INDIA Law and Practice Contributed by: Tejesh Chitlangi, Sushreet Pattanayak, Pooja Mehta and Anita Jain, IC Universal Legal
3. Retail Funds 3.1 Fund Formation 3.1.1 Fund Structures Domestic Mutual Funds Structure of mutual funds
3.1.2 Common Process for Setting Up Investment Funds Domestic Mutual Funds A mutual fund in India can initiate its operations and collect monies from investors and issue units to them only after obtaining prior approval from the SEBI, which is a two-step process. • In-principle approval to sponsor – the sponsor must apply, filing Form A via an online portal, so that the SEBI can establish its eligibility to act as the sponsor of a mutual fund. The SEBI analyses the application to ensure that the sponsor has a sound track record and a general reputation of fairness and integrity in all business transactions, meets all criteria as a fit and proper person, has at least five years’ experience in financial services, and has a solid financial position. The SEBI also analyses a business plan submitted by the sponsor to assess the reasons why the latter wishes to enter into the mutual fund business. Any queries are raised by the SEBI during its evaluation and an on-site visit to the office of the sponsor is carried out. The process generally takes six to 12 months. • Final approval for registration as a mutual fund – after receipt of in-principle approval, the sponsor is given six months to file a final application. During this period, the sponsor is required to either incorporate a new AMC or create a clearly demarcated division for mutual fund business in an existing business and infuse it with necessary capital. This can be INR50 crore or INR150 crore, depending upon the conditions of past financial perfor - mance and business experience. The sponsor will incur the cost of setting up infrastructure, such as IT architecture, Business Continu - ity Planning and Disaster Recovery Sites, as well as expenses incurred hiring personnel and engaging vendors and intermediaries in
Mutual funds are trusts set up under the Indi - an Trusts Act, 1882, through a registered trust deed. The trust is established by one or more sponsors, who are similar to the promoters of a company. It is registered with the SEBI under the MF Regulations as a mutual fund, and this fund can launch multiple schemes, each with assets and liabilities that are segregated and ring-fenced from other schemes of the mutual fund. The investors contributing to the schemes of a mutual fund are the beneficial owners of that scheme. In addition, the sponsor establishes a trustee company in India which holds the property of the mutual fund for the benefit of the investors. The trustee company of the mutual fund in turn appoints an Asset Management Company (AMC), a limited liability company incorporated in India, which is approved by the SEBI, for man - agement of the mutual fund. The decentralised structure of mutual funds in India ensures that a system of checks and bal - ances is maintained. No party can unilaterally take a decision which may not be in the interests of the investors. However, a decentralised – ver - sus leaner – structure also leads to increased reporting requirements and higher set-up and administration costs.
Retail Schemes under GIFT Funds Please see 2.1.1 Fund Structures .
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