Legal and Regulatory Framework: formula sheet

Key formulas

Primary law for mutual funds

SEBI (Mutual Funds) Regulations, 1996

Framed by SEBI under the SEBI Act, 1992. This is the main rulebook for mutual funds in India.

SEBI vs AMFI

SEBI = statutory regulator; AMFI = self-regulatory industry body

SEBI makes binding rules and can penalise. AMFI sets industry standards and registers distributors (ARN).

Legal form of a mutual fund

Mutual fund = trust (sponsor settles trust; trustees hold property for unitholders; AMC manages)

The fund is not a company. The AMC is a company, and the trust holds the assets for unitholders.

RBI's link to mutual funds

RBI = banking and money market regulator; indirect role

RBI does not register or supervise mutual funds. SEBI does.

Role split of key parties

Sponsor: sets up fund | Trustees: oversee, protect unitholders | AMC: manages schemes | Custodian: holds securities

Match each duty to the right party in exam questions.

Legal form

Mutual fund = trust (Indian Trusts Act, 1882) registered with SEBI

Unitholders are the beneficiaries. The trustees hold the assets, not the AMC.

Sponsor track record

Business in financial services ≥ 5 years; positive net worth in each of the preceding 5 years; net profit in 3 of the preceding 5 years including the fifth

Also the sponsor's net worth in the preceding year must exceed its capital contribution to the AMC, and it needs a reputation for fairness and integrity.

Sponsor stake in AMC

Sponsor contribution ≥ 40% of the AMC's net worth

The sponsor must contribute at least 40% to the net worth of the AMC. A person holding 40% or more of the AMC's net worth is deemed a sponsor, provided it also meets the other conditions in the definition.

Trustee board independence

Independent trustees ≥ 2/3 of the board of trustees

Independent means not associated with the sponsor in any manner. At least two-thirds of the trustees must be independent.

AMC and trusteeship

AMC cannot act as a trustee of any mutual fund

Keeps managing and supervising roles separate.

Custodian disqualification

A custodian cannot act for a fund of the same sponsor (or its associates or subsidiary) if the sponsor or its associates hold 50% or more of the custodian's voting rights, or 50% or more of its directors represent the sponsor's or associates' interest. The custodian must be registered with SEBI.

This is a threshold test, not a blanket ban. A sponsor-group entity below the 50% limits is not barred by this rule.

NAV per unit

NAV = (Market value of investments + receivables + accrued income − liabilities − accrued expenses) ÷ number of units outstanding

Net assets divided by units. Expenses accrue daily and reduce NAV.

TER, equity-oriented schemes (daily net assets)

2.25% on first ₹500 crore; 2.00% on next ₹250 crore; 1.75% on next ₹1,250 crore; 1.60% on next ₹3,000 crore; 1.50% on next ₹5,000 crore (this band ends at ₹10,000 crore); then the limit falls by 0.05% for every ₹5,000 crore (or part) of daily net assets over the next ₹40,000 crore, which is 8 steps: 1.45% (₹10,000-15,000 crore), 1.40%, 1.35%, 1.30%, 1.25%, 1.20%, 1.15%, 1.10% (₹45,000-50,000 crore); 1.05% on the balance above ₹50,000 crore

Slabs apply to the portion of daily net assets in each band, not the whole fund.

TER, other than equity-oriented schemes (daily net assets)

2.00% on first ₹500 crore; 1.75% on next ₹250 crore; 1.50% on next ₹1,250 crore; 1.35% on next ₹3,000 crore; 1.25% on next ₹5,000 crore (this band ends at ₹10,000 crore); then the limit falls by 0.05% for every ₹5,000 crore (or part) of daily net assets over the next ₹40,000 crore, which is 8 steps: 1.20% (₹10,000-15,000 crore), 1.15%, 1.10%, 1.05%, 1.00%, 0.95%, 0.90%, 0.85% (₹45,000-50,000 crore); 0.80% on the balance above ₹50,000 crore

Debt and other non-equity schemes have limits 0.25% below the equity limits in each slab.

Effective TER

Effective TER = total permitted expense ÷ average net assets × 100

Use this when a question asks for a blended percentage.

Portfolio disclosure

Monthly portfolio: within 10 days of month end. Half-yearly portfolio: within 10 days of each half-year end

The monthly factsheet is a separate disclosure that follows the applicable SEBI/AMFI requirement. Do not memorise portfolio and factsheet as one single 10-day rule.

Half-yearly results

Unaudited financial results: within one month of 30 September and 31 March

Published on the website and in a national English daily and a regional newspaper. The scheme-wise annual report, or its abridged summary, is hosted or sent within four months of the financial year end.

Exit load

Exit load is credited to the scheme (net of GST), not kept by the AMC

It is a charge on the investor at redemption, separate from TER.

ARN

ARN = AMFI Registration Number, unique to the distributor (individual or firm)

Quote it on every application you route. It decides who gets the commission. A firm's ARN rests on its certified employees or key persons.

EUIN

EUIN = Employee Unique Identification Number, unique to the employee or salesperson

Identifies the person who gave the advice. Meant to reduce mis-selling and to track the actual seller.

Eligibility to register

Individual: NISM-Series-V-A pass + AMFI application + KYC = ARN. Firm: ARN is granted on the basis of its certified employees or key persons, each with a valid NISM certificate and EUIN

The NISM certificate is valid for 3 years from the date of the examination.

NISM-Series-V-A exam pattern

100 questions, 100 marks, 2 hours, pass 50%, no negative marking

Because there is no negative marking, attempt every question.

ARN vs EUIN

ARN → firm or individual distributor; EUIN → individual who sells

Where a firm's staff sell, each person quotes their own EUIN alongside the firm's ARN. The firm's ARN depends on those certified people holding valid NISM certificates.

KYC validity

One KYC with a KRA → usable across SEBI-regulated intermediaries

Investor does not repeat KYC for each fund house once it is registered and valid.

PMLA reporting

Suspicious transaction → report to FIU-IND

Do not tip off the client. Records must be kept as required by the PML Rules.

Nomination eligibility

Individuals can nominate; non-individuals cannot

Companies, trusts and similar entities cannot nominate.

Grievance escalation order

Distributor/AMC → SCORES → further forums

SCORES is SEBI's online platform for registering and tracking complaints.

Unit holder exit right

Fundamental attribute change → exit option at prevailing NAV, no exit load

Applies to eligible unit holders during the notice period.

Equity-oriented fund test

Equity shares of domestic companies ≥ 65% of assets

Meets this test, and it is taxed as an equity-oriented fund.

Equity fund STCG

Holding ≤ 12 months: 20%

Rate applies to gains on redemption (plus surcharge and cess where applicable).

Equity fund LTCG

Holding > 12 months: 12.5% on gains above ₹1,25,000 in a financial year

No indexation. The ₹1,25,000 exemption applies to total LTCG on such assets in the year, not per fund.

Specified mutual fund (debt-oriented)

Gains taxed at slab rate, any holding period

Applies to units acquired on or after 1 April 2023. Check the current definition in your workbook.

Other funds (not equity-oriented, not specified)

Short term: slab rate. Long term (listed units held > 12 months, unlisted > 24 months): 12.5%, no indexation

Holding periods depend on whether units are listed.

IDCW taxation

Taxed at investor's slab rate as income from other sources

The fund does not pay tax on it.

TDS on IDCW to residents

10% if IDCW in the financial year exceeds the threshold (₹10,000 from FY 2025-26; ₹5,000 earlier)

Once the threshold is crossed, TDS is on the whole amount.

NRI TDS

Capital gains: TDS at rates in force on the gain. IDCW: 20% plus surcharge and cess

Resident investors have no TDS on capital gains.

STT on equity-oriented fund redemption

0.001% of the redemption value

Paid by the seller. No STT on debt fund redemption.

Set-off of losses

Short-term loss: against short-term or long-term gain. Long-term loss: only against long-term gain. Carry forward: 8 years

Losses can be carried forward only if the return is filed on time.

Quick revision

• SEBI is the regulator of mutual funds; the SEBI (Mutual Funds) Regulations govern their structure and operations.
• A fund is set up by a sponsor, held through a trust, run by trustees, managed by an AMC and safekept by a custodian.
• Trustees oversee the AMC; the AMC manages the schemes and investments.
• The custodian holds the securities of the schemes; it is separate from the AMC.
• NAV is the value per unit: net assets of the scheme divided by the number of units outstanding.
• Scheme expenses are subject to regulatory limits; check the exact limits in your workbook.
• Distributors must hold a valid AMFI registration and use their ARN on transactions.
• The code of conduct bars misleading investors and requires disclosure of material information.
• KYC is required before investing; know the basic process and who can do it.
• Unresolved complaints can be escalated through the grievance route; learn the order of escalation.
• Taxation depends on the type of scheme and holding period; learn the current rules from the workbook.

Common mistakes

• Saying AMFI is the regulator of mutual funds. Fix: Remember AMFI is a self-regulatory industry body. SEBI is the statutory regulator that registers and supervises mutual funds.
• Thinking RBI registers mutual funds. Fix: SEBI registers mutual funds. RBI regulates banks and money markets and affects funds only indirectly.
• Mixing up the AMC holding the fund's assets with the trustees holding them. Fix: Trustees hold the property in trust for unitholders. The AMC only manages the investments.
• Treating the sponsor and trustee as the same party. Fix: The sponsor is the settlor who creates the fund. The trustees are the supervisors who protect unitholders.
• Applying the first-slab TER rate to the whole scheme. Fix: Split average net assets into bands and apply each rate only to its band. Add the amounts.
• Forgetting accrued expenses and liabilities in the NAV formula. Fix: Always write the full formula: add receivables and accrued income, subtract liabilities and accrued expenses.
• Treating ARN and EUIN as the same number. Fix: ARN belongs to the distributor. EUIN belongs to the individual who sold. A firm has one ARN but many EUINs.
• Thinking the NISM certificate never expires. Fix: It is valid for 3 years from the date of the examination. Registration depends on a valid certificate.
• Thinking KYC must be repeated for every mutual fund house. Fix: Remember KYC is registered once with a KRA and reused across intermediaries.
• Saying a company can make a nomination. Fix: Only individuals can nominate; non-individuals cannot.

Exam tips

• Expect role-matching questions: SEBI, AMFI, RBI, sponsor, trustee, AMC, custodian. Make a one-line role for each and revise it often.
• Watch absolute words like only, always and guarantee. They often mark the wrong option.
• The paper has no negative marking, so always attempt every question even if you must guess.
• If an option gives SEBI's power to AMFI or RBI, it is almost certainly a trap. Check who is the statutory regulator.
• Always name the 1996 Regulations as the main law. Do not confuse them with the SEBI Act, 1992, which created SEBI.
• Learn the numbers as a set: 5 years, 3 of 5 years profit, 40% sponsor contribution to the AMC's net worth, two-thirds independent trustees. Questions often swap them as trap options.
• Many questions ask 'who is responsible for...'. Answer from the role line: creates, guards, manages, keeps, records.
• Watch the words 'cannot' and 'must'. Prohibition questions, such as the AMC acting as trustee, are common.