SEBI Mutual Funds Regulations 1996
The SEBI (Mutual Funds) Regulations 1996 form the foundational legal framework for the mutual fund industry in India, governing the establishment, operation, investment norms, and winding up of mutual funds, and have been amended more than fifty times to reflect evolving market realities.
The regulations require every mutual fund to be constituted as a trust under the Indian Trusts Act 1882, with a sponsor, a board of trustees, and a separate Asset Management Company (AMC). This three-tier structure — sponsor, trustees, AMC — is fundamental: the sponsor sets up the fund and holds at least 40% of the net worth of the AMC; the trustees hold the assets in a public trust and act as the watchdog for unitholders' interests; and the AMC makes the day-to-day investment decisions. SEBI must approve the appointment of key personnel at AMC level.
The investment universe and exposure limits for each scheme category are defined by SEBI's Categorisation and Rationalisation Circular of October 2017, which is effectively an amendment to the Mutual Funds Regulations. This circular standardised scheme categories (large-cap, mid-cap, small-cap, etc.) and mandated that each AMC can have only one scheme per category (with limited exceptions for index funds, ETFs, and FoFs).
The regulations prescribe a comprehensive due-diligence process for investments, valuation policies (based on AMFI guidelines derived from SEBI circulars), segregated portfolio (side-pocketing) rules for credit events, and liquidity risk management frameworks introduced after the Franklin Templeton wind-up in 2020. Net Asset Values must be declared daily (except for funds in winding-up mode) and published on the AMFI website.
The 1996 Regulations also govern distributor conduct, commissions, and the distinction between 'direct' and 'regular' plans (introduced by SEBI in 2013). Mis-selling provisions were tightened through amendments requiring mandatory upfront disclosure of product suitability, risk-o-meter, and the potential conflicts of interest in commission-based distribution. SEBI's circular on scheme performance disclosure standardised rolling return disclosures to make comparisons across funds more meaningful.
Recent amendments have introduced risk-adjusted performance disclosures, T+2 NAV applicability for liquid funds based on fund receipt time, and tighter rules on inter-scheme transfers.