INDIA Law and Practice Contributed by: Tejesh Chitlangi, Sushreet Pattanayak, Pooja Mehta and Anita Jain, IC Universal Legal
3.5 Fund Finance Domestic Mutual Funds Borrowings
framework and practices and submit a report to their board of directors, along with a road map for its implementation. • Investment Policy – this must be maintained by the AMC which guides its team in their investment decisions, as well as asset alloca - tion. • Valuation Policy – laid down byunder the MF Regulations, this must be adopted by the AMC. It covers how to calculate the fair value of assets to ensure a consistent valuation methodology across all mutual funds. This policy is also disclosed to the investors. • Insider Trading Policy – SEBI has mandated the AMCs to put in place an institutional mechanism for identification and deter - rence of market abuse. This should consist of enhanced surveillance systems, internal control procedures and escalation processes so that specific types of misconduct, includ - ing front running, insider trading and misuse of sensitive information, etc, can be moni - tored and addressed. It is mandatory that the Insider Trading Policy be adopted by all the parties to the mutual fund in terms of PIT Regulations. • Anti-Money Laundering (AML) Policy – this must be adopted by AMCs under the terms of the AML/CFT Guidelines which are similar to those adopted by Domestic AIFs. • Conflict of Interest Policy – this covers checks to mitigate actual/potential conflicts and to ensure arms-length conduct whilst perform - ing multiple activities, segregation of inves - tors, segregation of personal interest of employees, etc.
Mutual Funds cannot borrow unless it is to meet temporary liquidity needs (which cannot be more than 20% of NAV) for the purposes of repurchas - es, redemption of units or payment of interest or dividends to unitholders. The duration of bor - rowing cannot exceed a period of six months. The costs of borrowing for a given mutual fund scheme must be adjusted against the portfolio yield of the scheme and the borrowing costs in excess of portfolio yield, if any, will be borne by the AMC. If an associate of the sponsor or AMC is the bor - rower, disclosure must be provided to the trustee and investors regarding the reasons for borrow - ing and the competitiveness of the terms of the borrowings. Also, any general borrowings by AMCs must be
disclosed to trustees and investors. Retail Schemes Under GIFT Funds See 2.5 Fund Finance 3.6 Tax Regime Domestic Mutual Funds
Mutual funds are tax exempt, in accordance with the provisions of Section 10(23D) of the IT Act. The funds receive their income without any deduction of tax at source. For investors, units of a mutual fund held for more than 12 months are treated as long-term capital assets. The capital gain is charged after deduction of expenditure incurred wholly and exclusively on this transfer and cost as inflated by the cost-inflation index released by the Cen - tral Government of India for unitholders.
Retail Schemes Under GIFT Funds See 2.4 Operational Requirements
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