Legal and Regulatory Framework for NISM certification
Mutual funds are among the most closely regulated financial products in India. This chapter covers who regulates them, the limits on how schemes invest, what investors are entitled to, and where they can complain.
Mutual FundsSeries V-A63 MCQs4 lessons14 flashcards4 memory tricks
Practise Legal and Regulatory Framework free
What you'll learn
- Who regulates what
Match each authority to its role in the mutual fund business. - Investment restrictions
Apply the key SEBI limits on what a scheme can buy. - Investors' rights and obligations
List what unit holders are entitled to and what they must do themselves. - Due diligence, advertisements and other investor protections
Explain AMCs' checks on distributors, advertising rules, winding up and unclaimed amounts.
Concepts explained
Investment restrictions
SEBI caps how much a scheme can put into one company, issuer or sector so that one failure can't sink it and funds can't control companies.
What it means
- Equity: 10% of NAV in one company; all schemes together 10% of a company's voting capital.
- Debt issuer: 10%/8%/6% of NAV for AAA/AA/A-and-below; +2% with approvals.
- Debt sector: 20% of NAV.
- Unlisted equity: 5% open-ended, 10% close-ended.
- Scheme NAV ₹500 crore; issuer rated AA
- Cap 8% × 500 = ₹40 crore
- With trustee and AMC board approval, 10% = ₹50 crore
Answer: ₹40 crore, or ₹50 crore with approvals
Related terms
- Passive breach: limit crossed due to market moves or redemptions, to be rebalanced in time
- Active breach: a purchase that crosses the limit: not allowed
Exam tip: Check whether the question's limit is on the scheme's NAV or on the company's capital.
Investor grievance route
Complain to the AMC first; if unresolved, go to SEBI's SCORES; then to online dispute resolution (conciliation, arbitration).
What it means
- AMCs must have an investor relations officer.
- SCORES tracks the complaint and the entity's reply.
- ODR offers conciliation and arbitration online.
Payment timelines
Redemption money within 3 working days; IDCW within 7 working days of the record date; 15% a year interest for delays, paid by the AMC.
What it means
- The interest comes from the AMC, not the scheme.
- Exceptions exist for some schemes investing overseas or in special situations (SEBI list).
- ₹2,00,000 redemption paid 5 days late
- 2,00,000 × 15% × 5/365
Answer: ≈ ₹411 interest
Memory tricks
Single-issuer debt limit: 10%, 8%, 6% of NAV for AAA, AA, A and below; +2% with trustee and AMC board approval.
Redemption within 3 working days; IDCW within 7 working days; 15% a year interest for delays.
Escalate from the AMC to SEBI's SCORES and then the ODR portal.
Schemes may borrow up to 20% of net assets for at most 6 months, only for redemptions or income distribution.
Try 3 NISM-style questions
Q1. A mutual fund scheme can invest at most what share of its NAV in the equity shares of a single company (non-index, non-sector fund)?
- 5%
- 25%
- 10%
- 15%
Show answer
Answer: (3) 10%
SEBI's single-company equity limit is 10% of NAV.
Q2. A complaint against a mutual fund distributor's conduct can lead to action by
- RBI, which can bar the distributor from banking
- The custodian
- AMFI, which can suspend or cancel the ARN
- The stock exchange, which can delist the distributor
Show answer
Answer: (3) AMFI, which can suspend or cancel the ARN
AMFI handles distributor registration and conduct, under SEBI.
Q3. AMCs must carry out due diligence on distributors mainly to
- Fix distributors' commissions at the rates set by law
- Choose which investors each distributor may approach
- Ensure distributors are qualified, compliant and sell suitably
- Approve distributors' tax returns
Show answer
Answer: (3) Ensure distributors are qualified, compliant and sell suitably
AMCs are responsible for the conduct of distributors they empanel.
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