SEBI (Mutual Funds) Regulations 1996

The SEBI (Mutual Funds) Regulations 1996 are the foundational regulatory framework governing every mutual fund in India. Issued by the Securities and Exchange Board of India under Section 30 of the SEBI Act 1992 and notified on 9 December 1996, these regulations have governed the entire Indian mutual fund industry continuously since they replaced the earlier mutual fund framework administered through SEBI’s general directions. The regulations establish the three-tier sponsor-trustee-AMC structure that has remained the structural foundation of the industry through subsequent reforms.

Every participant in the Indian mutual fund industry operates within this framework: the 44 Asset Management Companies that manage Rs 60+ lakh crore in AUM as of 2026 are registered under these regulations, their schemes are launched and operated under these regulations, the Association of Mutual Funds in India operates as a self-regulatory body that supplements them, and the 50+ million retail investors interact with mutual fund products that are structured within their parameters.

The regulations have been amended approximately 70 times since 1996 through specific amendment circulars, broader SEBI Master Circulars (most recently the SEBI Master Circular on Mutual Funds of 27 May 2024), and structural reforms including the October 2017 scheme categorisation circular , the direct-plan regime introduction of January 2013 , the March 2020 multi-cap reclassification , the April 2023 debt mutual fund taxation reform , and various AMC governance amendments through 2024.

This article covers the regulations end-to-end: the legal foundation, the three-tier structural framework, the AMC registration regime, scheme launch requirements, investment restrictions and expense caps, valuation and disclosure rules, the termination and winding-up framework, the amendment history, and the operational interaction with AMFI and the depositories.

Legal foundation

SEBI Act 1992 authority

The SEBI (Mutual Funds) Regulations 1996 are issued under the powers conferred by Section 30 of the SEBI Act 1992 . Section 30 authorises SEBI to make regulations consistent with the SEBI Act for carrying out the purposes of the Act. The regulations have the status of subordinate legislation and are binding on every mutual fund participant.

Structure

The 1996 Regulations comprise 78 regulations organised into 14 chapters plus 16 schedules. The principal chapters:

The schedules cover specific operational requirements including investment-restriction matrices, scheme-information-document formats, prudential limits, and standard offer documents.

Replacement of pre-1996 framework

Before the 1996 Regulations, mutual fund operations in India were governed by:

• The Unit Trust of India Act 1963 (specific to UTI).
• SEBI’s general circulars and ad-hoc directions to private-sector AMCs that began operating after 1993 liberalisation.
• The Companies Act 1956 corporate-law framework for AMC governance.

The 1996 Regulations consolidated and replaced this fragmented framework with a single comprehensive regulation governing all mutual funds equally. This consolidation was particularly important as private-sector AMCs (Kothari Pioneer being among the first in 1993) had begun to operate in significant numbers and required a comprehensive regulatory framework.

The three-tier structure

Sponsor

The mutual fund is “established” by a sponsor under Regulation 7. The sponsor:

• Is typically a bank, financial services group, or AMC parent company.
• Contributes the initial capital required for the mutual fund’s establishment.
• Cannot directly operate the mutual fund (because of conflict-of-interest considerations).
• Must meet specified eligibility criteria including a minimum net worth of Rs 50 crore.
• Sets up the trustee company and the Asset Management Company .

Sponsor categories in the Indian market:

• Bank-sponsored: SBI Mutual Fund (sponsored by State Bank of India), HDFC Mutual Fund (HDFC Bank), ICICI Prudential (ICICI Bank), Axis Mutual Fund (Axis Bank), Kotak Mutual Fund (Kotak Mahindra Bank).
• Foreign joint-venture: Mirae Asset (Mirae Asset Korea), DSP-BlackRock (historical), Franklin Templeton (historical, exited 2023).
• Insurance-sponsored: HDFC Life-affiliated, SBI Life-affiliated.
• Independent and fintech-sponsored: PPFAS (Parag Parikh family), Quant, Navi, Zerodha Fund House.

Trustee

The trustee company holds the assets of the mutual fund on behalf of unitholders under Regulation 18. The mutual fund trustee is the legal owner of the scheme assets and operates with fiduciary obligations to the unitholders. Key trustee functions:

• Approve scheme launches.
• Review AMC performance and compliance.
• Ratify investments exceeding prescribed limits.
• Receive periodic AMC compliance reports.
• Handle conflict-of-interest matters between AMC and unitholders.

Trustees are required to be independent of the AMC. Regulation 16 prescribes the trustee composition requirements including a minimum of 4 directors, of whom at least 2/3 must be independent.

Asset Management Company (AMC)

The AMC manages the mutual fund’s investments under Regulation 22-25. The AMC:

• Designs and launches schemes.
• Manages the investment portfolios.
• Markets the schemes through distribution channels.
• Provides ongoing fund administration.
• Reports to the trustee and to SEBI.

The AMC is a separately incorporated company under the Companies Act 2013 and holds a SEBI registration as an AMC. AMC governance requirements include:

• Minimum net worth of Rs 50 crore.
• Board with independent directors (at least 50 per cent independent for major AMCs).
• Designated key personnel (CEO, CIO, Compliance Officer, Risk Manager).
• Compliance with skin-in-the-game rules requiring senior employees to invest a portion of their compensation in the schemes they manage.

Custodian

The mutual fund custodian , although not a tier of the structure itself, is a critical operational participant under Regulation 26. The custodian:

• Holds the scheme’s securities in safe custody.
• Settles purchases and sales on behalf of the scheme.
• Reconciles holdings with the AMC’s records.
• Reports holdings to the trustee.

Major custodians include HDFC Bank Custody Services, ICICI Bank Custody Services, Standard Chartered Bank Custody Services, Deutsche Bank, and SBI-SG Global Securities Services.

AMC registration

Eligibility for AMC registration

To register as an AMC under Regulation 22, the applicant must:

• Have a minimum net worth of Rs 50 crore.
• Have a sponsor meeting the sponsor eligibility criteria.
• Have a trustee structure compliant with Regulation 16.
• Have qualified key personnel (CEO with at least 5 years of experience, CIO with at least 5 years of investment management experience).
• Have a compliance officer.

Registration process

The AMC registration process runs through SEBI’s Investment Management Department :

1. Application submission to SEBI through the prescribed form with supporting documents.
2. SEBI examination including verification of sponsor financials, trustee composition, AMC personnel, infrastructure, and proposed business plan.
3. In-principle approval from SEBI upon satisfactory examination.
4. Final registration certificate after the AMC demonstrates operational readiness.

The end-to-end timeline typically runs 9-18 months from application to operational registration. SEBI registers approximately 1-3 new AMCs per year, with the total industry at 44 AMCs as of 2026.

Scheme launches

Scheme types

Under Regulation 28 and the October 2017 categorisation circular , schemes are classified into:

• Open-ended schemes: continuous purchase and redemption at NAV. The dominant scheme structure.
• Closed-ended schemes: fixed maturity, listed on the exchanges after the NFO period. Limited usage today.
• Interval schemes: hybrid with specified subscription/redemption windows.

Within each structural type, schemes are further classified by:

• Asset class: equity, debt, hybrid, solution-oriented, other (index/ETF/FoF).
• Category within asset class (e.g., large-cap, mid-cap, ELSS, liquid, gilt, aggressive hybrid).

Scheme Information Document (SID)

The Scheme Information Document is the core disclosure for every scheme launch under Regulation 28. The SID:

• Defines the scheme’s investment objective and asset allocation pattern.
• Lists the fund manager and key personnel.
• Specifies the expense ratio cap and the load structure.
• Identifies the benchmark for performance comparison.
• Documents the riskometer assessment.

The SAI (Statement of Additional Information) provides the broader AMC-level disclosure that supplements the scheme-specific SID.

New Fund Offer (NFO) process

A scheme launch begins with the NFO period during which the scheme is open for subscription at the offer price (typically Rs 10). The NFO timeline:

1. SEBI clearance of SID (typically 4-8 weeks examination).
2. NFO period of 15 days (open-ended) to 30 days (closed-ended).
3. Allotment at the close of the NFO.
4. Listing (for closed-ended schemes).
5. Continuous subscription opens (for open-ended schemes) typically within 5 working days of allotment.

Investment restrictions

Asset-allocation requirements

Regulation 44 read with the October 2017 categorisation circular prescribes asset-allocation requirements by scheme category:

Single-issuer limits

Regulation 44 prescribes maximum exposure to a single issuer:

• 10 per cent of NAV per equity issuer.
• 10 per cent of NAV per debt issuer (Group-level limit applies).
• 5 per cent per non-rated issuer (limited cases).

The single-issuer limits are designed to prevent concentration risk in any individual security position.

Group-level limits

Beyond single-issuer limits, exposure to all securities of any one group (parent + subsidiaries + associates) is restricted to 25 per cent of NAV. Specific industry exposure limits also apply.

Prohibited transactions

Regulation 44 also prohibits:

• Buying physical commodities.
• Operating as a buyer in primary market underwriting.
• Lending or borrowing other than as permitted.
• Investing in any other scheme of the same AMC beyond prescribed limits.

Expense ratios

Total Expense Ratio (TER) caps

Regulation 52 prescribes maximum TER by scheme category and AUM tier. The current framework after the 2018 amendment:

The slab structure incentivises AMCs to lower expense ratios as funds grow.

Direct plan vs Regular plan

Since 1 January 2013, every scheme must offer both a direct variant and a regular variant under Regulation 49. The direct vs regular TER differential is the embedded distributor commission in the regular plan, which is absent in the direct plan.

TER deduction

The TER is deducted daily from the scheme’s NAV, with the daily accrued amount paid to the AMC. The TER funds the AMC’s investment management, marketing, administration, distribution commissions (for regular plans), and SEBI’s investor protection fund contributions.

Valuation and NAV

NAV computation

Regulation 47 and the SEBI Master Circular prescribe NAV computation rules. The mutual fund NAV is computed daily based on:

• Market price of listed securities at the official close.
• Yield-to-maturity-based valuation for debt securities (or amortisation for short-tenor debt).
• AMFI-published valuation guidance for specific instrument categories.

Cut-off times

The NAV cut-off framework prescribes which day’s NAV applies for transactions:

• Equity schemes: same-day NAV for orders received with cleared funds before 3:00 PM.
• Liquid schemes: same-day NAV for orders received with cleared funds before 1:30 PM (purchases up to Rs 2 lakh).
• Other debt: same-day NAV for orders received before 3:00 PM.

The 2021 reform tightened the framework to require funds-received (not orders-placed) before the cut-off.

Disclosure framework

Daily NAV

Every scheme publishes its NAV daily by 9:00 PM on the AMFI website and the AMC website under Regulation 56.

Monthly portfolio disclosure

AMCs disclose the full portfolio (down to individual security level) once a month under Regulation 58. The disclosure is published on the AMC website and aggregated by AMFI.

Half-yearly disclosures

Under Regulation 59, AMCs publish half-yearly:

• Unaudited financial results.
• Portfolio-attribution analysis.
• Fund-manager commentary.

Annual disclosures

Full audited annual reports are published within 4 months of the financial-year-end. These include scheme-level audited financials, AMC-level audited financials, and the AMC’s annual report content under Regulation 60.

Termination and winding up

Voluntary winding up

A scheme may be voluntarily wound up under Regulation 39 by AMC decision with trustee approval. Common reasons:

• Sub-economic AUM.
• Strategy obsolescence.
• AMC consolidation.

The winding-up process involves liquidation of the portfolio, distribution of proceeds to unitholders, and notification to SEBI.

Mandatory winding up

SEBI may direct mandatory winding up under specified circumstances including:

• Failure to meet minimum AUM thresholds.
• Persistent non-compliance with regulations.
• AMC failure or restructuring.

Franklin Templeton precedent

The Franklin Templeton winding-up of six debt schemes in April 2020 is the major recent precedent. The winding-up was triggered by liquidity stress on the schemes following COVID-related debt-market dislocation. The episode prompted subsequent SEBI reforms on debt-fund liquidity and side-pocketing.

Amendment history

Major amendments

The regulations have been amended through:

• Numerous specific amendment circulars addressing operational details, expense ratios, scheme categorisation, and disclosure requirements.
• The October 2017 scheme categorisation circular standardising 36 categories across AMCs.
• The 2013 direct-plan amendment introducing mandatory direct variants.
• The 2018 TER amendments revising the expense-ratio slab structure.
• The 2020 multi-cap reclassification changing multi-cap allocation requirements.
• The 2023 debt-fund taxation reform (effective through Section 50AA of the Income Tax Act).
• Various 2018-2024 AMC governance amendments addressing board independence, skin-in-the-game, insider trading, and risk management.

SEBI Master Circular consolidation

In 2023, SEBI issued the SEBI Master Circular on Mutual Funds consolidating all operating circulars and amendments under a single master document. The most recent version (27 May 2024) is the operative reference for current regulatory requirements.

Relationship with AMFI

The Association of Mutual Funds in India operates as an industry self-regulatory body alongside the SEBI regulations. AMFI publishes industry codes (the AMFI Code of Ethics , AMFI Best Practice Guidelines ) and administers operational frameworks (the ARN system , the Risk-O-Meter ). SEBI often mandates AMFI standards through subsequent regulations, creating a layered framework where AMFI’s industry consensus becomes regulatory through SEBI endorsement.

See also

• SEBI
• SEBI Act 1992
• SEBI Investment Management Department
• Mutual fund industry in India
• Mutual funds in India
• Association of Mutual Funds in India (AMFI)
• SEBI Oct-2017 scheme categorisation circular
• SEBI multi-cap reclassification (September 2020)
• Mutual fund TER in India
• Direct vs regular plan TER differential
• Mutual fund NAV
• NAV cut-off reform of 2021
• Mutual fund custodian
• AMFI Risk-O-Meter
• SEBI MF board independence
• SEBI MF skin-in-the-game rule
• Franklin Templeton winding-up (April 2020)
• Debt mutual fund taxation (post-2023)
• Mutual fund taxation in India

External references

• SEBI (Mutual Funds) Regulations 1996
• SEBI Master Circular on Mutual Funds
• AMFI India
• SEBI Act 1992

References

1. SEBI (Mutual Funds) Regulations 1996 and subsequent amendments, sebi.gov.in.
2. SEBI Master Circular on Mutual Funds dated 27 May 2024, sebi.gov.in.
3. SEBI Act 1992, indiacode.nic.in.
4. AMFI industry codes and best-practice guidelines, amfiindia.com.
5. SEBI scheme categorisation circular dated 6 October 2017 and subsequent clarifications.
6. SEBI Annual Reports for mutual-fund-industry activity statistics, sebi.gov.in.
7. Franklin Templeton winding-up SEBI orders and the subsequent debt-fund liquidity reforms (2020-2021).