FinTechRegulations of Digital Investment Platforms In India – Mutual Fund

January 14, 20220

INTRODUCTION

In this article we attempt to provide an insight on the concept of Mutual Fund, How it works, it’s kinds, how the Digital Investment Platforms are helping investment sector grow exponentially in India and the regulatory framework governing such platform in the context of Mutual Fund.

THE CONCEPT

The “Mutual Fund” as the name suggests is a financial vehicle, in which several investors come together and create a pool of funds, which is further invested by the fund managers into stocks, bonds, money market instruments or any other assets and thereafter, the return earned from this investment is distributed amongst the investors as “Return on Investment”.

This innovative financial vehicle i.e., Mutual Fund, since its inception has contributed enormously towards the awareness and growth of investment sector in India. Since, it gave access to the individual investors to diversify their investment into multiple instruments, which they would not be able to do on their own at such a low price.

The market size of the Mutual Funds in India has witnessed exponential growth over the last few years, with the rise of Digital Investment Platform in India, as these Digital Investment Platform allows the investors to analyze, access and invest is a single click.

Investing in a mutual fund is not the same as investing in individual shares. Instead of a single holding, a mutual fund share represents investments in various stocks (or other securities). Unlike stock, mutual fund shares do not provide voting rights to the holders.

The well-publicized ‘Mutual Funds Sahi Hai’ campaign has educated many budding investors about Mutual Funds. However, while the campaign has succeeded in raising awareness, it is necessary to learn the basics of mutual fund before venturing into the world of Mutual Funds in India.

HOW DOES MUTUAL FUND WORK?

TYPES OF MUTUAL FUND

THE FRAMEWORK

a. Apply for Registration

The Mutual Fund in India is setup by a sponsor in the form of a trust, which includes trustees, Asset Management Companies and Custodians.

In order to setup a Mutual Fund in India, the Sponsor is required to comply with Securities and Exchange Board of India (Mutual Fund Regulation), 1996 (“SEBI Mutual Fund Regulation”) and submit an application under Form A, Schedule I of SEBI Mutual Fund Regulation along with the Application fee of INR Five Lakh as required under Regulation 3 of SEBI Mutual Fund Regulation. Provided, the Sponsor is eligible under Regulation 7 of the SEBI Mutual Fund Regulation.

Eligibility Criteria

  • The sponsor shall have a sound track record & reputation of fairness & integrity in his past experiences & business transactions;
  • The Sponsor shall have at least 5 years of experience of carrying on the businesses of providing financial services and the net worth in all those years shall be positive;
  • The sponsor has to contribute 40% or more to the net worth of the Asset Management Company.
  • The sponsor or any of its directors or the principle officer to be employed by the mutual fund should not have been guilty of fraud or has not been convicted of an offence involving moral turpitude or has not been found guilty of any economic offence;
  • The sponsor shall appoint a mutual fund trustee;
  • If the sponsor company is registered with RBI as a Banking Company or Non-Banking Company, the details of the same shall also be annexed;
  • A trust deed shall be executed along with setting up the board of trustees comprising two/third of independent directors;
  • If the sponsor company is registered with RBI as a Banking Company or Non-Banking Company, the details of the same shall also be annexed.

b. Setup an Asset Management Company and Trust 

The Sponsor as per Regulation 14 while applying for registration of a Mutual Fund is required to register the Mutual Fund as a Trust as per the Indian Trust Act, 1882 and register the instrument of trust deed under the Indian Registration Act, 1908 along with setting up the board of trustees comprising two/third of independent directors to act as trustees of the Mutual Fund.

Thereafter, the sponsor or the board of trustees as per Regulation 19 or 20 of the SEBI Mutual Fund Regulation, shall setup an Asset Management Company (“AMC”) to manage the mutual fund and operate the scheme of such fund in India.

c. Submit Auditor Certificate, Trust Deed and Investment Management Agreement to SEBI

Once the Trustee company and AMC is established, the Sponsor is required to submit the following documents along with the application –

i. Auditor’s certificate certified by chartered accountant stating –

      • Sponsor has contributed 40% of the Net Worth of AMC in the Mutual Fund.
      • AMC has a net worth of not less than INR 10 Crore.

ii. Trust Deed and the Investment Management Agreement entered between Sponsor and the AMC.

d. Furnish complete details of the infrastructure of the Mutual Fund going to be established.

e. Appoint the custodian to carry out the custodial activities for the scheme of the Mutual Fund as required under Regulation 26 of the SEBI Mutual Fund Regulations.

f. Once all the documents are furnished along with the Application, the SEBI upon undertaking thorough Due Diligence will grant certificate of Registration under Form B of the SEBI Mutual Fund Regulation.

g. Once the Mutual Fund is setup, it is required to pay an annual fee to the SEBI as given below –

DIGITAL INVESTMENT PLATFORMS AND MUTUAL FUNDS – A LINKAGE

The primary goal of the Digital Investment Platform is to provide access to the investors to invest, manage, and track investment made in the mutual fund in an easier, secured, speedier, and efficient manner.

In order to provide these services to the investors, these Digital Investment Platforms are required to be registered as an intermediary with the SEBI with the Securities and Exchange Board of India (Intermediaries Regulation), 2008 ( “Intermediary Regulation”) and allow the Mutual Fund companies with the help of their AMC’s to list their Mutual Fund schemes on these platforms for their investors.

Further, to operate as a mutual fund broker or distributor, one must be accredited by the Association of Mutual Funds in India (“AMFI”) and have a unique identification number known as the ARN (“AMFI Registered Number”) as per the code of conduct of the AMFI.

PREQUISITES FOR ONBOARDING INVESTORS ON DIGITAL INVESTMENT PLATFORMS

The Digital Investment Platforms as discussed earlier requires their investors to register themselves on the platform and undergo Know Your Customer (“KYC”) to establish a secured framework, to ensure that such individuals are eligible to invest and to avoid any fraudulent activities.

As discussed earlier KYC serves as an efficient mechanism, which allows businesses to instantly verify and validate a customer’s identity. The use of KYC for companies providing financial services i.e. FinTech is crucial.

Therefore, the Digital Investment Platforms established with the agenda of providing services to the investor to invest in Mutual Funds while onboarding its customers are required to undertake KYC to verify proof of Address and proof of Identity of such customers to ensure such person is genuine and have valid credentials to avoid any illegal or fraudulent activity.

AMLEGALS REMARKS

The Mutual Fund in simple terms is pool of funds created by the investors to be invested by the fund manager in a profitable financial instrument.

Mutual Funds in India serve as one of the safest option as they hold the characteristic of being less volatile and they are not required to be handled on daily basis as they are handled by the fund manager registered with SEBI.

The introduction of Digital Investment Platforms allowing investors to access Mutual Fund scheme in an instant and secured manner is with the Mutual Funds is serving as the testimony of the exponential growth that has been witnessed by the investment sector over the past few years.

Team AMLEGALS assisted by Mr. Hraday Jaiswal


For any queries or feedback, feel free to get in touch with arushi.vyas@amlegals.com or tanmay.banthia@amlegals.com.

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