Ch.3 · Legal Structure of Mutual Funds in India

Sponsor, Trustee and AMC Roles

40 practice questions on this topic

What is the minimum net worth contribution that a sponsor must make to the AMC?

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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.

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What is the registration fee structure for mutual funds under SEBI regulations?

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EXPLANATION

SEBI charges an initial application/registration fee for new mutual funds and ongoing annual registration renewal fees. The registration fees are structured to reflect the size and complexity of the mutual fund's operations. Failure to renew registration can result in lapse of the right to operate schemes.

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What is 'scheme merger' and what protection do unit holders have during a merger?

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EXPLANATION

Scheme merger involves one scheme (merging scheme) being absorbed into another (surviving scheme). Unit holders of the merging scheme receive units of the surviving scheme based on the NAV ratio. SEBI mandates that unit holders be given a 30-day exit window without exit load to protect those who do not wish to hold units of the surviving scheme.

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What are the 'associate transactions' restrictions in the mutual fund structure?

A.Restrictions on transactions between the AMC and its own employees

B.SEBI restrictions on business transactions between a mutual fund scheme and entities associated with the AMC or sponsor — to prevent conflicts of interest

C.Restrictions on how many associate firms an AMC can hire as advisors

D.Rules preventing trustees from being associated with more than one mutual fund trust

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What is a 'no-objection certificate' from SEBI in the context of mutual fund scheme launches?

A.SEBI's formal approval guaranteeing the scheme will perform well

B.SEBI's observation letter conveying it has no objection to the scheme launch — this is not an endorsement of the scheme's merit

C.A certificate from SEBI that the scheme has no conflicts of interest

D.A clearance from SEBI that distributor commissions are reasonable

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What enforcement actions can SEBI take against a non-compliant AMC?

A.SEBI can only issue warning letters — no financial penalties

B.SEBI can issue warnings, impose monetary penalties, suspend or cancel registration, and issue directions to protect investors

C.SEBI must refer all enforcement to AMFI before taking action

D.SEBI can only take action against the fund manager personally, not the AMC

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How does SEBI's oversight differ from day-to-day management of mutual funds?

A.SEBI manages funds directly while AMCs only handle marketing

B.SEBI sets the regulatory framework and enforces compliance but does not manage investments — day-to-day management is entirely the AMC's responsibility

C.SEBI and AMC jointly make all investment decisions

D.SEBI manages debt funds while AMCs manage equity funds

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What is 'winding up' of a mutual fund scheme and under what conditions can it occur?

A.Temporary suspension of NAV calculation during market holidays

B.Termination of a scheme where assets are liquidated and net proceeds distributed to unit holders — triggered by trustee decision, 75% unit holder vote, or SEBI direction

C.The merger of a scheme into another scheme of the same AMC

D.Suspension of new purchases while allowing redemptions

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What is 'Know Your Customer' (KYC) centralization in mutual funds through KRAs?

A.Each AMC maintains its own separate KYC database

B.KYC Registration Agencies (KRAs) maintain a centralized KYC database — KYC done once with any SEBI-registered intermediary is valid across all mutual funds and other SEBI-registered entities

C.KYC is centralized only for NRI investors

D.SEBI directly maintains the KYC database for all investors

Q10

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What investor protection is provided during an AMC acquisition or merger?

A.Investors automatically get a cash refund at NAV

B.Investors receive a 30-day exit window without exit load and must be notified of all material changes before the merger is effective

C.The acquiring AMC must guarantee the acquired scheme's historical returns

D.SEBI compensates investors for any NAV drop during the merger period

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