How to set up A Mutual Fund Business in India?

A mutual fund is a way of doing business through Company by way of pooling of resources in form of money from various individuals, Corporates, High Net Worth Individuals, Foreign Investors who invests their wealth (Money) in various stocks, bonds, debt instruments, convertible notes or other similar assets.

Mutual Fund in India are basically governed and registered with Securities Exchange Board of India (SEBI) a regulatory body, meant for regulating securities markets in India.

These pooled investments received from various investors are invested in such stocks, debentures or other instruments which can bring a reward in form high return to their invested amount. These funds are managed by Professional Fund Managers. The main intention of fund manager is to provide optimum returns to investors by investing in securities.

 Investment in Mutual Fund is an excellent investment options for individuals and investors to get exposure to an expert managed portfolio.

How to set up a mutual fund business?

An application for registration of a mutual fund shall be made by the applicant proposing to sponsor a mutual fund (MF) to the Securities Exchange Board of India (SEBI) vide “Form A” with a non-refundable fee of Rs 5 (Five) Lakhs only. The application is examined by the SEBI and once the applicant satisfies the eligibility criteria it is required to complete the other remaining formalities for setting up a MF.

Eligibility criteria for grant of Certificate

• The applicant/sponsor should have been carrying a business in financial services for a minimum period of 5(Five) years.
• The net worth should be positive in all the immediately preceding 5( five) years;
• The net worth of an applicant in the immediately preceding year should have been more than the capital contribution of the sponsor in the Asset Management Company.
• The sponsor should have profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year.
• The Applicant should be a fit and proper person.
• the sponsor has contributed or contributes at least 40% to the net worth of the Asset Management Company (any person who holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor and will be required to fulfil the eligibility criteria)
• The applicant or any of its officers of that Company had not committed any fraud or crime and found guilty for any offence relating to financial matters.
• Applicant has to appoint trustees and asset management company to regulate and manage buying and selling of securities on behalf of the investors.

Documents/Confirmations required while making an application

• An applicant should apply for registration in “Form A”, any person who holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor and will be required to apply in “Form A”.
• Confirmation that the main objects of the memorandum of the sponsor company should permit it to carry on mutual fund activities.
• The list of Names of the associate organizations/group companies/subsidiaries, etc. registered with SEBI in any other capacity.
• Furnishing the details of any of the sponsor or its group/associate companies which are listed in any of the recognized stock exchange(s) in India, if any.
• Confirmation that here have been no instances of violation of or non-adherence to any securities related regulations and also that there are has been no actions taken against applicant or any of applicants’ associate/group companies in this regard, by a regulatory agency in India or abroad.
• Declaration that Applicants’ sponsor company or any of Applicants’ directors have not been found guilty of fraud or have not been convicted of an offence involving moral turpitude or have not been found guilty of any economic offence
• Details of disciplinary action taken by RBI/other Regulators against Applicant or any of Applicants’ group/associate companies
• Details of the RBI/ other Regulator’s approval, if any required, for the purpose of sponsoring a mutual fund
• To protect the interests of the investors, the sponsor/applicant has to provide additional capital to the asset management company if it is required.

Physical Verification

SEBI may conduct physical verification (due -diligence) of the existing business of the sponsor to verify the following things:

• Existing infrastructure for client servicing, complaints handling
• Track record of complaint/grievance handling and
• Compliance related issues

Communication by SEBI

Further at any time of registration, the applicant has to provide all information, documents as required by the SEBI within 30 (Thirty) days from the receipt of any communication received from SEBI, if there is any delay from the applicants’ side the case may be considered as closed from SEBI.

SEBI will examine the application and all relevant documents relating to registration and if the applicant is found eligible, applicant has to undertake some steps within a period of 12(Twelve) months from the date of the communication.

Steps required post receiving the comments from SEBI within 12 Months

• Applicant has to incorporate Board of Trustees and Asset Management Company to manage fund of investors.
• Auditor’s certificate certifying that:
  • The sponsor has contributed at least 40% to the net worth of the AMC
  • The AMC has a net worth of not less than INR Fifty Crore (500 million)

•  Copies of Trust Deed and Investment Management Agreement shall be filed with SEBI.
• A detailed note on the infrastructure facilities available with the Asset Management Company should be sent to SEBI, providing the details of office premises, profile of Key Personnel, system support (hardware & Software), arrangement made for investors services, Bio Data of Directors, details of AMC Company and Trustee Company.

Grant of Certificate of Registration

Once all requirements have been Complied with and requisite fee are paid, SEBI will grant Certificate of Registration as a mutual fund. SEBI may also conduct physical inspection of the existing business of the applicant before grant of certificate of registration.

Conclusion

To set up a Mutual fund house requires proficiency & knowledge in finance sector, backed by pre-requisites/eligibility criteria as mentioned herein above. The timeline of 12 months given by SEBI post submission of documents are crucial in nature to fulfill the obligations set out hereinabove. Mutual funds business can generate huge revenue if they are managing well by usage of the funds of investors in securities/stocks which can bring a better return to the investo