Mutual fund trust structure (India)

The mutual fund trust structure in India is the statutory three-tier arrangement under which every mutual fund is constituted as an irrevocable Indian trust under the Indian Trusts Act, 1882, with three legally distinct roles: the sponsor, the trustee, and the asset management company (AMC). The arrangement is codified in the SEBI (Mutual Funds) Regulations, 1996 , framed under the SEBI Act, 1992 , and supplemented by the requirement that the AMC be a body corporate registered under the Companies Act, 2013. Each tier carries a distinct legal capacity, eligibility test, and relationship to the unit-holder.

The defining feature is the separation between economic ownership and managerial control. Unit-holders are the beneficial owners of the scheme corpus; the trustee company holds legal title to scheme assets on their behalf under the Indian Trusts Act; the AMC is hired help, an investment manager appointed under an investment management agreement, and is neither the owner of the assets nor a principal of the unit-holder. The sponsor, although founding promoter and contributor to the AMC’s capital, has no direct authority over investment decisions and cannot give binding instructions to the AMC or trustee.

The structure departs from the United States corporate model, where the fund is itself a registered investment company with a board of directors elected by shareholders. India adopted the trust model in 1963 with the Unit Trust of India, retained it through the 1993 private-sector framework, and entrenched it in the 1996 Regulations, with investor protection through ring-fencing of scheme assets as the consistent motivation.

Statutory basis

The structure rests on three primary statutes and one subordinate instrument.

• Indian Trusts Act, 1882, Sections 3 and 4. Section 3 defines a trust as an obligation annexed to the ownership of property, arising out of a confidence reposed in the owner by the author of the trust, for the benefit of another. Section 4 confirms that a trust may be created for any lawful purpose. The scheme corpus is trust property; unit-holders are the beneficiaries; the trustee holds the property in fiduciary capacity.
• SEBI Act, 1992, in particular Sections 11(2)(g) and 30, empowering SEBI to register and regulate mutual funds and to frame regulations; Section 12 requires registration of intermediaries.
• SEBI (Mutual Funds) Regulations, 1996. Regulation 7 sets out sponsor eligibility; Regulations 16 to 18 cover trustee composition and responsibilities; Regulations 20 to 25 cover AMC registration, board composition, and obligations. The Third Schedule prescribes the contents of the trust deed.
• Companies Act, 2013, under which the AMC must be a body corporate. Most trustees are also incorporated as private limited companies, although a board of individual trustees remains a permitted alternative.

The trust deed, executed by the sponsor in favour of the trustees, is the constitutive document of the fund. Under Regulation 14(2), it must be registered under the Indian Registration Act, 1908. The deed creates the corpus, names initial trustees, sets out replacement procedure, prescribes remuneration, and lays down broad investment policy. Schedule III specifies minimum contents.

The sponsor

Definition

Regulation 2(za) defines the sponsor as any person who, alone or with another body corporate, establishes a mutual fund. The sponsor executes the trust deed, contributes the initial AMC capital, and appoints the first trustees. Residual liability to unit-holders continues until SEBI is satisfied that any successor sponsor is in place.

Eligibility under Regulation 7

The eligibility test under Regulation 7 is cumulative:

1. Track record of at least five years in financial services.
2. Profitability in at least three of the previous five financial years, including the most recent year, with positive net worth in each year.
3. Net worth must exceed the proposed capital contribution to the AMC.
4. Sound financial standing and reputation for fairness and integrity, as assessed by SEBI.
5. Capital contribution of at least 40 per cent of the net worth of the AMC. Any entity holding 40 per cent or more of the AMC’s net worth is deemed a sponsor.

The dedicated article on SEBI MF sponsor eligibility treats each limb of the test in detail.

Skin-in-the-game rule

The September 2021 amendment requires designated AMC employees, including the chief executive officer, chief investment officer, fund managers, dealers, research analysts, and senior management, to invest a defined minimum percentage of gross annual compensation in units of the schemes they manage. The AMC must also contribute a percentage of every new fund offer subscription, capped at Rs 50 lakh per scheme. Holdings vest over three years and are subject to clawback. Mechanics are covered in SEBI MF skin-in-game rule .

2023 alternative eligibility

The 2023 amendment to Regulation 7 created an alternative test for entities that fail the conventional track record. A body corporate may qualify as sponsor with net worth of at least Rs 150 crore for each of the previous five years and demonstrated operational capacity to run a fund house. The alternative permits private equity firms, fintech promoters, and other non-traditional applicants to enter the market while preserving capital adequacy.

Continuing obligations

Under Regulation 8, the sponsor is liable for losses suffered by the trustee company or AMC on account of misfeasance during formation of the trust. The sponsor cannot dilute its holding below 40 per cent without SEBI approval; any change in control of the sponsor amounts to a change in control of the mutual fund and requires fresh SEBI approval. Cross-holdings between sponsor of one fund and AMC of another are restricted under Regulation 7B.

The trustee

Form

The trustee may be either a board of individual trustees or, more commonly, a trustee company, a private limited company under the Companies Act, 2013, with the specific object of acting as trustee for funds set up by the sponsor. Examples include HDFC Trustee Company, ICICI Prudential Trust, SBI MF Trustee Company, and Nippon Life India Trustee.

Composition under Regulation 16

Regulation 16(5) requires that two-thirds of trustees (or directors of the trustee company) be independent. Independence is defined negatively: the trustee must not be associated with the sponsor as employee, director, member, officer, or holder of more than 10 per cent of the shareholding, in the present or in the preceding three years. Persons convicted of moral-turpitude or economic offences are disqualified. SEBI must be informed of changes.

Responsibilities under Regulation 18

Regulation 18 sets out the principal trustee responsibilities:

• Ensure the AMC has the systems, procedures, and personnel for proper conduct of the fund’s business in compliance with the SEBI Act and 1996 Regulations.
• Approve every scheme floated by the AMC and ensure full disclosure of material facts in the offer document.
• Review investment policy, performance against benchmark, and adherence to the Scheme Information Document .
• Furnish a half-yearly trustee report to SEBI on trustee, AMC, and scheme activities.
• Ensure compliance with the Fifth Schedule code of conduct.
• Appoint scheme auditors, the custodian, the RTA, and the compliance officer.
• Take remedial action where the AMC has failed to discharge its obligations, including removal of the AMC with SEBI consent.

The compliance officer reports administratively to the AMC chief executive and substantively to the trustee. Trustees must hold at least six meetings every financial year; the audit committee of the trustee board must meet at least twice a year.

Liability

Trustees owe duties of care, loyalty, and good faith under the Indian Trusts Act, 1882. Sections 13 to 30 cover duties to execute the trust, to inform the beneficiary, to keep accurate accounts, to deal impartially, and to refrain from self-dealing. Section 23 makes a trustee liable to make good any loss to trust property caused by breach. The SEBI Act and 1996 Regulations overlay administrative penalties, including fines, suspension of registration, and disgorgement. Personal liability is enforceable through civil suits and SEBI adjudication.

The asset management company

Form and registration

The AMC is a body corporate under the Companies Act, 2013, appointed by the trustee under an investment management agreement and approved by SEBI under Regulation 21. It is the operative arm of the fund, employing fund managers, research analysts, dealers, risk, compliance, and operations staff. Examples include HDFC Asset Management Company, ICICI Prudential AMC, SBI Funds Management, and Nippon Life India Asset Management.

Net worth

The minimum AMC net worth was set in 1996 at Rs 10 crore, raised to Rs 25 crore in 2002, to Rs 50 crore in 2014, and to Rs 150 crore in August 2023 for new applicants and for existing AMCs over a glide path. The threshold must be maintained throughout registration. Net worth is computed on paid-up capital, free reserves, and surplus, net of accumulated losses, intangible assets, and revaluation reserves.

Board composition under Regulation 21

The AMC board must have at least 50 per cent independent directors, that is, directors neither associated with the sponsor nor part of AMC management. The chief executive officer, chief investment officer, and chief compliance officer must be full-time employees. At least one director must be nominated by the trustees, creating a two-level governance structure under the trust.

Functions

The AMC discharges the following principal functions:

• Scheme management, including design, offer documents, and ongoing portfolio management.
• Investment decisions through the fund manager and investment committee, under the chief investment officer.
• Dealing, placing buy and sell orders through the dealing room.
• Accounting and valuation, including daily NAV computation under Schedule VIII.
• Compliance monitoring SEBI regulations, AMFI guidelines, and scheme documents.
• Risk management, including liquidity stress testing, credit risk assessment, and operational risk control.
• Investor servicing, RTA coordination, distributor management, and grievance redress.

Restrictions on business

Regulation 24 restricts the AMC to permitted activities: asset management for mutual funds, investment advisory, portfolio management services (PMS) under separate registration and ring-fencing, and management of alternative investment funds (AIFs) under safeguards. The AMC cannot conduct any business conflicting with unit-holder interests, cannot be trustee of any mutual fund, and cannot sponsor another fund. The intent is to prevent cross-subsidy of loss-making schemes, informational leakage between PMS and mutual fund clients, and erosion of trustee independence.

Functional flow within the structure

The flow of obligations and asset custody, in the order value moves:

The custodian, registered separately with SEBI under the SEBI (Custodian of Securities) Regulations, 1996, holds scheme securities physically or, more commonly, in dematerialised form through a depository. The RTA, registered under the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993, processes investor transactions. Both must be independent of the sponsor under Regulations 26 and 27.

Inter-entity safeguards

The 1996 Regulations enforce structural firewalls between the tiers:

• AMC and trustee independence. Two-thirds of trustees and 50 per cent of AMC directors must be independent. No trustee may be an AMC employee, and no AMC employee may sit on the trustee board.
• AMC and sponsor of another fund. An AMC of one fund cannot sponsor another; cross-holdings are limited under Regulation 7B.
• Custodian independence. Under Regulation 26, the custodian cannot be a group company of the sponsor or AMC unless SEBI permits the arrangement with disclosure.
• Auditor independence. The auditor of each scheme is appointed by the trustee, not the AMC; the AMC’s own auditor must differ from the scheme auditor.
• Compliance officer. The substantive reporting line runs to the trustee, not the AMC chief executive.
• Investment firewall. The sponsor cannot give binding instructions on individual investments; trustees do not participate in stock-by-stock decisions.

These firewalls are reinforced by SEBI inspection powers under Chapter VII and by the disclosure obligation through the Statement of Additional Information and other periodic filings.

MF Lite framework, 2024

The SEBI Mutual Fund Lite framework introduced in 2024 modifies structural requirements for passive-only AMCs, namely those restricted to index funds, ETFs, and certain rule-based products. It reduces net worth, simplifies sponsor eligibility, and relaxes some staffing prescriptions, on the rationale that operational risk in passive management is materially lower. The trust form, sponsor-trustee-AMC tiering, and the custodian and RTA arrangements remain unchanged. The dedicated SEBI MF Lite framework article sets out the specific concessions.

Comparison with international mutual fund structures

United States

The principal vehicle in the United States is the registered investment company under the Investment Company Act of 1940. The fund is itself a corporation, usually organised in Delaware, Maryland, or Massachusetts, with a board of directors a majority of whom must be independent of the investment adviser. Shareholders elect directors and vote on material matters. The fund is the principal, the adviser is the agent under an advisory contract.

United Kingdom

The British structure is bimodal. Authorised unit trusts, under the Financial Services and Markets Act 2000 and the Collective Investment Schemes Sourcebook (COLL), use a trust form similar to the Indian arrangement, with a depositary holding scheme property and a separate management company. Open-Ended Investment Companies (OEICs), introduced in 1997, are corporate vehicles akin to the United States model and dominate new launches since the early 2000s.

Choice of trust form in India

India adopted the trust form in 1963 because, under the Indian Trusts Act, 1882, the trust was the most thoroughly tested Indian-law vehicle for segregating beneficial ownership from legal title. The corporate form was less developed for collective investment after the Investment Trust Companies of pre-independence India faded post-1956. The 1993 and 1996 Regulations retained the trust form for continuity and because the irrevocable Indian trust offers a stronger ring-fence around scheme assets. The trust form also avoids corporate income tax on the fund, incidence falling on the unit-holder.

Major regulatory changes to the structure over time

1963 to 1993

The Unit Trust of India , established under the Unit Trust of India Act, 1963, was the sole mutual fund entity through 1987. Its statute-based structure, with the Government of India as sponsor and an internal board, predated the modern trust framework. Public-sector AMCs sponsored by banks and insurers entered in 1987; UTI was bifurcated in 2002.

1996 codification

The SEBI (Mutual Funds) Regulations, 1996 replaced the 1993 Regulations and codified the three-tier structure as the universal model, with all existing funds required to migrate.

2003 trustee independence

The 2003 amendment raised the trustee independence threshold to two-thirds, brought in the half-yearly trustee report, and required substantive reporting of the compliance officer to the trustee.

2008 trustee responsibility expansion

Following the global financial crisis and credit events in Indian debt funds, SEBI expanded the trustee role under Regulation 18 to include explicit oversight of valuation, liquidity, and the AMC’s risk management framework.

2014 net-worth raise

The 2014 amendment raised minimum AMC net worth to Rs 50 crore, reflecting SEBI’s view that prevailing thresholds were inadequate against operational losses or regulatory penalties.

2021 skin-in-the-game rule

Regulation 25 was amended in September 2021 to introduce the skin-in-the-game rule , with deferral and clawback features.

2023 sponsor alternative and Rs 150 crore net worth

The 2023 amendment to Regulation 7 introduced the alternative net worth test for new entrants. In August 2023 SEBI also raised minimum AMC net worth to Rs 150 crore for new registrants, with existing AMCs migrating over a glide path.

2024 MF Lite framework

The 2024 SEBI MF Lite framework provided a relaxed entry route for passive-only AMCs; the trust structure remained unchanged.

Notable enforcement actions

Franklin Templeton, 2020

In April 2020, Franklin Templeton Mutual Fund wound up six open-ended debt schemes with combined assets of approximately Rs 25,856 crore, citing redemption pressure on illiquid bond portfolios. Trustees ratified the winding-up but were required, following a Supreme Court direction, to seek unit-holder consent under Regulation 18(15)(c). The postal ballot in December 2020 passed by a substantial majority; see Franklin Templeton winding-up 2020 . The case reinforced the trend towards explicit unit-holder voting on material matters.

Karvy RTA, 2019

The Karvy Stock Broking matter of November 2019 involved alleged misuse of client securities pledged to the broker. Because Karvy was RTA for several mutual funds, the episode disrupted unit-holder records and prompted SEBI to tighten the RTA framework; see Karvy RTA pledge misuse, 2019 . The lesson was that entities outside the sponsor-trustee-AMC perimeter can affect unit-holder protection.

UTI US-64, 2001

The 2001 freeze on sales and repurchases of US-64 exposed defects in the pre-codification arrangement, in particular the absence of mark-to-market NAV, opacity of internal cross-subsidies, and the lack of an independent trustee board. The bailout and bifurcation of UTI are detailed in UTI US-64 crisis 2001 . The episode hardened consensus that the 1996 trust-form framework was the only viable architecture for collective investment in India.

Criticism and debates

Trustee passivity

A frequent criticism concerns trustee oversight in practice. Although two-thirds of trustees are independent of the sponsor, the trustee company is set up by the sponsor, trustees are remunerated through fees borne by the AMC, and information flow is mediated by the AMC’s compliance officer. Critics argue that the incentives tend towards ratification rather than challenge. Reform proposals include direct election of trustees by unit-holders, an industry-wide trustee panel, and public disclosure of trustee dissent.

Product proliferation

The AMC-driven approach to scheme design has been associated with periodic proliferation. The 2017 SEBI scheme rationalisation circular reduced open-ended schemes from over 2,000 to around 550 by enforcing one scheme per category per AMC. Critics argue that the underlying incentive, AMC compensation tied to AUM growth, has not changed and that proliferation recurs in themed equity, sectoral debt, and passive variants.

Sponsor-AMC informational asymmetry

Where the sponsor is a financial group with banking, broking, or insurance arms, the group may possess material information about issuers or markets not available to the AMC’s investment team. The framework forbids communication of such information for scheme use, but the boundary is difficult to monitor. The Insider Trading Regulations and the AMFI code of conduct provide additional restriction.

Fiduciary clawback

Commentators have called for clearer rules enabling clawback of AMC and trustee fees where a scheme has been mis-sold or mismanaged. The current framework permits SEBI to direct disgorgement under Section 11B of the SEBI Act, but no automatic clawback applies. Proposals include escrow of a percentage of management fees and statutory unit-holder class-action rights.

See also

• SEBI (Mutual Funds) Regulations, 1996
• SEBI Act, 1992
• SEBI Investment Management Department
• SEBI MF Lite framework
• SEBI MF sponsor eligibility
• SEBI MF skin-in-game rule
• SEBI MF half-yearly trustee report
• Open-ended mutual fund
• Close-ended mutual fund
• Mutual fund industry in India
• History of mutual funds in India
• AMFI, Association of Mutual Funds in India
• Unit Trust of India
• UTI US-64 crisis 2001
• Franklin Templeton winding-up 2020
• Karvy RTA pledge misuse, 2019

References

1. Indian Trusts Act, 1882 (Act II of 1882), Sections 3, 4, 13 to 30.
2. SEBI Act, 1992 (Act 15 of 1992), Sections 11, 12, 15A to 15H, 30.
3. SEBI (Mutual Funds) Regulations, 1996, Gazette of India Extraordinary, Part II, Section 3, 9 December 1996, as amended, with particular reference to Regulations 7, 14 to 18, 20 to 25.
4. Companies Act, 2013 (Act 18 of 2013), provisions relating to incorporation of bodies corporate and directors.
5. SEBI Circular SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/553, 28 April 2021, alignment of interest of designated employees of asset management companies with the unit-holders of the mutual fund schemes.
6. SEBI Notification SEBI/LAD-NRO/GN/2023/146, June 2023, amendment to Regulation 7, alternative eligibility test for sponsors.
7. SEBI Master Circular for Mutual Funds, SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/137, 27 May 2024.
8. SEBI Order in re Franklin Templeton AMC, WTM/AB/IMD/IMD/11476/2021, 7 June 2021.
9. Supreme Court of India, Franklin Templeton Trustee Services Pvt Ltd v. Amruta Garg and others, Civil Appeal No. 498 of 2021, judgment dated 14 July 2021.
10. SEBI Annual Report 2023 to 24, Mumbai, August 2024.
11. AMFI Industry Best Practices, Compendium of Resolutions of the Board of AMFI, 2024 edition.
12. Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (Act 58 of 2002).