NISM V-A Chapter 3: Legal Structure of Mutual Funds in India — Practice Questions
Chapter 3 examines the legal framework governing mutual funds in India under SEBI regulations. This chapter is critical for understanding how mutual funds are legally structured and operated within the Indian financial system. Candidates must grasp three fundamental concepts: First, the regulatory role of SEBI as the primary regulator establishing guidelines for mutual fund operations, fund structure, and investor protection. Second, the concept of a mutual fund as a collective investment scheme where money is pooled from investors and managed by a professional fund manager on their behalf. Third, the mandatory structure requiring three key entities—the Sponsor (promoter), Asset Management Company (AMC), and Custodian—each with distinct legal responsibilities and accountability measures. Understanding SEBI's mutual fund regulations, including registration requirements, fund documentation standards, and compliance obligations, is essential. Candidates should focus on how these structural requirements protect investor interests and ensure transparency. This knowledge directly supports questions about fund governance, regulatory compliance, and the roles of various stakeholders in the mutual fund ecosystem, making it indispensable for exam success.
Q1. What is the minimum net worth requirement for an AMC?
ANSWER
Option C
EXPLANATION
Under SEBI (Mutual Funds) Regulations, 1996, an AMC must have a minimum net worth of ₹50 crore at all times. This financial requirement ensures the AMC is adequately capitalised to manage investor assets and meet operational obligations.
Q2. What is the minimum net worth contribution that a sponsor must make to the AMC?
ANSWER
Option C
EXPLANATION
As per SEBI (Mutual Funds) Regulations, 1996, the sponsor must contribute at least 40% of the AMC's net worth. This ensures the sponsor has meaningful financial commitment to the AMC's operations and investor protection.
Q3. What financial track record must a sponsor demonstrate to be eligible to set up a mutual fund?
ANSWER
Option B
EXPLANATION
SEBI requires the sponsor to have been profitable in at least 3 of the immediately preceding 5 years, including the latest year. This ensures only financially sound entities can establish mutual funds, protecting investor interests.
Q4. What are the two forms in which trustees can be constituted for a mutual fund?
ANSWER
Option A
EXPLANATION
Trustees can be constituted either as individual trustees (a Board of Trustees with individual persons) or as a Trustee Company (a company incorporated under the Companies Act). Both forms are valid under SEBI (Mutual Funds) Regulations, 1996, and both must meet the independence and eligibility requirements.
Q5. What is the minimum number of trustees required for a mutual fund?
ANSWER
Option C
EXPLANATION
SEBI (Mutual Funds) Regulations, 1996 require a minimum of 4 trustees for a mutual fund. At least two-thirds of them must be independent — i.e., not associated with the sponsor or its associates in any way.
Q6. What fraction of trustees must be independent as per SEBI regulations?
ANSWER
Option C
EXPLANATION
At least two-thirds of the members of the Board of Trustees must be independent — they must not be associated with the sponsor or any of its associates. This majority independence requirement is designed to ensure trustees can objectively protect unit holders' interests without being influenced by the sponsor.
Q7. What must trustees do before approving a new scheme?
ANSWER
Option B
EXPLANATION
Before approving any new scheme, trustees must satisfy themselves that the scheme is in the interest of unit holders, that the AMC has conducted proper due diligence, and that all required regulatory documents (SID, SAI) are filed with SEBI. Trustees must certify this through a due diligence certificate filed with SEBI.
Q8. What is a 'due diligence certificate' filed by trustees with SEBI?
ANSWER
Option B
EXPLANATION
Before every new scheme launch, trustees must file a due diligence certificate with SEBI confirming that they have reviewed the SID, ensured the disclosures are adequate and accurate, and are satisfied that the scheme is in the interest of investors. This is a key accountability mechanism for trustees.