GROUP MEMBERS:NAME ROLL NO

HITESH KUKREJA 10 Hemant Chaudhari 28 TARUNA KUNDNANI 34 La een !adh"a 3#

S$NI AHUJA 3% &RI'A (AN!ANI 38 NA)IN JETH!ANI 43 CHUNK' LULLA *8

INTRODUCTION
1.1 SEBIs Background
Capital market was growing at a very fast pace in India particularly after liberalization in Industrial Policy in 1991. Controller of Capital Issues (CCI) was looking after new issues. epartment of company affairs was also looking after some aspects. !owever" need was felt to #ave a single aut#ority to regulate and administer t#e securities law. $it# t#is in mind" %&'I (%ecurities and &(c#ange 'oard of India)" w#ic# was earlier establis#ed as an administrative body in )pril 19**" was given a statutory status under section + of %ecurities are &(c#ange 'oard of India )ct" 199, on +-t# .anuary 199,. Controller of Capital Issue (CCI) was abolis#ed wit# a view to #ave %&'I as a single agency to look after over capital market.

1.2 Mutual Funds

/utual funds are financial intermediaries w#ic# collect t#e savings of investors and invest t#em in a large and well diversified portfolio of securities. 0#e ma1or advantages for t#e investors are reduction in risk" e(pert professional management" diversified portfolio and ta( benefit. 'y pooling of t#eir assets t#roug# /utual 2unds" Investors ac#ieve economies of scale. /utual 2unds are to be establis#ed in t#e form of 0rust under Indian 0rust )ct" and are to be operated by )sset /anagement Company ()/C). /utual 2unds dealing e(clusively wit# /oney /arket Instruments are to be regulated by 3'I. /utual 2unds dealing primarily wit# capital market and also partly in /oney /arket Instruments are to be regulated by %&'I. )ll sc#emes floated by /utual 2unds are to be registered wit# %&'I.

1.3 SEBI R gulat!on on Mutual Funds"

%ecurities 4 &(c#ange 'oard of India #ad issued a set of regulations and code of conduct as %&'I (/utual 2und) 3egulations" 1995 on 9 t# ecember 1995 for t#e

smoot# conduct and regulation of mutual funds. 3ecently" %&'I #as issued updated regulations as %&'I (/utual fund) 3egulations ,-11 on -6 .an ,-1, covering all amendments up to ec ,-11. 0#ese guidelines lay down certain criteria for investment" disclosure" accountability and distribution of profits to its members. 0#e salient features of t#ese regulations include various aspects relating to 3egistration of /utual 2und" Constitution and management of mutual fund 4 rig#ts and obligations of trustees" Constitution and management of )sset /anagement Company and custodian" 3estrictions on business activities of )/C and its obligations" %c#emes of mutual fund" Investment ob1ectives and valuation policies" )dvertisement code" Code of conduct" 3estrictions on investments" Investment valuation norms" )ccounts and 7ffer documents.

,.

#ITER$TURE RE%IE&

0#ere are some Indian studies w#ic# viewed 80I as a developmental financial institution and critically e(amined t#e role of 80I in providing industrial finance but not attempted to evaluate t#e performance of 80I %c#emes in terms of returns and risk. !ence" t#ese studies cannot be considered as researc# work on t#e Indian /utual 2unds. %ince 19*5" a number of articles and brief essays #ave been publis#ed in financial dailies" periodicals" and a few in t#e professional and researc# 1ournals. 0#e available literature can be divided into t#ree categories9 '!( Informative and descriptive" '!!( regulatory issues" '!!!( /anagerial aspects and Performance evaluation. ) brief review of t#e literature is presented #ere: ) number of academics" professionals" and 1ournalists #ave written articles e(plaining t#e basic concept of mutual funds" t#eir c#aracteristics and reviewed t#e trends in t#e growt# of mutual funds. 0#ey also emp#asised t#e importance of mutual funds in t#e development of t#e capital market in India. ) few under t#is category are: Sud ) *+os+" Madan *o)al, %!d-as+ank r, Batra, Sun!l *arod!a, Sarkar, $gra.al, and Sad+ak, % r/as book on mutual funds covers t#e conceptual and regulatory aspects to t#e Indian /utual 2und wit# some

informational data and guidelines to t#e investors in selection of mutual funds. *u)ta made a !ouse#old investor %urvey in )pril 199,. 0#e main ob1ective of t#e survey is to provide data on t#e investor preferences on mutual funds and ot#er financial assets. 0#e findings are more appropriate to t#e policy makers w#o design t#e financial products (2und %c#emes) S /a %a!ds study covers conceptual and t#e regulatory framework" review of t#e growt# of mutual funds" and primary information about mutual fund sc#emes. 0ulas+r s+ta offers certain guidelines to t#e investors in selecting t#e mutual fund sc#emes. i) ) few articles #ig#lig#ted t#e importance and issues for t#e regulation of mutual funds. )mong t#em t#e notable are: Barua" Nara-an B+att" B+anu" and B+att. 2inally" in 1995" %&'I framed regulations for mutual funds. !!!( ) few articles touc#ed upon certain aspect of portfolio management and ot#er issues involved in t#e management of mutual funds. 0#e notable among t#em are S ngu)ta" #al and S+ar/a" and Sa+a and Murt+-. Barua and ot#er (1991)" made a pioneering attempt to evaluate t#e performance of ;Master Share sc#eme of 80I from t#e investor point of view. S+arad S+ukla (1991) evaluated t#e S+ar) " 1 ns n" Tr -nor ratios for t#e period .anuary19** to .une 1991. $2a- S+a+ and Susan T+o/as studied t#e performance evaluation of 11 mutual fund sc#emes" on t#e basis of market price data. 1a!d ) and Sud!) Ma2u/dar (199<) evaluated t#e performance of five growt#=oriented sc#emes for t#e period of 2ebruary 1991 to )ugust 199+. 0aura and 1a-ad 3 (199>) evaluated t#e performance of five growt# oriented sc#emes in t#e year 199+=9<. #at r on, a nu/4 r o5 stud! s . r und rtak n 4ut /ost o5 t+ stud! s ar r lat d t+ ) r5or/anc o5 t+ sc+ / s.

On t+ 4as!s o5 r 3! . o5 a3a!la4l l!t ratur !t can 4 conclud d t+at t+ .ork on t+ rol o5 SEBI !n r gulat!ng /utual 5und +as not 4 n don - t. T+ r 5or , !n t+!s r s arc+ )ro2 ct . .!ll tr- to go !n d ) .+ t+ r SEBI !s r gulat!ng /utual 5unds !n )ro) r .a- or not.

+.

SI*NIFIC$NCE 6 OB1ECTI%ES OF T7E STUD8

0oday t#ere are around <- mutual funds and over +-- sc#emes wit# total assets of around 3s. 5.5< lacs crores. 0#is fast grown industry is regulated by t#e %ecurities and &(c#ange 'oard of India (%&'I). 0oday t#e investor is being offered service standard (daily ?)@" reduced transaction time" on t#e Auery answering etc.) comparable to t#at of western countries. )nd #as a c#oice of a diverse range of products" wit# Internet being widely used" mutual funds minimise t#e costs and improve turnaround time in transactions in future. %ince t#e mutual funds involve a #uge amount of investors" t#erefore" it #as been tried and analysed w#et#er %&'I regulatory role is up to t#e mark or #ave some s#ortcomings. 0o appraise different rules and regulation laid down in India to regulate t#e /utual 2unds. 0o analyze t#e working of %&'I in regulating /utual 2und /arkets. 0o e(amine t#e effectiveness of %&'IBs functioning in t#is regard and to suggest suitable measures for t#e effective regulation of /utual 2unds. 0o study t#e difficulties e(perienced by t#e /utual 2unds. 0o study t#e role 4 effectiveness of %&'I in protection of Investors in /utual 2unds.

<.

789OT7ESIS

In t#is researc# t#e following #ypot#esis #ave been tested9 1. There is no significant effect of SEBI regulations in facilitating the Mutual Funds to channelising the savings of Investors. ,. Most of the Investors are not aware about the SEBI (Mutual Fund) regulations. There is no significant effect of these regulations in protection of Investors interest. +. There is no significant effect of these regulations in regulating Mutual funds.

<. There is no significant effect of these regulations on fund of a sche e).

anagers to

innovate and i ple ent the invest ent strategies to opti i!e the returns ("#$

>. RESE$RC7 MET7ODO#O*8 0#e study is based on primary and secondary data. 0#e main sources of secondary data are various 1ournals" periodicals" ?ews Papers" ?ewsletters of /2 Companies and %&'IBs documents" /utual 2und Companies report etc. 0#e relevant data pertaining to /utual 2unds #ave been obtained from t#e investors" intermediaries and professionals associated wit# /utual 2und market and +- leading /utual 2unds operating companies suc# as ICICI /utual fund" ! 2C /utual fund" Can 'ank /utual 2und" %'I /utual 2und" 0ata /utual 2unds" 'irla /utual 2unds etc. ) sample survey tec#niAue is adopted to elicit t#e opinions of various respondents. 7ut of <-- approac#ed individuals" ,95 responded to our inAuiries made. 2or reac#ing on t#e conclusion various relevant

statistical tools like average" ratio" percentage" z test" t=testCetc are used. Period under t#is study #ave taken from t#e year ,--- and onwards. ) suitable Auestionnaire is prepared for collecting primary data from professionals and investors. 0#e areas covered for sampling are el#i" ?oida" D#aziabad" 2aridabad" and Durgaon" five leading cities of t#ree states of India.

5.

SEBIS RO#E TO RE*U#$TE MUTU$# FUNDS

0#e role of %&'I can be understood from t#e following points:

:.1 S cur!t! s Mark t $.ar n ss Ca/)a!gn

%&'I believes t#at ;$n Educat d In3 stor !s a 9rot ct d In3 stor. ) compre#ensive %ecurities /arket )wareness Campaign was launc#ed on .anuary 16" ,--+. 0#e campaign includes works#ops" audio=visual clippings" distribution of educative materials in &nglis#" !indi and local languages" a dedicated investor website wit# inventory of bookletsEpamp#letsE2)FBs and periodic advertisements in )ll India 3adio ()I3) and print media. 0ill /arB1," +,16 works#ops were conducted covering around <9+ citiesEtowns in India.

:.2 R cogn!t!on to In3 stor $ssoc!at!ons"

%&'I recognises investor associations" e(tends financial support for conducting investor education programmes" and also addresses various issues raised by t#em to protect t#e interest of t#e investors. %&'I #as so far recognised 1- InvestorsB )ssociations.

:.3 9ort5ol!o D!sclosur

0ransparency is essential for corporate governance and portfolio disclosure is an important means of keeping t#e investors informed about t#e way t#eir moneys are being used to create financial assets. 0#erefore" %&'I #as made it mandatory for mutual funds to disclose t#e entire portfolio of any sc#eme.

:.< Trans)ar nc- !n In3 st/ nt D c!s!ons

%&'I #as taken a far=reac#ing step towards ensuring due diligence and transparency in all investment decisions by advising all mutual funds ;to maintain records in support of eac# investment decision w#ic# will indicate t#e date" facts and opinion leading to t#at decisionB.

:.= Scr n!ng o5 /utual 5unds at t+

ntr- l 3 l"

&very mutual fund s#all be registered wit# %&'I and t#e registration is granted on t#e fulfillment of certain conditions laid down in t#e regulations for ;efficient and orderly conduct of t#e affairs of a mutual fundB.

:.: SEBI +as outl!n d t+ ad3 rt!s / nt cod too"

)ll mutual funds are bound to publis# a sc#eme=wise annual report or an abridged summary t#roug# an advertisement wit#in si( mont#s of t#e closure of t#e financial year. 0#e trustees of a mutual fund are bound to convey to t#e investors any information t#at #as an adverse impact. ) mutual fund is also to publis# #alf= yearly unaudited financial results t#roug# an advertisement.

:.> 9r scr!4 d Nor/s 5or In3 st/ nt

%&'I #as prescribed norms for investment management wit# a view to minimisingEreducing undue investment risks. 0#ere are also certain restrictions" w#ic# are aimed at ensuring transparency and pro#ibiting mutual funds from e(cessive risk e(posure. 0#ese restrictions and limitations #ave strong similarities wit# t#ose imposed in t#e 8% and t#e 8G.

:.? Ins) ct!on 6 9 nalt! s

%&'I inspects t#e books of accounts" records and documents of a mutual fund" t#e trustees" )/C and custodian. %&'I also imposes a monetary penalty in case of violations of regulations specified. 0#e regulatory framework indicates t#at %&'I

is a #ig#ly powerful regulator. 0#ere is strong emp#asis on e(=post investigation and disciplining of mutual funds t#roug# financial penalties.

:.@ )s financial 1ournalists play a critical role for investorsB education" %&'I decided to conduct a one=day works#op on capital market for t#e financial 1ournalists at different centers.

6.

$N$#8SIS 6 FINDIN*S

7n t#e basis of t#e data collected and analysed" t#e followings are t#e findings of t#e study:

>.1 $.ar n ss o5 SEBI r gulat!ons 6 !ts rol to c+ann l!s t+ sa3!ngs

7ut of t#e investors responded" only +*H of t#e investors are aware about t#e %&'I regulations w#ile 9*.<H of t#e professionals associated wit# /2 Industry are aware about t#e updated regulations and appreciate t#e regulations in building t#e investorsB confidence to invest in /utual 2unds. Investors do not acknowledge t#e role of %&'I regulations.

Ta4l A1" Awareness about SEBI regulations and its role R s)ond nts Professionals associated 8s 9No -, 1, Investors (/2 unit #olders) 66 6 Total 9 , , <

>.1.1 Null 7-)ot+ s!s

There is no significant effect of SEBI regulations in channelising the savings of Investors to Mutual fund. 0#e results of t#e test s#ow t#at at > H level of significance" null #ypot#esis is re1ected. (8sing z test) There is a significant role of SEBI regulations in channelising the savings of Investors to Mutual fund. #lthough% there is a significant difference between investors and associated professionals view about the role of SEBI. (&sing t test)

>.1.2 Null 7-)ot+ s!s

Most of the Investors are not aware about the SEBI (Mutual Fund) regulations. There is no significant effect of these regulations in protection of Investors interest. 0#e results of t#e test at > H level of significance accept t#e null #ypot#esis.

(8sing z test) 'arge nu bers of investors are not aware about these regulations. #lthough% there is a significant difference between investors and associated professionals view about the role of SEBI in protecting the investors interest. (&sing t test) (rofessionals do ad ire the role of SEBI while Investors do not give an) credit to SEBI.

>.2 E55 ct o5 SEBI r gulat!on on In3 st/ nt d c!s!onA/ak!ng 4Fund Manag rs"
0#e respondents associated wit# /utual 2und Industry reveals t#at %&'I regulations do affect t#e decision making process by fund /anagers. 0#ey #ave to consider first t#ese regulations beforetaking any decision regarding investment. 0#ese often demotivate t#e fund managers to innovate t#e investment strategies t#at may optimize t#e unit #olderBs wealt#. /ost of fund managers are reluctant to innovate new strategies on account of strict investment norms specified by %&'I.

>.2.1 Null 7-)ot+ s!s

There is no significant effect of the regulations on fund anagers to innovate and i ple ent the invest ent strategies to opti i!e the returns ("#$ of a sche e). 0#e results of t#e test s#ow t#at at > H level of significance" null #ypot#esis is re1ected. (8sing z test) %ignificant numbers of professionals do consider t#ese regulations first before implementing any innovative investment strategies.

>.2.2 Null 7-)ot+ s!s

There is no significant effect of the regulations on fund anagers to innovate and i ple ent the invest ent strategies to opti i!e the returns ("#$ of a sche e).

0#e results of t#e test s#ow t#at at > H level of significance" null #ypot#esis is re1ected. (8sing z test) %ignificant numbers of professionals do consider t#ese regulations first before implementing any innovative investment strategies. 6.+ E55 ct o5 SEBI r gulat!ons on t+ )art!c!)ant )la- rs. 0#e results of t#is study reflect t#at %&'I #as so far not been able to control t#e market players and t#eir activities in an effective manner. 0#e %&'I regulations often are reactive rat#er t#an proactive. 0o some e(tent" t#ese regulations are able to regulate t#e operations of /utual fund market but not able to curb t#e malpractices (fraudulent" unscrupulous" etc) effectively.

>.3.1 Null 7-)ot+ s!s

There is no significant effect of these regulations in regulating Mutual funds. 0#e results of t#e test s#ow t#at at > H level of significance" null #ypot#esis is re1ected. (8sing z test) #lthough% there is a significant difference between investors and associated professionals response about the effectiveness of SEBI regulations. (&sing t test) (rofessionals do accept the effective role of SEBI while Investors do not.

>.< Rol o5 SEBI" 9roact!3 or R act!3 B

0#e results of t#is study indicate t#at %&'I regulations often are reactive rat#er t#an proactive. 6.> SEBI In3 stor $.ar n ss Ca/)a!gn" 0#e results of t#is study indicate t#at %&'I Investor education initiatives are not known to investors. ) large proportion of Investors are not familiar wit# Investor )wareness Campaign

>.: E55 ct o5 SEBI *r! 3anc R dr ssal M c+an!s/"

0#e )nalysis of data collected indicates t#at %&'I grievance redressal mec#anism is very effective. /ore t#an *-H of complainant got t#eir grievances resolved. 0#e respondents w#o #ad never complained about t#eir grievances could not comment anyt#ing on its grievance redressal but t#ose w#o #ad approac#ed %&'I consider it to be very effective.

>.> SEBIs Funct!on!ng" $ Cr!t!cal R 3! .

%ince /arc# 1991" %&'I #as supervised all t#e /utual 2unds (e(cluding 80I) several times. %&'I #as conducted certain special investigations from time to time. 0#oug# t#e reports are confidential (according to %&'I officials) t#e financial press #as reported certain important points. 0#ey are as follows: (i) In t#e case of '7I /utual 2und it is found t#at t#e pages of t#e investment registers containing t#e details of t#e transactions in eAuity s#ares of 3eliance Industries #ad been torn off. 2urt#er" in t#e case of 2estival 'onanza Drowt# %c#eme" '7I /utual 2und #as #anded over 3s. ,-.>- Crores to stockbrokers. (ii) Can 'ank /utual 2und #as entered in transactions wit# its sponsor" Canara 'ank" to give t#e benefit of 2und resources. In one single transaction fund #as acAuired 3s. +-- Cr wort# s#ares. !ig#lig#ting t#e irregularities in securities transactions" 0#e .anaki 3aman Committee appointed by 3'I found t#at" some /utual 2und #ave misappropriated t#e funds by indulging in irregularities. 0o inAuire about irregularities in securities transactions" t#e Dovernment of India #as appointed a .oint Parliamentary Committee I.PCJ" t#e committee also probed about involvement of /utual funds in t#ese irregularities. 0#e following comments made by t#e committee are wort# noting: K0#e committee regrets to note t#at %ome /utual 2und #as violated almost all t#e guidelines and regulations of t#e /inistry of 2inance" 3'I and %&'I. In many cases" t#e sponsor and its subsidiary #ave derived benefit t#roug# t#e operations

of fund at t#e cost of investors.L K0#e manner in w#ic# /utual funds #ad invested t#e funds indicates t#at it #ad not e(ercised sufficient care" prudence and diligence in t#e interest of investors and in several instances e(posed t#e investors to #ig# degree of risks wit#out disclosure of it to t#e investors. 0#is is in t#e view of t#e committee is a serious breac# of trustL 0#e committee regrets to note t#at several funds indulged in serious malpracticesEirregularities detrimental to t#e interest of investors. 2ailure to e(ercise adeAuate control by t#e aut#orities concerned resulted in recurrence of t#e same and regrettably" t#e irregularities came to be regarded as market practice. It is systematic failure of t#is order t#at set t#e stage for t#e scam. 0#e system is as muc# in need of rectification as culpable individuals are in need of punis#mentL. In )ugust ,--+" %&'I barred %amir )rora" t#e famed fund manager of )lliance Capital /utual 2und" and t#e 2IIEsub=accounts of 8%=based )lliance Capital /anagement" from trading directly or indirectly in t#e capital market wit# allegations of insider trading. %&'I also critically scrutinized t#e rallies in t#e stock market and estimated t#at of substantial part of 2II investment came t#roug# participatory notes (P=notes). uring various investigations" it was revealed t#at nearly M+ bn was invested by t#e 7verseas Corporate 'odies (7C's) registered in /auritius" w#ose beneficiaries were resident Indians. 0#e 7C'Bs funds were largely unregulated and caused a lot of volatility and a subseAuent ras# in t#e markets. 0#erefore" %&'I furt#er tig#tened t#e 2II regulations to ensure t#at P=notes are not misused. 0#e %&'I board #as restricted

t#e issue of P=notes by 2II to only regulated entities.

?. 9ROB#EM$TIC $S9ECTS FOR FURT7ER RE*U#$TION

)n analytical view of crucial issues for furt#er regulations is presented #ere.

?.1 %ot!ng R!g+t to Mutual Funds"

)s per Companies )ct" trust cannot e(ercise any voting power" but it can be e(ercised by a public trustee w#o is a government official" w#ic# is as good as not e(ercising at all. 0#e recently formed )/2I #as urged for voting rig#ts to mutual funds so as to #ave a say in decision=making. /utual 2unds sponsors like bank and 2inancial Institutions" in t#eir role as merc#ant bankers and lenders #ave access to inside information w#ic# coupled wit# voting rig#ts encourage t#e fund managers to indulge in unscrupulous practices" suc# as insider trading w#ere regulations are weak. 8ndoubtedly" firmBs wealt# would improve" but it may be at t#e cost of t#e corporate #ealt#.

?.2 C !l!ng on Cor)us $/ount"

%&'I regulations #ave not stipulated any ma(imum amount to be collected under eac# sc#eme. 3etention of over subscribed amount creates difficulty not only in management of t#e fund but eventual problems may crop up at t#e time of redemption also. 0#erefore" t#ere s#ould be a limit on t#e retention of over subscribed amount. 0#e ot#er viewpoint is" if limitation on corpus amount is imposed" t#e entry for more and more investors into t#e mutual fund would be closed and t#e ob1ective of mutual funds gets defeated. !owever" in t#e present situation w#ere t#e mutual fund industry is in t#e nascent stage and not fully professionalised.

?.3 Ca)!tal $d Cuac-"

%afety of t#e principal amount can be ac#ieved by guarantee offered by t#e

Dovernment" like post=office saving deposits. )lternatively" safety can be assured t#roug# capital adeAuacy" w#ic# is presently applicable to bank deposits" debentures and eAuity s#ares. /utual 2unds" w#ose main activity is to invest in marketable securities" are put to risk of default. 0#e collapse of market may affect t#e interest of investors and safety of depression" t#e investor" and t#e )/Cs s#ould #ave capital adeAuacy norms. 0#e norms are to be formulated after a t#oug# study of t#e issue.

?.< Borro.!ng )o. rs"

%&'I regulations #ave not specified about borrowing powers. 0#e basic feature of open= ended /utual 2unds is to provide liAuidity by continuous repurc#ase and resale. 7n repurc#ase reAuisition" t#e fund will sell some of its securities and meet t#e investor reAuirement. 'ut if t#e fund invests in securities=w#ic# are not liAuidable at optimumEfair price or t#e encas#ment may be delayed because of various reasons. In t#is conte(t" %&'I regulations may #ave to permit open=ended fund to borrow in order to accommodate t#e liAuidity interest of t#e investor.

?.= Insuranc co3 rag 5or Mutual Fund In3 stors"

eposit Insurance Corporation of India provides an insurance coverage to some e(tent to deposit #olders of banks. %imilarly" /utual 2und investors s#ould also #ave suc# coverage against t#e risks associated. In t#e 8G" %ecurities and Investments 'oard organises a compensation fund=w#ic# is contributed by financial services companies including unit trusts.

?.: Nor/s 5or 9ort5ol!o Turno3 r Rat "

Portfolio turnover rate indicates t#e e(tent of portfolio activity and depends on t#e investment ob1ective of t#e sc#eme. 0#e turnover rate also influences t#e stock market price level" investment costs and t#e level of risk associated. %&'I regulations do not specify norms for portfolio turnover rate for different sc#emes. Portfolio turnover rate s#ould to be disclosed in t#e annual report.

?.> No/!nat!on Fac!l!t-"

0o facilitate easy transmission of t#e units" mutual funds s#ould be permitted to provide t#e service of nomination facility to t#e unit #olders. Presently 80I is offering suc# facility to its unit #olders. 0#e same s#ould be e(tended to ot#er mutual funds by amending t#e %&'I regulations.

?.? S+ar d Trust s"

0#e trustee #as t#e power of superintendence and direction over )/Cs. 0#ey monitor t#e performance and compliance of %&'I regulation. /any trustees are associates wit# more t#an one mutual fund t#at may diversify t#e attention of a trustee and can not fully entertain t#e interest of a particular mutual fund.

9.

SEBI 'MUTU$# FUND( RE*U#$TIONS, 2D11

%&'I #as now reviewed all old regulations and introduced modifications" w#erever necessary. It #as issued revised set of regulations on .an 6" ,-1,. It includes all amendments to previous regulation (1995) up to new regulation in ,-11. 0#ere is an e(pansion of t#e derivatives segment" t#e Corporatisation and demutualization of t#e bourses" t#e central listing aut#ority" sweat eAuity norms" delisting norms etc. It #as already amended t#e takeover code and modified t#e portfolio management service guidelines. isclosure standards #ave been improved9 initial public offer documents #ave become more streamlined wit# more information on business and revenue models. ec +-" ,-11. %ome of t#e above=suggested c#anges #ave been incorporated by %&'I by issuing t#e

1D. SU**ESTIONS FOR EFFECTI%E RE*U#$TIONS

0#e following suggestions can be given on t#e basis of t#is study:

1D.1 To /)o. r !n3 stor to /ak !n5or/ d d c!s!ons 6 ac+! 3 5a!r d als"
%&'I s#ould ensure t#at t#e c#ecks and balances in t#e surveillance system work well to curb manipulations" w#ic# s#ould be backed by prompt scrutiny" investigations and punitive actions. %&'I #as to e(ercise due diligence to ensure timely crackdown on price manipulation" and impose stringent penal action and #ave a close tab on fund flows to protect investor interests.

1D.2 Sugg st!ons 5or consu/ rs and )art!c!)ants to t+!nk t+at

/ark ts ar

55!c! nt, ord rl- and cl an"

%&'I can encourage more market players. It can reconsider t#e participation of 7C's by making it mandatory for t#em to announce t#eir beneficiaries rat#er t#an completely banning t#em. It s#ould proactively e(amine issues of contentious nature. In most cases" It #as taken action only w#en t#ere is a referral from a court or investor forum or t#e government (e.g." 80IBs assured return sc#emes). %&'I s#ould make all disclosures available freely to everyone. It #as taken t#e first step towards it t#roug# its website & I2)3.nic.in.

1D.3 To 5urt+ r con5!d nc "

sta4l!s+ an a))ro)r!at , )ro)ort!onat

and

55 ct!3 r gulator- r g!/ !n .+!c+ all t+ ;stak +old rs +a3

%&'I #as done a commendable 1ob in terms of stringent regulation. !owever" t#e penalties must be more severe and appropriate" so t#at t#ey deter t#e market participants from indulging in malpractices. It must ensure t#at new norms for corporate disclosures #ave more dept# and are implemented over a s#orter time period.

0#e %)0 dismissals of ma1or %&'I orders s#ow a poor rate of conviction. %&'I needs to ensure t#at it e(ercises its penal powers (up to 3s. ,> cr t#ree times t#e ill=gotten profits) on proper grounds and leaves no room for reversals" as #appened in cases of 'PN"@ideocon" 8' group..etc. It must also ensure t#at skilled staff to make its case and decisions stronger" #andles ma1or violations of markets and investorsB interests. e.g." %terlite" 'PN" @ideocon" )nand 3at#i and )ssociates" !industan Never etc.

1D.< $4out caut!ous !n3 st/ nt !n unl!st d s cur!t! s, )r!3at l)lac d s cur!t! s, unrat d d 4t s cur!t! s, and NonA9 r5or/!ng $ss ts
)ll t#e )/Cs are advised to observe specific attention on investments in unlisted" privately placed" unrated debt securities" non=performing assets (?P)s)" and transactions w#ere associates are involved as t#ese investment are #ig#ly risky. %&'I s#ould include some specific provisions in its regulations to ensure t#e proper safeguard against t#e risk associated wit# t#ese investments (securities).

1D.= Sugg st!on R gard!ng Co/)l!anc C rt!5!cat

0#e compliance certificate to be submitted by t#e )/C on a #alf=yearly basis s#ould contain specific comments on t#e followings: If t#e )/C is carrying on ot#er activities" w#et#er as per t#e regulations" and w#et#er it continues to meet t#e capital adeAuacy reAuirements for eac# of t#e activities. If t#e investments #ave been made in accordance wit# t#e regulations" trust deed and investment ob1ectives of t#e sc#eme.

 If t#e utilization of t#e services of t#e sponsor or any of t#e )/CBs associates" employees or t#eir relatives for any securities transaction is in accordance wit# t#e offer document and t#e brokerage and commission paid to suc# affiliates.

etails of any c#anges in t#e interests of t#e directors on t#e )/CBs board of directors.

InvestmentsE3edemption by t#e )/C or sponsor in any of t#e sc#emes and inter=sc#eme investments" giving details" date" price" value and c#arges levied. 0ransactions in securities by t#e key personnel of t#e )/C" w#et#er in t#eir own name or on be#alf of t#e )/C" giving details of t#e names of t#e personnel" name of t#e security" and purc#aseEsale details like t#e Auantity" rate" value and name of t#e broker9 w#et#er t#e transaction is on personal account or conducted by t#e immediate family or fiduciary. 0#e identification and appropriation of e(penses to individual sc#emes and w#et#er t#e e(penses are in conformity wit# t#e limits laid down by %&'I. eficiencyE$arning letters" if any" received from %&'I and t#e corrective action taken.

1D.: Sugg st!ons R gard!ng Trans)ar nc- !n In3 st/ nt D c!s!ons

%&'I #as taken a far=reac#ing step towards ensuring due diligence and transparency in all investment decisions. $#ile t#e )/C boards can prescribe t#e broad parameters of investment" it is important t#at t#e basis for t#e decision to invest in individual security=eAuity or debtOs#ould be recorded. 0#e )/C s#ould report on t#e matter of compliance to t#e trustees and t#e trustees s#all report to t#e %&'I in t#eir bi=annual report.

1D.> Sugg st!ons to 9ro3!d Mor 9o. r to S l5 R gulator- 'SRO(

)ssociation of /utual 2und Industry ()/2I) needs to be given t#e status of %37 t#roug# legislative measures" and to be declared a ;1uridical personB. 1-.6.1 %&'I s#ould delegate certain supervisory powers to )/2I so t#at it can function as t#e first=line supervisor suc# as %creening of applications for licenses and t#e ;fit and proper testB for )/C" intermediaries" registrars and transfer agents" fund managers..etc" routine audit matters" investigation relating to investorsB complaints" implementation of t#e advertisement code" etc.." valuation of t#e portfolio" routine disclosure of portfolio assets9 and Periodic investigations to uncover any possibility of moral #azards" fraud" etc. 1-.6., )/2I must set up an appellate body" w#ic# could act as an arbitrator between members and )/Cs" between investors and )/Cs" between )/2I and )/Cs.

1D.? Sugg st!ons R gard!ng R!sk Manag / nt Funct!on

It is recommended t#at all funds s#ould #ave an independent risk management function responsible for identifying" evaluating or measuring all risks in#erent in a mutual fund organisation" as well as establis#ing controls to mitigate suc# risks. 0#is function s#ould be separate from fund management.

0!)?G P78