NISM Series V-A Chapter 3: Legal Structure of Mutual Funds in India Practice Questions

Question 1

What is the primary and overarching duty of the Board of Trustees of a mutual fund?

Accepted Answer

To ensure that the Asset Management Company (AMC) acts in the best interest of the unitholders.. The Board of Trustees of a mutual fund acts as a fiduciary for the unitholders and has the primary duty to ensure that the Asset Management Company (AMC) manages the fund's affairs and operates the schemes in the best interest of the unitholders, as per SEBI (Mutual Funds) Regulations, 1996.

Question 2

What is the minimum proportion of independent directors required on the Board of Trustees of a mutual fund as per SEBI regulations?

Accepted Answer

At least two-thirds of the total trustees. SEBI (Mutual Funds) Regulations, 1996, mandate that at least two-thirds of the directors on the Board of Trustees must be independent directors. This ensures that the trustees act independently and in the best interest of the unitholders, providing a check on the AMC.

Question 3

As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum duration for which a sponsor must have a positive net worth in all immediately preceding five years, including profits in at least three of these five years, to be eligible to establish a mutual fund?

Accepted Answer

Immediately preceding 5 years. SEBI (Mutual Funds) Regulations, 1996, Chapter II, Regulation 7(a)(ii) specifies that the sponsor must have a positive net worth for all the immediately preceding five years and have profit in at least three out of the five immediately preceding years. Additionally, the net worth in the immediately preceding fifth year must be more than the capital contribution of the sponsor in the asset management company.

Question 4

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum proportion of independent directors required on the board of directors of an Asset Management Company (AMC)?

Accepted Answer

Not less than half of the directors.. As per SEBI (Mutual Funds) Regulations, 1996, the Asset Management Company (AMC) board must have at least half of its directors as independent directors to ensure proper oversight and investor protection.

Question 5

What is the minimum proportion of independent trustees required on the Board of Trustees for a mutual fund as per SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

Two-thirds. As per SEBI (Mutual Funds) Regulations, 1996, Chapter III, Regulation 16(b), at least two-thirds of the trustees on the Board of Trustees must be independent persons.

Question 6

What is a mandatory regulatory requirement for a Registrar and Transfer Agent (RTA) providing services to a mutual fund in India?

Accepted Answer

The RTA must be registered with SEBI.. As per SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993, and SEBI (Mutual Funds) Regulations, 1996 (now 1999), any entity acting as a Registrar and Transfer Agent for a mutual fund must be registered with SEBI. This ensures that RTAs adhere to regulatory standards for investor servicing and data management. There is no specific minimum paid-up capital requirement like INR 100 crores, nor is it mandatory for the RTA to be a subsidiary of the AMC. Records can be maintained in both physical and electronic formats.

Question 7

What is the minimum net worth an Asset Management Company (AMC) must maintain at all times as per SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

₹50 crore. As per SEBI (Mutual Funds) Regulations, 1996, an Asset Management Company (AMC) is required to have a minimum net worth of ₹50 crore at all times. This requirement was revised upwards from an earlier ₹10 crore.

Question 8

Which of the following statements is INCORRECT regarding the board of directors of an Asset Management Company (AMC) as per SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

The Chief Executive Officer (CEO) of the AMC can also concurrently serve as the Chairman of the AMC's board.. As per Regulation 21(1)(e) of SEBI (Mutual Funds) Regulations, 1996, the Chief Executive Officer (CEO) of the Asset Management Company shall not be the Chairman of the AMC's board. The Chairman must be an independent director (Regulation 21(1)(f)). Options A, B, and D are correct statements as per the regulations.

Question 9

To ensure effective oversight and safeguard unit holder interests, what is the minimum proportion of independent trustees required on the Board of Trustees of a mutual fund?

Accepted Answer

At least two-thirds of the trustees must be independent.. As per SEBI (Mutual Funds) Regulations, 1996, at least two-thirds of the trustees on the Board of Trustees must be independent persons and not associated with the sponsor or the Asset Management Company (AMC). This ensures that the trustees can act impartially and in the best interest of the unit holders.

Question 10

Which of the following activities is generally restricted for an Asset Management Company (AMC) under SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

Undertaking unrelated financial services like stock broking or insurance agency. Regulation 24(c) of the SEBI (Mutual Funds) Regulations, 1996, states that 'The asset management company shall not undertake any activity other than asset management activity.' While managing venture capital funds or offshore funds can be considered part of asset management (often requiring specific permissions or separate entities for VCF), undertaking unrelated financial services like stock broking or insurance agency is generally restricted for the AMC itself to maintain focus on its core mutual fund management business and avoid conflicts of interest.

Question 11

What is the minimum proportion of independent directors required on the board of a Trustee Company overseeing a mutual fund?

Accepted Answer

At least half of the directors. As per Regulation 16(b) of the SEBI (Mutual Funds) Regulations, 1996, at least half of the trustees (directors on the board of the Trustee Company) shall be independent persons and shall not be associated with the sponsor or the asset management company in any manner.

Question 12

As per SEBI (Mutual Funds) Regulations, 1996, which entity is primarily responsible for ensuring that the Asset Management Company (AMC) has adequate infrastructure and personnel to manage the mutual fund's operations?

Accepted Answer

The Sponsor. The Sponsor is the entity that establishes the mutual fund and promotes the Asset Management Company (AMC). It is the Sponsor's primary responsibility to ensure that the AMC it promotes is capable of managing the fund, including having adequate infrastructure, financial strength, and experienced personnel, as stipulated in SEBI (Mutual Funds) Regulations, 1996.

Question 13

Who is primarily responsible for the appointment of the Custodian for the assets of a mutual fund scheme?

Accepted Answer

The Board of Trustees.. The Custodian, responsible for holding the securities and other assets of the mutual fund schemes, is appointed by the Board of Trustees. This appointment requires prior approval from SEBI and is a critical part of the trustees' fiduciary duty to safeguard unitholders' interests, as per Regulation 26(d) of the SEBI (Mutual Funds) Regulations, 1996.

Question 14

As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth an Asset Management Company (AMC) must maintain at all times?

Accepted Answer

Rs. 10 crore. Regulation 15(2) of SEBI (Mutual Funds) Regulations, 1996, mandates that an Asset Management Company (AMC) must have a minimum net worth of not less than Rs. 10 crore at all times.

Question 15

Which of the following is an eligibility criterion for an entity to act as a sponsor of a mutual fund in India, as per SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

The sponsor must have a profit after tax for at least 3 out of the immediately preceding 5 years, including the fifth year.. As per Regulation 7(b) of SEBI (Mutual Funds) Regulations, 1996, a sponsor must have a positive net worth for all the immediately preceding five years and a profit after providing for depreciation and interest for at least three out of the immediately preceding five years, including the fifth year.

Question 16

As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum profitability track record required for an entity to act as a sponsor of a mutual fund?

Accepted Answer

Profit-making for at least 3 out of the immediately preceding 5 years, including the immediately preceding year.. SEBI (Mutual Funds) Regulations, 1996, specify that a sponsor must have a sound track record of financial soundness and general reputation. Specifically, the sponsor or its group must be profit-making for at least 3 out of the immediately preceding 5 years, including the immediately preceding year.

Question 17

Which legal document primarily establishes the mutual fund as a trust and specifies the powers and duties of the Trustee, the Sponsor, and the AMC?

Accepted Answer

Trust Deed. The Trust Deed is the foundational legal document that establishes the mutual fund as a trust. It defines the relationship between the Sponsor and the Trustee and outlines their respective rights, powers, duties, and obligations, as well as the rights of the unitholders.

Question 18

Under the SEBI (Mutual Funds) Regulations, 1996, an Asset Management Company (AMC) is generally prohibited from engaging in which of the following activities?

Accepted Answer

Acting as a trustee for any other mutual fund.. The SEBI (Mutual Funds) Regulations, 1996, strictly separate the roles of the Asset Management Company (AMC) and the Trustee to ensure independent oversight. An AMC cannot act as a Trustee for any mutual fund, including its own, due to the inherent conflict of interest. While there are restrictions and conditions for other activities like managing venture capital funds/PMS or proprietary trading, acting as a Trustee is a fundamental prohibition.

Question 19

Which of the following statements regarding the Asset Management Company (AMC) of a mutual fund is INCORRECT as per SEBI (Mutual Funds) Regulations?

Accepted Answer

The AMC must have a minimum net worth of Rs. 25 crore at all times.. As per SEBI (Mutual Funds) Regulations, Regulation 21(1)(f), the Asset Management Company (AMC) shall have a minimum net worth of Rs. 50 crore at all times. Therefore, stating Rs. 25 crore is incorrect. Options b, c, and d are correct requirements under the regulations.

Question 20

Under what circumstance can a Custodian of a mutual fund be typically held liable for loss or damage to the securities held by it?

Accepted Answer

If the loss is caused by its own negligence, willful default, or fraud.. A Custodian is responsible for the safekeeping of the mutual fund's securities. While they are not insurers against all risks, they can be held liable for loss or damage to securities if it is directly attributable to their own negligence, willful default, or fraudulent acts. Force majeure events or acts beyond their control typically exempt them from liability. This is a standard principle of custodial agreements and regulatory expectations.

Question 21

Which of the following statements is true regarding the appointment and role of a custodian for a mutual fund in India?

Accepted Answer

The custodian must be independent of the sponsor and its associates to safeguard assets.. As per SEBI (Mutual Funds) Regulations, 1996 (now 1999), the custodian must be an independent entity, separate from the sponsor and its associates. This independence ensures segregation of duties and provides an additional layer of protection for the mutual fund's assets. Option (a) is incorrect as the AMC cannot be its own custodian. Option (b) contradicts the independence requirement. Option (c) describes the role of the Registrar and Transfer Agent (RTA), not the custodian.

Question 22

As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum proportion of independent directors required on the Board of Directors of an Asset Management Company (AMC)?

Accepted Answer

At least half of the directors.. Regulation 21(1)(f) of SEBI (Mutual Funds) Regulations, 1996, mandates that at least half of the directors of the AMC must be independent directors and not associated with the sponsor, or any associate or subsidiary of the sponsor, or any of the directors of the trustee company.

Question 23

Which of the following is the primary responsibility of the Registrar and Transfer Agent (RTA) in the mutual fund structure?

Accepted Answer

Maintaining investor records and processing transactions like subscriptions and redemptions.. The primary responsibility of the Registrar and Transfer Agent (RTA) is to maintain all investor records, process transactions such as subscriptions, redemptions, switches, and systematic investment/withdrawal plans, and communicate with unitholders (e.g., sending account statements). Investment management is handled by the AMC, asset custody by the Custodian, and investment advice is typically provided by distributors or advisors.

Question 24

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum proportion of independent directors required on the Board of Directors of an Asset Management Company (AMC)?

Accepted Answer

At least 50% of the directors.. SEBI (Mutual Funds) Regulations, 1996, Regulation 21 (Board of directors of asset management company) mandates that the Asset Management Company shall have at least fifty per cent of the directors as independent directors.

Question 25

What is the minimum proportion of independent trustees required on the Board of Trustees of a mutual fund?

Accepted Answer

Two-thirds. As per SEBI (Mutual Funds) Regulations, 1996, Regulation 16(2), at least two-thirds of the trustees on the board of trustees must be independent trustees. An independent trustee is defined as one who is not associated with the sponsor or the Asset Management Company (AMC).

Question 26

Which of the following statements about the Custodian of a mutual fund is most accurate?

Accepted Answer

The Custodian must be an entity independent of the Asset Management Company and registered with SEBI.. The Custodian is responsible for holding the securities and other assets of the mutual fund. To ensure investor protection and prevent conflict of interest, SEBI regulations mandate that the Custodian must be an entity independent of the Asset Management Company and must be registered with SEBI. Options A, B, and D describe incorrect roles or relationships.

Question 27

Which of the following conditions must be continuously fulfilled by a Sponsor of a mutual fund in India, even after the fund has been established?

Accepted Answer

Contributing at least 40% to the net worth of the Asset Management Company (AMC).. As per SEBI (Mutual Funds) Regulations, 1996, the Sponsor must continuously contribute at least 40% to the net worth of the Asset Management Company (AMC). This ensures the Sponsor's continued commitment and financial backing to the AMC.

Question 28

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum percentage of independent directors required on the Board of Directors of an Asset Management Company (AMC)?

Accepted Answer

At least half. Regulation 21(5) of SEBI (Mutual Funds) Regulations, 1996, mandates that the Board of Directors of the Asset Management Company (AMC) shall have not less than half of the directors as independent directors. This is a crucial requirement for governance and investor protection.

Question 29

What is the minimum proportion of independent trustees required on the Board of Trustees of a mutual fund, as per SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

Not less than two-thirds of the trustees. As per SEBI (Mutual Funds) Regulations, 1996, Chapter VI, Clause 18(1)(c), at least two-thirds of the trustees on the Board of Trustees must be independent trustees, who are not associated with the sponsor or its associates.

Question 30

Which of the following functions is typically performed by a Fund Accountant, either in-house or outsourced, for a mutual fund?

Accepted Answer

Calculating and disclosing the Net Asset Value (NAV) of schemes.. The Fund Accountant's primary responsibilities include maintaining the books of accounts for the schemes, calculating income and expenses, and ultimately determining the Net Asset Value (NAV) of each scheme on a daily basis. Investment strategy is the AMC's role, marketing is done by distributors/AMC, and custody is handled by the Custodian.

Question 31

Beyond the safekeeping of securities and other assets of the mutual fund schemes, which of the following is another critical function of a Custodian as per SEBI (Mutual Funds) Regulations?

Accepted Answer

Providing information to SEBI regarding transactions in securities held by the mutual fund, as required.. As per SEBI (Mutual Funds) Regulations, 1996, the Custodian is responsible not only for holding the securities and other assets of the schemes but also has a duty to provide information to SEBI regarding transactions in securities held by the mutual fund, as and when required. This is a key regulatory reporting function.

Question 32

What is the minimum proportion of independent trustees required on the board of trustees for a mutual fund in India, as per SEBI regulations?

Accepted Answer

Two-thirds of the total number of trustees. As per SEBI (Mutual Funds) Regulations, 1996 (now 1999), at least two-thirds of the trustees of a mutual fund must be independent persons, meaning they should not be associated with the sponsor or the Asset Management Company (AMC). This provision is crucial to ensure the trustees can act in the best interest of the unitholders without any conflict of interest.

Question 33

A sponsor establishing a mutual fund is required to contribute a minimum percentage of the Asset Management Company's (AMC) net worth. What is this minimum percentage?

Accepted Answer

40%. As per SEBI (Mutual Funds) Regulations, 1996, a sponsor must have a sound track record and contribute at least 40% to the net worth of the Asset Management Company (AMC). This ensures the sponsor's financial commitment to the mutual fund business.

Question 34

As per SEBI (Mutual Funds) Regulations, 1996, what is one of the key eligibility criteria for an entity to act as a sponsor of a mutual fund, in addition to prescribed net worth requirements?

Accepted Answer

The sponsor must have profits in at least three out of the immediately preceding five years, including the immediately preceding year.. As per SEBI (Mutual Funds) Regulations, 1996, a sponsor must have profits in at least three out of the immediately preceding five years, including the immediately preceding year, to be eligible to sponsor a mutual fund. This ensures financial soundness and a track record of profitability.

Question 35

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth requirement for an Asset Management Company (AMC) at all times?

Accepted Answer

INR 50 crore. SEBI (Mutual Funds) Regulations, 1996, stipulate that an Asset Management Company (AMC) must have a minimum net worth of INR 50 crore at all times. This ensures the AMC's financial soundness and capacity to manage the fund.

Question 36

As per SEBI (Mutual Funds) Regulations, 1996, which of the following is NOT an eligibility criterion for a sponsor seeking to establish a mutual fund in India?

Accepted Answer

The sponsor must have earned profits in at least two out of the immediately preceding five years.. As per SEBI (Mutual Funds) Regulations, 1996, a sponsor must have earned profits in at least three out of the immediately preceding five years, including the fifth year. Options A, B, and C are correct eligibility criteria.

Question 37

As per SEBI (Mutual Funds) Regulations, 1996, what is a key requirement for the appointment of at least two-thirds of the Trustees of a mutual fund?

Accepted Answer

They must be independent persons, not associated with the Sponsor.. SEBI (Mutual Funds) Regulations, 1996, mandate that at least two-thirds of the trustees must be independent persons, not associated with the sponsor, to ensure unbiased oversight and protect unitholder interests.

Question 38

Which of the following is a fundamental eligibility criterion for an entity to act as a sponsor for a mutual fund in India, beyond financial net worth requirements?

Accepted Answer

It must have a sound track record and general reputation of fairness and integrity in all business transactions.. As per SEBI (Mutual Funds) Regulations, 1996, a sponsor must have a sound track record and general reputation of fairness and integrity in all business transactions as a key eligibility criterion. While financial strength and positive net worth for a specified period are also crucial, the general reputation for fairness and integrity is a non-negotiable qualitative requirement.

Question 39

As per SEBI regulations, what is the maximum percentage of its own scheme's units that an Asset Management Company (AMC) can hold in its own books, other than seed capital or investments made to meet regulatory requirements?

Accepted Answer

Up to 5% of the total units of a scheme.. As per SEBI regulations (e.g., SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06, 2017, and subsequent clarifications), an Asset Management Company (AMC) is permitted to invest in units of its own schemes (other than seed capital or investment required for meeting regulatory requirements) up to a maximum of 5% of the total units outstanding of that scheme. This is to prevent conflicts of interest and ensure fair valuation.

Question 40

What is the maximum permissible percentage of directors on the board of an Asset Management Company (AMC) who can also be directors on the board of the sponsor company, as per SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

Not more than one-third.. Regulation 21(d) of SEBI (Mutual Funds) Regulations, 1996 states that not more than one-third of the directors of the asset management company shall be directors of the same sponsor or any of its associates or subsidiaries. Additionally, not less than fifty percent of the directors of the AMC shall be independent directors.

Question 41

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum proportion of independent trustees required on the board of trustees of a mutual fund?

Accepted Answer

At least two-thirds of the trustees.. Regulation 16(1)(e) of SEBI (Mutual Funds) Regulations, 1996 mandates that at least two-thirds of the trustees shall be independent persons and shall not be associated in any manner with the sponsor or any of its subsidiaries or the asset management company or any other company in the same group.

Question 42

Which of the following aspects is NOT typically specified in the Trust Deed of a mutual fund?

Accepted Answer

The specific investment objectives and policies for each scheme launched by the fund.. The Trust Deed primarily establishes the mutual fund as a trust, defining the powers, duties, and responsibilities of the Trustees, the appointment/removal of the AMC, and the general administration of the trust property. The specific investment objectives, policies, and other details for *each individual scheme* are detailed in the Scheme Information Document (SID) or Offer Document, which is a scheme-specific disclosure document, not in the foundational Trust Deed.

Question 43

Which of the following is a key responsibility of the Board of Trustees of a mutual fund, specifically pertaining to the Asset Management Company (AMC)?

Accepted Answer

Ensuring that the AMC has adequate systems in place for managing risks and preventing conflicts of interest.. As per SEBI (Mutual Funds) Regulations, 1996, the Trustees are responsible for overseeing the AMC and ensuring that it has adequate systems in place for managing risks, preventing conflicts of interest, and ensuring compliance with regulations, among other duties. While Trustees appoint the auditor, ensuring AMC's systems for risk and conflict management is a more specific oversight function.

Question 44

Which of the following is a specific responsibility of a Custodian appointed by a mutual fund, beyond merely holding the securities?

Accepted Answer

Ensuring reconciliation of investment records with the fund's books.. As per SEBI (Mutual Funds) Regulations, 1996, the Custodian is responsible for the safekeeping of securities and other assets of the fund, and also for ensuring reconciliation of investment records with the fund's books. Maintaining unit holder records is the RTA's role, portfolio valuation is AMC's/Fund Accountant's, and appointing auditors is the Trustees' role.

Question 45

Which of the following entities in a mutual fund structure is primarily responsible for holding the securities and other assets of the mutual fund in safe custody?

Accepted Answer

Custodian. The Custodian is appointed by the Trustees with SEBI's prior approval and is primarily responsible for safe-keeping the securities and other assets of the mutual fund.

Question 46

Which of the following is a primary responsibility of the Board of Trustees regarding the Asset Management Company (AMC)?

Accepted Answer

To ensure that the AMC has adequate infrastructure and systems to manage the mutual fund's operations.. The Trustees are responsible for overseeing the AMC's operations. A key duty is to ensure that the AMC has the necessary systems, processes, and infrastructure in place to effectively manage the mutual fund's operations, including investment management, administration, and investor services, in compliance with regulations. Investment management is the AMC's role, not the Trustees'.

Question 47

Which entity in the legal structure of a mutual fund is primarily responsible for holding the securities and other assets of the fund in safe custody on behalf of the unitholders?

Accepted Answer

The Custodian. The Custodian is an independent entity appointed by the trustees with SEBI's approval, whose primary responsibility is to hold the securities and other assets of the mutual fund in safe custody, ensuring their safekeeping and proper accounting.

Question 48

To ensure independence and proper oversight, which of the following statements regarding the appointment of a Custodian and Registrar & Transfer Agent (RTA) for a mutual fund is most accurate?

Accepted Answer

Both the Custodian and RTA must be independent of the AMC and appointed with the approval of the Trustees.. As per SEBI (Mutual Funds) Regulations, 1996, both the Custodian and the Registrar & Transfer Agent (RTA) must be independent of the Asset Management Company (AMC) to maintain checks and balances and prevent conflicts of interest. Their appointments are crucial for the integrity of the fund's operations and therefore require the prior approval of the Trustees.

Question 49

As per SEBI (Mutual Funds) Regulations, 1996, a sponsor is required to have a sound track record. Which of the following conditions correctly describes a part of this requirement regarding net worth?

Accepted Answer

The sponsor must have a positive net worth for all the immediately preceding five years.. As per Regulation 7(b) of SEBI (Mutual Funds) Regulations, 1996, for a sponsor to have a 'sound track record', it must have a positive net worth for all the immediately preceding five years. It also requires the sponsor to have earned profits (after providing for depreciation and interest) in at least three out of the immediately preceding five years, including the fifth year.

Question 50

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum percentage of the Asset Management Company's (AMC) net worth that the Sponsor is required to contribute?

Accepted Answer

40%. As per SEBI (Mutual Funds) Regulations, 1996, the sponsor must have a sound track record and contribute at least 40% to the net worth of the Asset Management Company (AMC). This ensures the sponsor's commitment and financial stake in the mutual fund.

Ch.3: Legal Structure of Mutual Funds in India

What You Will Learn in This Chapter

Multiple Choice Questions (80)

Most candidates guess their way through V-A.
BullWiser makes you prove it.

Ch.3: Legal Structure of Mutual Funds in India

What You Will Learn in This Chapter

Multiple Choice Questions (80)

Most candidates guess their way through V-A.BullWiser makes you prove it.

Most candidates guess their way through V-A.
BullWiser makes you prove it.