2013 IIFA Annual Conference. October 21 October 23, New Orleans, USA COUNTRY REPORT - INDIA ASSOCIATION OF MUTUAL FUNDS IN INDIA

Transcription

1 2013 IIFA Annual Conference October 21 October 23, 2013 New Orleans, USA COUNTRY REPORT - INDIA ASSOCIATION OF MUTUAL FUNDS IN INDIA

2 COUNTRY REPORT INDIA January 1, 2012 to December 31, 2012 and January 1, 2013 to June 30, Economic and financial Background 1.1 As against real GDP Growth of 6.2 percent in , GDP growth was 5 percent in As per the Economic outlook for released by Govt. of India, India s GDP growth rate is expected to be 5.3%. 1.2 The Indian mutual fund industry comprises 46 Asset Management Companies managing assets of US$ 136 Bn. (Rs.8,114 Bn.) under 1184 different mutual fund schemes as at the end of June At the end of August 2013, the Assets Under Management managed by 46 Asset Management Companies were US$ 117 Bn. (Rs.7,661 Bn.). There are mutual funds sponsored by public sector banks, institutions, private sector (including wholly foreign owned) and joint sector with foreign participation. The regulatory framework is very comprehensive and matches with the best in terms of standards, practices and procedures. 2. Data on Funds under Management and portfolios 2.1 Assets Under Management as on December 31, 2012 As at end of December 2012, the mutual fund industry managed assets of US $ Bn. (Rs. 7,600 Bn.). The break-up of the Assets Under Management is given below : US $ Million Type of schemes Assets Under % to Total Management Income (Bond) 68, Growth (Equity) including 34, special tax saving schemes Balanced 3,288 2 Liquid/Money Market 27, Gilt 1,185 1 Gold ETFs 2,186 2 Other ETFs Fund of Funds Investing overseas Total 138,559 Less than 1% Exchange rate as on US $ = INR Assets Under Management as on June 30, 2013

3 As at end of June 2013, the mutual fund industry managed assets of US $ Bn. (Rs. 8,115 Bn.). The break-up of the Assets Under Management is given below: US $ Million Type of schemes Assets Under % to Total Management Income (Bond) 74, Growth (Equity) including 28, special tax saving schemes Balanced 2,712 2 Liquid/Money Market 27, Gilt 1,424 1 Gold ETFs 1,615 1 Other ETFs Fund of Funds Investing overseas Total 136,383 Less than 1% Exchange rate as on US $ = INR 3. Key trends in flows The net inflow under different categories of funds during the year January 1, 2012 to December 31, 2012 is indicated in the table below: Net Inflows of Funds Category US $ (Mn.) Bonds (Income) 10,346 Growth (Equity) including special tax -2,848 saving schemes Balanced -65 Liquid / Money Market 2,964 Gilt 554 Gold ETFs 333 Other ETFs -30 Fund of Funds Investing Overseas -73 TOTAL 11,181 Exchange rate as on US $ = INR The net inflow under different categories of funds during the period January 1, 2013 to June 30, 2013 is indicated in the table below: Net Inflows of Funds Category US $ (Mn.) Bonds (Income) 8,354 Growth (Equity) including special tax -814 saving schemes Balanced 4 Liquid / Money Market 985

4 Gilt 265 Gold ETFs -42 Other ETFs -15 Fund of Funds Investing Overseas -18 TOTAL 8,719 Exchange rate as on US $ = INR 4. Product development major changes Schemes available in India The Indian Mutual Fund industry offers a variety of products including Exchange Traded Funds (ETFs), Gold Exchange Traded Funds and Capital Protection Oriented Schemes. There are special schemes, which invest only in government securities called Gilt Schemes and there are schemes, which provide returns on monthly basis called Monthly Income Scheme. There are specific sector funds viz. Auto, Pharma, Banking, Petroleum, Power, FMCG, Technology, Media and Entertainment, Infrastructure, Service Sector Funds etc. Regulator has also issued Guidelines in respect of Real Estate Mutual Fund Schemes. However, so far no Mutual Fund has launched Real Estate Mutual Fund Scheme. There are feeder funds, which invest in Overseas schemes, thereby giving opportunity to the investors to diversify their investments in Mutual Funds and also to participate in the schemes launched in foreign economy. Besides the products mentioned above Mutual Funds in India provide facilities to the investors like Systematic Investment Plan (SIP). Under this plan investors are encouraged to build up their savings in Mutual Funds by investing a fixed amount on a predetermined date every month on a regular basis. Some Mutual Funds have also introduced free insurance along with SIP. Number of SIP Accounts as on June 2013 were 7 million, more or less at the same level of June Similar facilities like Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP), Dividend Transfer Plan (DTP) and Trigger Facility are also provided to the investors. During the period under review, the following plans/ options are introduced : i) Single plan structure for mutual fund schemes a. Mutual Funds/ AMCs are required to launch schemes under single plan and ensure that all new investors are subject to single expense structure. b. Existing schemes with multiple plans based on the amount of investment (i.e. retail, institutional, super-institutional, etc.) to accept fresh applications only under one plan.

5 c. Other plans will continue till the existing investors remain invested in the plan. ii) Separate option for direct investments introduced w.e.f. January 1, 2013 a. Mutual Funds/ AMCs have launched a separate plan for direct investments, i.e. investments not routed through a distributor, in existing as well as new schemes. b. Such separate plan has a lower expense ratio excluding distribution expenses, commission, etc. and no commission is to be paid from such plans. The said plan will also have to have a separate NAV. 5. Regulatory and self regulatory developments (including tax) Securities and Exchange Board of India (SEBI) regularly In respect of mutual funds, SEBI has taken several steps to reenergise mutual fund industry to increase product penetration especially in smaller cities/towns, regulation of distributors and issues concerning investor protection, develop a longterm policy for the sustainable growth of the industry and mobilization of household savings for the growth of the economy and increase household savings through mutual funds. The comprehensive guidelines for registration and supervision of mutual funds are issued by SEBI by way of SEBI (Mutual Fund) Regulations, 1996 and circulars issued there under. The supervision system of mutual funds is a two-tier system, i.e., supervision by trustees on one hand and SEBI on the other hand. Mutual funds are required to periodically report their operations/activities to SEBI and a risk-based approach is followed for periodic inspections. In India, more than 85% of Mutual Fund Industry AUM is concentrated in top 15 cities. Keeping in mind the broad objectives of increasing penetration of mutual fund products across various towns and cities in India, increasing retail participation in Mutual Fund products, widening the distribution network, protecting the interest of investors, bringing in more transparency in disclosure of information, reenergising Mutual Fund Industry, India s regulator, Securities and Exchange Board of India (SEBI), has announced several measures, which are classified subject-wise in this section. Marketing and distribution of funds, e.g. products, fees, promotion a) Total Expense Ratio (TER) TER Structure : There is a different TER structure for Equity, debt oriented schemes, Index fund schemes and Fund of Funds schemes as mentioned under :

6 Type of schemes Equity schemes Debt oriented schemes Index Fund Schemes Fund of Funds Schemes AUM (` in crore) TER as a % of the daily net assets On the first 100 cr. 2.5% On the next 300 cr. 2.25% On the next 300 cr. 2.0% On the balance of 1.75% the assets Slabs same as per TER is at lesser by Equity Schemes least 0.25% than that can be charged by Equity Schemes No slab structure 1.50% No slab structure 2.50% including weighted average of charges levied by the underlying schemes i) Additional TER : Mutual Funds are allowed to charge additional TER up to 30 basis points on daily net assets of the scheme, if the new inflows from beyond top 15 (B-15) cities are at least 30% of gross new inflows in the scheme or 15% of the average assets under management (year to date) of the scheme, whichever is higher. Additional TER should be proportionately charged if inflows from beyond top 15 (T-15) cities are less than the higher of the above. ii) Claw back of additional TER : To ensure greater persistency, the additional TER so charged is required to be clawed back in case the said investments are redeemed within a period of one year from the date of investment. Also, the commission paid to distributors in respect of the said investment can be clawed back. iii) Fungibility of TER : AMCs can charge maximum TER of 2.5% including investment management and advisory fees. There is a slab-wise structure of TER (as mentioned above) that can be charged to a scheme according to AUM. Further, within the overall TER, there was a sub-limit on investment management and advisory fees charged by the AMC and other scheme related expenses that can be charged to scheme. Now Total expense Ratio (TER) has been made fully fungible, removing sub-limits on investment management and advisory fees charged by the Asset Management Company within the overall limit of TER. iv) Brokerage and Transaction Cost : AMCs are allowed to additionally charge brokerage and

7 transaction costs which are incurred for the purpose of execution of trade and is included in the cost of investment not exceeding 0.12 percent in case of cash market transactions and 0.05 percent in case of derivative transactions, additional expenses incurred towards different heads not exceeding 0.20 percent of daily net assets of the scheme. v) Service Tax : Service Tax, which was part of overall TER, is now allowed to be charged separately to the scheme in addition to the maximum limit of TER and recovered from investors. Service Tax on exit load is to be paid out of the exit load proceeds and exit load, net of Service Tax, is required to be credited to the scheme. vi) Investor Education and Awareness : AMCs now have to set apart annually at least 2 basis points on daily net assets within the maximum limit of TER for investor education and awareness initiatives. Complete disclosures regarding the investor education and awareness initiatives undertaken are required to be made in the half yearly trustee report to SEBI. b) Single plan structure for mutual fund schemes : AMCs have to launch schemes under single plan and ensure that all new investors are subject to single expense structure. Existing schemes with multiple plans based on the amount of investment (i.e. retail, institutional, super-institutional, etc.) are allowed to accept fresh applications only under one plan. Other plans will continue till the existing investors remain invested in the plan. c) Separate option for direct investments : W.e.f. January 1, 2013, AMCs have to offer as an option, a separate plan for direct investments, i.e. investments not routed through a distributor, in existing as well as new schemes. Such separate plan has a lower expense ratio excluding distribution expenses, commission, etc. and no commission is to be paid from such plans. The said plan will also have to have a separate NAV. d) Transaction Charges : Distributors incur incidental expenses while marketing Mutual Fund products. To compensate them, transaction charges of ` 100/- per subscription for existing investors and ` 150/- per subscription for new investors, in respect of subscriptions of ` 10,000/- and above, is allowed to be paid to the distributors, opting for levying such transaction

8 charges. Such transaction charges are paid out of the amount invested by the investor. Distributors were earlier given option to either opt in or Opt out of levying transaction charges, at distributor level, which was valid for all types of product across all Mutual Funds. Distributors are now having the option to either opt in or opt out of levying transaction charge based on type of the product, which will be valid across all Mutual Funds. e) Time period for initial offering and allotment of units of Mutual Fund Schemes eligible under RGESS, 2012 : Rajiv Gandhi Equity Savings Scheme (RGESS), is a tax saving scheme announced in the Union Budget The scheme is designed exclusively for first time retail individual investors in the securities market, whose gross total income for the year is less than or equal to ` 1 million. The investor would get 50% deduction of the amount of so invested, up to a maximum investment of ` 50,000/- from his/ her taxable income for that year. With respect to Mutual Fund Scheme eligible under RGESS, which is a tax saving scheme notified by the Govt. of India on November 23, 2012, SEBI has extended the maximum period for which initial offering of Mutual Fund Scheme shall be open from the existing 15 days to 30 days. Further, the period within which Mutual Fund/ AMC should allocate the units, refund money and issue Statement of Accounts in respect of these schemes, is extended from the existing requirement of five working days from the closure of the initial subscription to 15 days from the closure of the initial subscription. f) Gold Exchange Traded Funds (Gold ETFs) Investment in Gold Deposit Scheme (GDS) of Banks : Gold ETFs have to invest primarily in Gold and Gold related instruments. SEBI has now decided to designate GDS of banks as one such Gold related instrument. Investment in GDS of banks by Gold ETFs will be subject to total investment in GDS not exceeding 20% of total AUM of such schemes. Before investing in GDS of banks, AMCs have to put in place a written policy with regard to investment in GDS with due approval from the Board of AMC and the Trustees and review the policy at least once a year, obtain prior approval the Trustees for each investment proposal in GDS of any bank. Gold certificates issued by banks in respect of investment made by Gold ETFs in GDS should be held by the Mutual Funds only in dematerialized form.

9 g) Product Labeling in Mutual Funds : All Mutual Funds are required to Label their schemes, existing as well as new, with effect from July 1, 2013 on the parameters as mentioned below : i. Nature of scheme such as to create wealth or provide regular income in an indicative time horizon (short/ medium/ long term) ii. A brief about the investment objective (in a single line sentence) followed by kind of product in which investor is investing (Equity/ Debt) iii. Level of risk, depicted by color code boxed as under : Blue principal at low risk Yellow principal at medium risk Brown principal at high risk The color codes shall also be described in text besides the color code box. iv. A disclaimer that investors should consult their financial advisers if they are not clear about the suitability of the product. h) Infrastructure Debt Fund (IDF) : IDFs are now allowed for raising monies through private placement of units, subject to certain terms and conditions. Intermediaries, e.g. qualifications, conduct and sales practice, Distributors Regulation a) Distribution of mutual fund products i) New Cadre of Distributors : A new cadre of distributors, such as postal agents, retired government and semi-government officials (class III and above or equivalent), retired teachers and retired bank officers with a service of at least 10 years, and other similar persons as may be notified by AMFI/ AMC from time to time, are allowed to sell units of simple and performing mutual fund schemes i.e. diversified equity schemes, fixed maturity plans (FMPs) and index schemes having returns equal to or better than their scheme benchmark returns during each of the last three years. ii) Additional persons notified by AMFI : AMFI has notified Intermediaries/ Agents engaged in distribution of financial products e.g. insurance agent, FD agent, National Savings Scheme products, PPF, etc. registered with any other Financial Services Regulator, Business correspondents appointed by Banks and the persons of 50 years of age or more, to be included in this new cadre of distributors.

10 iii) Unique Identity Number for sales person : To identify sales person, who has sold mutual fund scheme to investor, AMFI has allotted a unique identity number to the employee/ relationship manager/ sales person of the distributor interacting with the investor for the sale of mutual fund products, in addition to the AMFI Registration Number (ARN) of the distributor. It is mandatory to disclose such unique identity number issued by AMFI on mutual fund scheme application forms along with the ARN of the distributor. b) Additional Disclosures i) By AMCs : In addition to the total commission and expenses paid to distributors, AMCs to make additional disclosures regarding distributor-wise gross inflows, whether the distributor is an associate or group company of the sponsors of the mutual fund, net inflows, average assets under management and ratio of AUM to gross inflows on their respective websites on an yearly basis. In case the above mentioned data suggests that a distributor has an excessive portfolio turnover ratio i.e. more than two times the industry average, AMCs to conduct additional due diligence of such distributors. ii) Consolidated disclosure by AMFI : AMCs to submit the above data to AMFI and the consolidated data in this regard to be disclosed on AMFI Website. c) Investment Advisors Regulations, 2013 Investment Advisors Regulations consisting registration of Investment Advisors with SEBI, eligibility criteria, qualification and certification requirement, etc. are issued. However, Mutual Fund Distributors registered with AMFI, are not required to be registered with SEBI, as Investment Advisors. Risk management a) Prudential limits and disclosures on portfolio concentration risk in debt oriented fund schemes AMCs to ensure that total exposure of debt schemes of Mutual Funds in a particular sector (excluding investments in Bank CDs, CBLO, G-Secs, T-bills and AAA rated securities issued by Public Financial Institutions and Public Sector Banks) does not exceed 30% of the net assets of the scheme.

11 Compliance by existing schemes : Existing schemes to comply with the said requirement by rebalancing the portfolio within a period of one year from the date of issuance of circular dated September 13, During this one year, total exposure of existing debt schemes of mutual funds in a particular sector should not increase from the existing level (if above 30%) as on the date of issuance of the circular i.e. September 13, (now extended up to December 2013). Additional exposure up to 10% allowed only for investments in Housing Finance Companies : In view of important role played by the Housing Finance Companies (HFCs) in the housing sector, an additional exposure up to 10% of net assets of the scheme is allowed only to HFCs as part of financial services sector. The additional exposure to financial services sector (over and above the limit of 30%) not exceeding 10% of the net assets of the scheme is allowed by way of increase in exposure to HFCs only. The total investment/ exposure in HFCs should not exceed 30% of the net assets of the scheme. b) Harmonizing applicability of NAV across schemes In respect of purchase of units of Mutual Fund schemes (other than liquid schemes) where application amount is equal to or more than ` 0.2 million, the closing NAV of the day on which the funds are available for utilization is applicable, irrespective of the time of receipt of such application. c) Mis-selling of units of a Mutual Fund Scheme Mis-selling of Mutual Fund Scheme is now brought under the ambit of Fraudulent and Unfair Trade Practices. Mis-selling is defined as sale of units of a Mutual Fund Scheme by any person, directly or indirectly by i) making a false or misleading statement; or ii) concealing or omitting material facts of the scheme; or iii) concealing the associated risk factors of the scheme; or iv) not taking reasonable care to ensure suitability of the scheme to the buyer d) Guidelines on Identification of Beneficial Ownership : All registered intermediaries to obtain, as part of their Client Due Diligence policy, sufficient information from their clients in order to identify and verify the identity of persons who beneficially own or control the securities account. The beneficial owner is the

12 natural person or persons who ultimately own, control or influence a client and/ or persons on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a legal person or arrangement. The Govt. of India in consultation with the Regulators has now specified a uniform approach to be followed towards determination of beneficial ownership. Accordingly guidelines to be complied by intermediaries in respect of clients other than individuals are stipulated. Listed Companies are exempted from the said requirement of identification of beneficial ownership. e) Illegal mobilization of funds through Collective Investment Scheme has been brought under the ambit of Fraudulent and Unfair Trade Practices Regulations (FUTP). The individuals as well as companies will be held equally guilty for manipulation. The penalty for violation of FUTP Regulations will be up to Rs. 25 crore. Others a) Uploading of the existing clients KYC (Know Your Client) details in the KYC Registration Agency (KRA) system by the intermediaries To avoid duplication of KYC process with every intermediary, KRA system was developed for centralization of the KYC records in the securities market. The system was made applicable for new clients who opened accounts with the intermediaries from January 1, Data in respect of existing clients registered prior to January 1, 2012 was uploaded in the current KRA system by March b) Amendment to the Consent Circular To provide more clarity on the scope and applicability of the framework provided for passing the consent orders and for considering the requests for composition of offences, the list of defaults, which shall not be settled by passing consent order is given, which includes defaults relating to manipulation of net asset value or other mutual fund defaults where the action of the AMC/ Mutual Fund/ Sponsor, result in substantial losses to the unit holders, except cases where the entity has made good the losses of the unit holders to the satisfaction of SEBI. c) Revision in framework for Qualified Foreign Investor (QFI) investment in Equity Shares and Mutual Fund schemes

13 The definition of QFI is revised. QFI shall mean a person who is a i) Resident in a country that is a member of the Financial Action Task Force (FATF) or a member of a group which is a member of FATF. ii) Resident in a country that is signatory to IOSCO s (International Organisation of Securities Commission) MMOU or a signatory of a bilateral MOU with SEBI. The combined investment by a person in a country through the QFI and FDI route should not exceed five percent of paid up equity capital of the Company at any point of time. All the eligible securities viz. Mutual Fund units (under both direct and indirect route), equity shares, corporate debt and any other security which is permitted for investment by QFI from time to time by GoI, RBI and SEBI, is to be held in a single demat account of the QFI. Also, the option of appointment of custodian of securities has been extended to QFI. d) Investment by Qualified Foreign Investors (QFI) a. in Indian Corporate Debt QFIs are now allowed to invest in corporate debt securities (without any lock-in or residual maturity clause) and Mutual Fund debt schemes subject to a total overall ceiling of USD 1 billion. This limit is over and above the limit of USD 20 billion for FII investment in corporate debt. QFI can invest without obtaining prior approval until the aggregate QFI investments reaches 90% of USD 1 billion i.e. USD 0.9 billion. For fresh purchases by QFIs after the investment limit reaches 90%, prior approval of the depositories is required to be obtained. b. in debt mutual fund schemes which invest in infrastructure QFIs are allowed to invest in mutual fund debt schemes, that hold at least 25 percent of their assets (either debt or equity or both) in the infrastructure sector, up to a total ceiling of USD 3 billion out of the total long term infrastructure limit of USD 25 billion. QFIs can invest without obtaining approval until the overall QFI investments reaches 90% of USD 3 billion i.e. USD 2.7 billion. e) Aadhaar Letter as Proof of Address for Know Your Client (KYC) norms

14 Unique Identification Authority of India (UIDAI), issues a unique identification document to citizens called Aadhaar. Aadhaar Letter issued by UIDAI is now accepted as Proof of Address in addition to its presently being recognized as Proof of Identity. f) Know Your Client (KYC) Requirements for foreign investors Based on the representations received regarding operational issues faced while implementing SEBI circular on Know Your Clients norms for the securities market, in case of foreign investors viz. Foreign Institutional Investors, Sub Accounts and Qualified Foreign Investors, clarification is issued in consultation with the Stock Exchanges, Depositories and Intermediaries, with respect to these investors. Accordingly, the requirements of PAN to be taken for individual promoters holding control/partners/ Trustees/ whole time Directors/ Authorized Persons, In-Person verification (IPV) for a non-individual client, Date of commencement of business, Copy of the Board Resolution for investment in securities market are no more applicable. Foreign investors investing under Portfolio Investment Scheme (PIS) route are classified under three broad segments according to their risk profile. While Government and other sovereign entities are assigned lowest risk category I, Mutual Funds, banks, university funds and pension funds have been put in the medium risk category II. Others, such as corporate bodies, individuals and family offices have been classified as category III. Risk based KYC norms to be followed based on the category of these investors. g) Monthly Portfolio Disclosures AMCs are required to disclose portfolio (along with ISIN) as on the last day of the month for all their schemes on their respective website in the same format that of half yearly portfolio disclosure on or before the tenth day of the succeeding month in a user-friendly and downloadable format (preferably in a spreadsheet). h) Cash investments in mutual funds In order to enhance the reach of mutual fund products amongst small investors who may not be tax payers and may not have PAN/ Bank accounts, such as farmers, small traders/ businessmen/ workers, cash transaction in mutual funds to the extent of ` 20,000/- per investor, per mutual fund, per financial year are allowed subject to (i) compliance with Prevention of Money Laundering Act, 2002 and

15 Rules framed there under; the SEBI Circulars on Anti Money Laundering (AML) and other applicable AML rules, regulations and guidelines and (ii) sufficient systems and procedures in place. Repayment in the form of redemptions, dividend, etc. with respect to above mentioned investments is to be paid only through banking channel. i) Disclosures with respect to Half Yearly Financial Results AMCs are required to make half yearly disclosures of their unaudited financial results on their respective website in a user-friendly and downloadable format (preferably in a spreadsheet). j) Participation of mutual funds in Credit Default Swaps (CDS) Market as Users ( Protection Buyers ) and in repo, in corporate debt securities i) CDS Mutual Funds as users (protection buyers) Mutual Funds are now allowed to participate in CDS market, as per the guidelines issued by RBI from time to time, subject to various conditions such as Mutual Funds can participate in CDS transactions only as users (protection buyers), Mutual Funds are permitted to buy credit protection only to hedge their credit risk on Corporate Bonds they hold, exposure to a single counterparty in CDS transactions not to exceed 10% of the net assets of the scheme, before undertaking CDS transactions, Mutual Funds are required to put in place a written policy on participation in CDS approved by the Board of the AMC and the Trustees, the policy is required to be reviewed by Mutual Funds, at least once a year, the concerned Scheme Information Document is required to disclose the intention to participate in CDS transaction in corporate debt securities, to enable the investors in the Mutual Fund schemes to take an informed decision, Mutual Funds are also required to disclose the details of CDS transactions of the scheme in corporate debt securities in the monthly portfolio statement as well as in the half yearly trustee report, Mutual Funds to disclose the schemewise details of CDS transaction in the notes to the accounts of annual report of the Mutual Fund. ii) Participation of Mutual Funds in repo in corporate debt securities

16 5.2 Taxation: Mutual Funds are now allowed to participate in repo in corporate debt securities. In order to encourage growth of the corporate bond market, the base of eligible securities, for Mutual Funds to participate in repo in corporate debt securities, has been expanded from AAA rated to AA rated and above rated corporate debt securities. k) Credit of exit load to scheme The exit load charged, if any, would be credited to the Scheme. Earlier Exit Loads were credited to AMC account and this amount was used for payment of commission/ maturity expenses. l) Rationalization process while obtaining PAN from investors In order to ease the PAN verification process, the intermediaries are allowed to verify the PAN of the clients online at the Income Tax Website without insisting on the original PAN card, provided that the client has provided a document for Proof of Identity other than the PAN card. m) Amendment to SEBI (Know Your Client) Registration Agency Regulations and relevant Circulars : The requirement of sending original KYC documents of the clients to KRA has been removed. n) Investment by QFIs in to be listed Indian Corporate Debt Securities : QFIs are now allowed to invest in to be listed corporate debt securities directly from the issuer. If the debt issue can not be listed within 15 days of issue for any reasons, then the holding of the QFI shall be sold off only to domestic participants/ investors until the securities are listed. In line with the taxation policy applicable to shares and stocks, investment in equity oriented mutual fund schemes are exempt from long term capital gain tax and short term capital gains are taxed at the reduced rate of fifteen percent. In respect of debt schemes, dividends paid out are subject to a Dividend Distribution tax. a) Direct Taxes Code (DTC) As a part of Tax Reforms, Direct Taxes Code, aiming to result in moderation of rates, simplification of laws and better compliance and which will replace the existing Income Tax Act 1961, was slated to be implemented effective April 1, However, Govt. is considering to incorporate the suggestions of the Standing Committee on Finance and would come up with a modified DTC Bill, which is yet to be passed by the Parliament.

17 b) Rajiv Gandhi Equity Savings Scheme (RGESS), 2012 : Deduction in respect of investment made under Rajiv Gandhi Equity Savings Scheme was introduced in the Union Budget , to give tax benefits to new investors who invest up to ` 50,000 in equity shares falling in the list of equity declared as BSE-100 or CNX-100 by the Bombay Stock Exchange and the National Stock Exchange, equity shares of public sector enterprises which are categorized as Maharatna, Navratna or Miniratna by the Central Govt. or units of Exchange Traded Funds or Mutual Fund Schemes with RGESS eligible securities as underlying and whose gross total annual income is less than or equal to ` 1 million. The objective of the scheme is to bring in new investors, encourage flow of savings in the financial instruments and improve the depth of domestic capital market. As of now there are 21 schemes available for subscription under RGESS. 6. Corporate Governance major developments In respect of governance of companies in which mutual funds invest, a detailed corporate governance framework has been put in place by the regulator. It was felt that mutual funds should play an active role in ensuring better corporate governance of listed companies. SEBI has therefore issued guidelines on Role of Mutual Funds in Corporate Governance of Public Listed Companies as follows : a) AMCs to disclose their general policies and procedures for exercising the voting rights in respect of shares held by them on the website of the respective AMC as well as in the annual report distributed to the unit holders from the financial year onwards. b) Further, the AMCs are also required to disclose on the website of the respective AMC as well as in the annual report distributed to the unit holders from the financial year onwards, the actual exercise of their proxy votes in the AGMs/ EGMs of the investee companies in respect of the following matters, in the prescribed format : i) Corporate governance matters, including changes in the state of incorporation, merger and other corporate restructuring, and anti takeover provisions. ii) Changes to capital structure, including increases and decreases of capital and preferred stock issuances. iii) Stock option plans and other management compensation issues. iv) Social and corporate responsibility issues. v) Appointment and Removal of Directors. vi) Any other issue that may affect the interest of the shareholders in general and interest of the unit-holders in particular.

18 7. Fund Governance a. Board of Trustees : Board of Trustees is the first level Regulators. Role and responsibilities of Trustees are prescribed in the Regulations. 2/3rd of Trustees and one half of the Directors of Asset Management Companies are to be independent. The Compliance Officer is called upon to report directly and independently to the Trustees. Trustees to give bi-monthly compliance reports to SEBI. Trustees to meet once in two months. Additionally, SEBI has advised to include the following additional item in the half yearly report by Trustees to SEBI : Half Yearly report by Trustees : Physical verification of gold underlying the Gold ETF units to be carried out by the Statutory Auditors of Mutual Fund Schemes and reported to Trustees on half yearly basis. The confirmation on physical verification of gold shall also form part of half yearly report by Trustees to SEBI. b. Uniform Cut off time : There is uniform cut-off time for applying NAVs, both for subscriptions and redemptions, across the Mutual Fund Industry. c. Uploading of NAV : Mutual Funds are required to update the Net Asset Value (NAV) by 9 P.M. on a daily basis on AMFI website. For Fund of Funds this time limit is extended upto the 10 A.M. of the next business day. d. Disclosure of Average Assets Under Management (AAUM) on quarterly basis : AAUM for the quarter, are required to be uploaded on the AMFI website on the next working day. e. Half yearly financial results and portfolio are required to be published in the newspaper and displayed on website of mutual funds and AMFI. AMCs to make half yearly disclosures of their unaudited financial results on their respective website in a user-friendly and downloadable format (preferably in a spreadsheet). A separate category of Securitised Debt Instruments is to be provided in the Half Yearly Portfolio Disclosure format under debt instruments. f. Disclosure of portfolio on monthly basis : AMCs to disclose portfolio on monthly basis for all their schemes on their respective website in the same format that of half yearly portfolio disclosure on or before the tenth day of the succeeding month in a user-friendly and downloadable format (preferably in a spreadsheet). 8. Other major issues and developments

19 Employee Provident Fund Organization (EPFO) has appointed four fund managers to manage employees provident fund corpus for three years. Two of the Fund Managers are Asset Management Companies. Public Sector Undertakings have been permitted to invest a certain portion of their surplus funds in Public Sector Mutual Fund Schemes. The Regulator has formed a Mutual Fund Advisory Committee that will advise the Regulator on the reforms needed to propel the growth of Mutual Funds. In line with the industry requirements and to match with the best of standards and practices available elsewhere in the world, the regulatory framework and guidelines are constantly updated and made sensitive to the market realities. The regulator plays a very active role in promoting and ensuring strict compliance of the regulations as well as in developing the industry on healthy lines. AMFI, which is a trade body, supports these developments and on its own takes several initiatives in putting in place best standards and practices. One of the major initiatives is the registration of agent distributors who are qualified and certified to provide proper advice to the investors. Institution for Mutual Fund Intermediaries (IMFI), a wholly owned subsidiary of AMFI, registered as a Section 25 Company, has applied to SEBI for recognition as a Self Regulatory Organization (SRO), under Securities and Exchange Board of India (Self Regulatory organization) Regulations The SRO will initially focus only on Distributors Regulation and other allied activities. We are awaiting further details from the Regulator. Investor Education and Awareness : AMCs to annually set apart at least 2 basis points on daily net assets within the maximum limit of TER for investor education and awareness initiatives. Mutual Funds shall make complete disclosures in the half yearly trustee report to SEBI regarding the investor education and awareness initiatives undertaken. AMFI Investor Awareness Programs : The AMCs conduct Investor Awareness Programs (IAP) across the country. Details of IAP conducted during past three years are as under : Period No of programs No of participants Cities/ towns covered May 2010 to Mar , April 2011 to Mar , April 2012 to Mar , , April 2013 to Aug , ,

20 Adoption of Districts for conducting focused Financial Literacy Campaign : AMFI has undertaken a voluntary program under which AMCs have been persuaded to adopt districts across the country, to conduct focused financial literacy campaigns. There are 642 districts in India, and as a first phase, AMCs have given their preferences for 88 districts to be adopted for conducting financial literacy campaigns. Advertisement Campaign : During FY , AMFI had organized Advertising Campaign through Television Media to create awareness about Mutual Funds, as a part of Investor Awareness Initiative. A five-week Advertisement campaign was conducted across television channels. The creative consisted of four different films, dubbed in 9 languages and were telecast across more than 30 channels. There were more than 5000 spots reserved for the campaign. The campaign had a communication tag line Mutual Fund Savings ka Naya Tareeka, primarily aiming at creating a regular saving habit among investors. The campaign was very successful and we received more than 41,000 SMS in response. All those responded through SMS, were sent a booklet which enumerates investing in Mutual Funds. A TV Commercial Campaign Saving Ka Naya Tareeka (A new way of Saving) : During the time of Budget, Inflation ka Injection (Injection for combating inflation) creative was aired on television. The 3 week campaign on television began on February 26, 2013 and continued till March 20, The campaign on radio and digital also were initiated one week after the TV campaign and had continued till April 15, The creative consisted of one short ad film i.e. Inflation ka Injection, dubbed in 7 languages and was telecast across more than 35 channels. There were more than 3,750 spots reserved for the campaign. The campaign on radio was for 15 days with 450 spots of 40 seconds duration each across three channels. The digital campaign consists of display on websites (Value Research, NDTV Profit, Money Control and YouTube), on mobiles through Inmobi (a mobile advertising network to flash banners under sections NDTV, Money Control, IBN Live, First Post, Headlines Today, NDTV Profit) and through ers (Money Control & DSIJ subscribers) spread over 4 weeks with about 7.2 million impressions with an expectation of about 0.17 million views. AMFI created a separate micro-site on IAP. The booklet is also available here for anyone to download the same. Total number of visit to the IAP micro-site till date has been 20,200+ and the number of booklet download has been

21 Standard Presentation for creating Investor awareness : AMFI IAP Committee had prepared Standard presentation for creating awareness about mutual fund among non investors, which was circulated to AMCs for using the same in the AMFI Investor Awareness Programme conducted by the AMCs. It was decided by the to review and revise the contents of the Standard Presentation on Mutual Fund used while conducting AMFI IAP. MF UTILITY (MFU) With a view to enhance infrastructure and thereby, to facilitate market expansion, AMFI has initiated one of its most ambitious initiatives - enabling a transaction platform for MFs that is scalable, cost efficient, provides national and global reach and provides benefits to various stakeholders. The proposed bespoke called MF Utility envisages creating a different level of investor/ distributor experience at no additional cost to the investor, enhancing operational and service efficiency, by bringing together all the stakeholders on a single platform. MF Utility aims to create a robust market infrastructure akin to other securities market facilities. The MFU is positioned to be a state of the art front-end application, to function as an Order Routing and service enhancement tool. The MFU is proposed to be an inclusive platform that seeks to facilitate efficient order placement and service by providing a common, scalable and efficient infrastructure to connect Investors and Distributors with the AMC or its service provider, and centralizing key information for easy and single-point access. It will play a complimentary role, creating convenience and facilitating smoother processes with higher efficiency while reducing the overall end to end process costs. AMFI believes that the proposed MF Utility can bring significant benefits to Investors, Distributors and the Mutual Fund industry. This is a game-changing concept that will allow Mutual Funds to significantly enhance their reach and presence in the country, further the goals of inclusion, retail penetration, improved customer convenience and help reduce the inherent risks of growth for the industry.