutual fund distributors are inculcated to craft the undertakings of 'advising' of investment products and 'selling' of investment products separately to defy the conflict of interest amid the advising activity and selling activity of investment products.

·       Mutual fund distributors are permitted to explain the features of the product to client despite the distribution of the investment product.

·       Existing registered investment advisers (offering distribution services through a separate division) will be provided with an option to decide on amid providing investment advice and distribution service by March 31, 2019.

·       It is mandated that with effect from April 1, 2019, any person (including their immediate relatives or holding or subsidiary or associate entity) will be eligible to offer either investment advice or distribution services.

These rules are formulated with the intent to sustenance with the provisions of Unit Trust of India Act (Act) and not in conflict with the said Act and further to streamline the governance structure of mutual funds.

It is hoped that with the serious implementation of latest mutual funds rules will result in evading the conflict of interest in certain mutual funds undertakings and enhance accountability and transparency in governance structure of mutual funds.

Research and inputs by Paruchuri Baswanth Mohan


About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.com.

Firm: Addleshaw Goddard

Practice Area: Trade & Customs

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