NISM Series V-A Chapter 4: Legal and Regulatory Framework Practice Questions

Question 1

As per SEBI (Mutual Funds) Regulations, 1996, a mutual fund scheme is generally restricted from investing more than what percentage of its net assets in the equity shares or equity-related instruments of any single company?

Accepted Answer

10%. Regulation 44(1) of SEBI (Mutual Funds) Regulations, 1996, generally restricts a mutual fund scheme from investing more than 10% of its net assets in the equity shares or equity-related instruments of any single company. This is a diversification norm to reduce concentration risk.

Question 2

What is the minimum net worth requirement for a sponsor to establish a mutual fund in India, as per SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

INR 50 crores for each of the immediately preceding three years.. As per SEBI (Mutual Funds) Regulations, 1996, a sponsor must have a sound track record and a minimum net worth of INR 50 crores for each of the immediately preceding three years. This is a key eligibility criterion for obtaining SEBI's approval to act as a sponsor.

Question 3

Under SEBI (Mutual Funds) Regulations, 1996, which of the following statements regarding mutual fund advertisements is FALSE?

Accepted Answer

Advertisements can guarantee returns if the fund has a consistent track record of high performance.. SEBI (Mutual Funds) Regulations strictly prohibit any advertisement that guarantees returns from mutual fund schemes, regardless of past performance. Mutual fund investments are subject to market risks, and advertisements must always carry a standard risk warning and be fair, clear, and not misleading.

Question 4

Under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, which of the following actions would most likely constitute 'fraud'?

Accepted Answer

Spreading false or misleading information to induce the sale or purchase of securities.. As per SEBI (PFUTP) Regulations, 2003, 'fraud' includes any act, omission, concealment of any material fact or misrepresentation of any material fact, done knowingly with an intent to deceive, to induce another person to enter into a contract or transaction. Spreading false or misleading information with the intent to influence investment decisions directly falls under this definition. The other options represent different types of regulatory or operational issues, but not necessarily fraud as defined.

Question 5

What is the minimum contribution that a sponsor is required to make to the net worth of the Asset Management Company (AMC) in a mutual fund structure?

Accepted Answer

Not less than 40% of the net worth of the AMC.. Regulation 21(c) of SEBI (Mutual Funds) Regulations, 1996, specifies that the sponsor shall contribute at least 40% to the net worth of the Asset Management Company.

Question 6

What is the frequency for publishing the abridged half-yearly financial results and portfolio statements for mutual fund schemes?

Accepted Answer

Half-yearly. Mutual funds are required to publish their abridged half-yearly financial results and portfolio statements within one month from the close of each half-year (March 31 and September 30) as part of their disclosure requirements.

Question 7

Under the SEBI (Mutual Funds) Regulations, 1996, what is the maximum percentage of the total voting rights in the Asset Management Company (AMC) that a single investor, other than the sponsor, can hold?

Accepted Answer

10%. As per SEBI (Mutual Funds) Regulations, 1996, no single investor, other than the sponsor, can hold more than 10% of the total voting rights or equity share capital in the Asset Management Company (AMC). This regulation aims to prevent excessive concentration of control in the AMC by entities other than the sponsor, safeguarding unitholder interests.

Question 8

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

Accepted Answer

Custodian. As per SEBI (Mutual Funds) Regulations, 1996, the Custodian is responsible for holding the securities and other assets of the mutual fund schemes in trust for the unitholders.

Question 9

The Board of Trustees of a mutual fund is primarily responsible for:

Accepted Answer

Ensuring that the Asset Management Company (AMC) operates in the interest of the unitholders and in accordance with regulations.. The Trustees act as guardians of the unitholders' interests. Their primary responsibility is to oversee the AMC's activities and ensure that the fund's assets are managed in accordance with the Trust Deed and SEBI (Mutual Funds) Regulations, 1996, safeguarding unitholder interests.

Question 10

The Association of Mutual Funds in India (AMFI) primarily functions as a:

Accepted Answer

Self-regulatory organization (SRO) for mutual funds. AMFI is a self-regulatory organization (SRO) that promotes ethical and professional standards in the Indian mutual fund industry, working under the overall supervision of SEBI.

Question 11

Under the Prevention of Money Laundering Act (PMLA), 2002, what is the reporting obligation for a mutual fund distributor if they suspect a transaction involves proceeds of crime?

Accepted Answer

They must report it to their respective Asset Management Company (AMC) for onward reporting to the Financial Intelligence Unit - India (FIU-IND).. While the mutual fund (AMC) is the 'reporting entity' under PMLA, distributors, as intermediaries or agents, are required to escalate any suspicious transaction reports (STRs) to the Principal Officer of their respective AMCs. The AMC then has the responsibility for reporting to FIU-IND. (Refer to SEBI's Master Circular for MFs, Section D - Prevention of Money Laundering (PML) and Combating the Financing of Terrorism (CFT)).

Question 12

The AMFI Code of Conduct for Intermediaries is primarily aimed at achieving which of the following objectives?

Accepted Answer

To ensure fair and ethical practices by mutual fund distributors and other intermediaries.. The AMFI Code of Conduct aims to promote ethical and professional standards among mutual fund intermediaries, ensuring they act in the best interest of investors and the industry, maintaining transparency and integrity in their dealings.

Question 13

As per SEBI (Mutual Funds) Regulations, 1996, what is the maximum percentage of a mutual fund scheme's corpus that can be invested in unrated debt instruments, excluding those where the issuer has a rated debt instrument outstanding?

Accepted Answer

5%. Regulation 44(1) read with Schedule VII, Clause 1, Sub-clause (e) of the SEBI (Mutual Funds) Regulations, 1996, specifies that a mutual fund scheme shall not invest more than 5% of its net assets in unrated debt instruments issued by a single issuer. This limit is 5% where the issuer does not have any rated debt outstanding. If the issuer has other rated debt outstanding, the limit can go up to 10% of the net assets of the scheme in unrated debt instruments.

Question 14

As per SEBI (Mutual Funds) Regulations, 1996, under which of the following situations can a mutual fund scheme be wound up only after obtaining the consent of the unit holders and approval of SEBI?

Accepted Answer

If the trustees are of the opinion that the interests of the unit holders are being adversely affected. Regulation 39(2)(c) of SEBI (Mutual Funds) Regulations, 1996, states that 'Where the trustees are of the opinion that the interests of the unit holders are being adversely affected, the scheme may be wound up after obtaining the consent of the unit holders and the approval of the Board (SEBI).' Other options represent automatic winding up or SEBI-initiated winding up that do not primarily require unit holder consent for the decision.

Question 15

Who is primarily responsible for the appointment and removal of the statutory auditor for a mutual fund?

Accepted Answer

The Board of Trustees, with prior approval of SEBI.. Regulation 22(1) of SEBI (Mutual Funds) Regulations, 1996, states that the Trustees shall appoint auditors for the mutual fund with the prior approval of SEBI. They also have the power to remove auditors, ensuring auditor independence from the AMC.

Question 16

As per SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth required for a sponsor to establish a mutual fund for the immediately preceding five years?

Accepted Answer

Rs. 50 crore. SEBI (Mutual Funds) Regulations, 1996, Chapter II, Regulation 7(b) specifies that the sponsor must have a sound track record and a net worth of not less than fifty crore rupees for the immediately preceding five years, including the period for which the application is made.

Question 17

Which document provides essential information about a mutual fund scheme in a summarized, user-friendly format, and must be updated at least once every two years?

Accepted Answer

Key Information Memorandum (KIM). The Key Information Memorandum (KIM) is a concise document containing essential information about a scheme and must be updated at least once every two years. It serves as an abridged version of the SID.

Question 18

The AMFI Code of Conduct for Intermediaries primarily aims to ensure:

Accepted Answer

Fair and transparent dealings by distributors with investors.. The AMFI Code of Conduct for Intermediaries (distributors) is designed to ensure that distributors conduct their business with honesty, integrity, and in a fair and transparent manner, always prioritizing the best interests of the investors. It sets ethical standards for sales and advisory practices.

Question 19

As per SEBI (Mutual Funds) Regulations, 1996, what is the maximum percentage of a mutual fund scheme's net assets that can be invested in the equity shares or debt instruments of its sponsor's associate or group companies?

Accepted Answer

25%. Regulation 44 (2) of SEBI (Mutual Funds) Regulations, 1996, states that a mutual fund shall not invest more than 25% of its net assets in the equity shares or debt instruments, including those which are unlisted, of the associate or group companies of the sponsor.

Question 20

As per SEBI (Mutual Funds) Regulations, 1996, a sponsor must have a sound track record of not less than how many years in the financial services business?

Accepted Answer

5 years. SEBI (Mutual Funds) Regulations, 1996, require a sponsor to have a sound track record of not less than five years in the financial services business.

Question 21

The Prevention of Money Laundering Act (PMLA), 2002, requires financial institutions like mutual funds to report suspicious transactions to which central agency?

Accepted Answer

Financial Intelligence Unit - India (FIU-IND). Under the Prevention of Money Laundering Act (PMLA), 2002, reporting entities (which include mutual funds) are mandated to report suspicious transactions and cash transactions above a specified threshold to the Financial Intelligence Unit - India (FIU-IND). FIU-IND is the central national agency responsible for receiving, processing, analyzing, and disseminating information relating to suspect financial transactions.

Question 22

The SEBI circular on 'Categorization and Rationalization of Mutual Fund Schemes' primarily aimed to achieve which of the following?

Accepted Answer

To ensure that mutual fund schemes are true to label and investors can compare similar schemes easily.. The SEBI circular on 'Categorization and Rationalization of Mutual Fund Schemes' (October 2017) was introduced to standardize scheme categories and ensure that schemes are 'true to label,' making it easier for investors to understand and compare different schemes based on their investment objectives and strategies, thereby reducing mis-selling.

Question 23

The advertisement code for mutual funds, which dictates the content and manner of mutual fund advertisements, is primarily specified in which regulatory framework?

Accepted Answer

SEBI (Mutual Funds) Regulations, 1996. Chapter VIII of the SEBI (Mutual Funds) Regulations, 1996, specifically deals with 'Advertisements' and lays down the advertisement code for mutual funds. AMFI's code complements these regulations.

Question 24

Which of the following actions can AMFI take against a mutual fund distributor found violating its Code of Conduct for Intermediaries (ARN Holders)?

Accepted Answer

Recommend suspension or cancellation of the distributor's ARN to SEBI.. AMFI, as a self-regulatory organization, can take disciplinary action against ARN holders for violations of its Code of Conduct. This includes issuing warnings, imposing fines, or recommending the suspension or cancellation of their ARN to SEBI. AMFI does not have the power to impose large monetary penalties, initiate criminal proceedings, or directly revoke SEBI registration.

Question 25

In the Indian mutual fund structure, which entity is established as a trust under the Indian Trusts Act, 1882, with the primary objective of holding the assets on behalf of the unitholders?

Accepted Answer

The Mutual Fund. As per SEBI (Mutual Funds) Regulations, 1996, a mutual fund must be established as a trust under the Indian Trusts Act, 1882. The trust holds the assets for the benefit of the unitholders and is managed by the AMC under the supervision of the Trustees.

Question 26

Under the Prevention of Money Laundering Act, 2002 (PMLA), when is a mutual fund primarily required to file a Suspicious Transaction Report (STR) with the Financial Intelligence Unit - India (FIU-IND)?

Accepted Answer

When transactions appear to be structured to avoid reporting thresholds, regardless of amount.. A Suspicious Transaction Report (STR) is filed when there are reasonable grounds to believe that a transaction (or a series of transactions) involves proceeds of crime, regardless of the amount. This includes transactions that appear to be structured to avoid reporting thresholds, unusual patterns, or those lacking economic rationale. The focus for STR is on the nature and suspicion, not just fixed monetary thresholds.

Question 27

Under the SEBI (Mutual Funds) Regulations, 1996, if a scheme of a mutual fund invests in another scheme of the same mutual fund, what is the maximum percentage of the net assets of the investing scheme that can be invested in the other scheme?

Accepted Answer

5%. As per SEBI (Mutual Funds) Regulations, 1996, a scheme of a mutual fund shall not invest more than 5% of its net assets in the units of another scheme of the same mutual fund. This restriction is to prevent excessive layering and potential conflict of interest within the same fund house.

Question 28

As per SEBI (Mutual Funds) Regulations, 1996, what is the maximum percentage of a mutual fund scheme's net assets that can be invested in the schemes of any other mutual fund under the same management or associate?

Accepted Answer

5%. Regulation 44(2) of SEBI (Mutual Funds) Regulations, 1996, restricts a mutual fund from investing more than 5% of its net assets in the schemes of any other mutual fund under the same management or associate.

Question 29

According to the AMFI Code of Conduct for Intermediaries, a mutual fund distributor must primarily ensure that the recommendations made to investors are:

Accepted Answer

Suitable for the investor's risk profile and financial objectives. The AMFI Code of Conduct for Intermediaries mandates that distributors must act in the best interest of investors, ensuring that recommendations are suitable based on the investor's risk profile, financial situation, and investment objectives.

Question 30

What is the primary role of a Custodian in the structure of a mutual fund?

Accepted Answer

Holding the securities and assets of the fund. The custodian is responsible for the safekeeping of the securities and other assets of the mutual fund, ensuring their physical and electronic security, and handling settlement of transactions. The AMC manages the portfolio, distributors sell units, and investment advisors provide advice.

Question 31

SEBI (Mutual Funds) Regulations, 1996, restrict a mutual fund from investing more than a certain percentage of its net asset value (NAV) in another scheme managed by the same Asset Management Company (AMC). What is this limit?

Accepted Answer

5% of its NAV. As per SEBI (Mutual Funds) Regulations, 1996, a mutual fund scheme cannot invest more than 5% of its net asset value (NAV) in the units of another scheme under the management of the same asset management company, to prevent concentration risk and self-dealing.

Question 32

As per SEBI (Mutual Funds) Regulations, 1996, and subsequent guidelines, if a security is not traded on any stock exchange or is illiquid, how should its valuation be primarily determined for NAV calculation?

Accepted Answer

By an independent valuer appointed by the AMC, or based on fair value determined in good faith by the AMC. SEBI (Mutual Funds) Regulations, 1996 (Fourth Schedule, Part A, 1(c) and subsequent circulars) mandate that unlisted or illiquid securities shall be valued in good faith on the basis of fair value determined by the AMC on a prudent basis, or by an independent valuer appointed by the AMC, in consultation with the Trustees. The valuation policy needs to be approved by the Trustees.

Question 33

The primary responsibility of the Board of Trustees in a mutual fund structure is to:

Accepted Answer

Protect the interests of the unitholders. The Trustees act as fiduciaries for the unitholders and their primary duty is to protect the interests of the unitholders in accordance with the Trust Deed and SEBI (Mutual Funds) Regulations, 1996.

Question 34

Which entity in the mutual fund structure is primarily responsible for ensuring that the mutual fund and its schemes are managed in accordance with the SEBI (Mutual Funds) Regulations and the provisions of the Trust Deed?

Accepted Answer

Board of Trustees. The Board of Trustees is the guardian of the unitholders' interests and is responsible for ensuring that the mutual fund's operations, including those of the AMC, adhere to the Trust Deed and SEBI (Mutual Funds) Regulations, 1996. (SEBI MF Reg 18 - General obligations of the trustees).

Question 35

Which of the following mutual fund documents provides essential information about a scheme in a summary format, typically used for application forms?

Accepted Answer

Key Information Memorandum (KIM). The Key Information Memorandum (KIM) is a summary of the Offer Document that provides essential information about a mutual fund scheme in a concise format and is typically accompanied with the application form.

Question 36

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

At least two-thirds. SEBI (Mutual Funds) Regulations, 1996, Regulation 16(1)(e) states that the Board of Trustees shall have at least two-thirds of the trustees as independent trustees.

Question 37

Under which of the following conditions is an Asset Management Company (AMC) **prohibited** from investing its own funds in any of the schemes managed by it?

Accepted Answer

When the investment is made at a concessional entry load or on more favourable terms.. SEBI regulations prohibit an AMC from investing its own funds in any scheme managed by it at a concessional entry load or on terms more favourable than those offered to other investors. Investments for seed capital or meeting minimum corpus are generally allowed if on an arm's length basis.

Question 38

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

Accepted Answer

At least 50% of the directors. SEBI (Mutual Funds) Regulations, 1996, mandate that at least 50% of the directors on the board of the Asset Management Company (AMC) must be independent directors. This ensures proper governance and protection of unitholders' interests.

Question 39

Which regulatory body is primarily responsible for framing regulations and overseeing the operations of mutual funds in India?

Accepted Answer

Securities and Exchange Board of India (SEBI). The Securities and Exchange Board of India (SEBI) is the apex regulator for the securities market in India, including mutual funds. It frames and enforces the SEBI (Mutual Funds) Regulations, 1996, which govern the establishment and operation of mutual funds.

Question 40

Which regulatory body is responsible for laying down the 'fit and proper' criteria for key personnel of an Asset Management Company (AMC) and its distributors in the Indian mutual fund industry?

Accepted Answer

Securities and Exchange Board of India (SEBI). SEBI, as the primary regulator of the securities market, including mutual funds, lays down the 'fit and proper' criteria for various market intermediaries, including AMCs and their key personnel, as well as distributors, to ensure integrity and competence. AMFI, under SEBI's broad framework, also develops specific codes of conduct and certification requirements.

Question 41

Which of the following is a key responsibility of the Compliance Officer of an Asset Management Company (AMC)?

Accepted Answer

Ensuring adherence to all regulatory requirements and internal policies. The Compliance Officer is responsible for monitoring and ensuring that the AMC, its employees, and its operations comply with all relevant laws, regulations, and internal policies, including SEBI (Mutual Funds) Regulations.

Question 42

Which of the following is a key function of a Registrar and Transfer Agent (RTA) for a mutual fund?

Accepted Answer

Maintaining records of unit holders and their transactions. The Registrar and Transfer Agent (RTA) is responsible for maintaining all records of unit holders, processing purchase, redemption, and switch transactions, and sending account statements.

Question 43

Which of the following changes concerning an Asset Management Company (AMC) requires prior approval from SEBI under the SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

Change in the shareholding pattern of the AMC leading to a change in control.. Regulation 28(3) of SEBI (Mutual Funds) Regulations, 1996, states that no sponsor shall, without the prior approval of the Board, reduce its shareholding below forty per cent. of the paid-up equity capital of the asset management company. More broadly, any change in control of the AMC, including changes in the shareholding pattern that lead to a change in control, requires prior approval from SEBI to ensure the continued integrity and stability of the mutual fund operations.

Question 44

According to SEBI (Mutual Funds) Regulations, 1996, what is the minimum net worth requirement for an applicant to be eligible to act as a Sponsor of a mutual fund for the last five consecutive years?

Accepted Answer

At least ₹100 crore. As per SEBI (Mutual Funds) Regulations, 1996 (Regulation 7), a sponsor must have a sound track record and a minimum net worth of ₹100 crore for the last five consecutive years, including a positive net worth in all these years.

Question 45

What is the minimum initial net worth requirement for an Asset Management Company (AMC) as per SEBI (Mutual Funds) Regulations, 1996?

Accepted Answer

INR 50 Crores. As per SEBI (Mutual Funds) Regulations, 1996, an Asset Management Company (AMC) must have a minimum net worth of INR 50 Crores at all times.

Question 46

The legal framework that governs the formation and operation of a mutual fund as a 'Trust' in India is primarily derived from which of the following acts?

Accepted Answer

Indian Trusts Act, 1882. Mutual funds in India are constituted as trusts, and their legal structure is governed by the Indian Trusts Act, 1882. The SEBI (Mutual Funds) Regulations, 1996, then govern their specific operations as investment vehicles.

Question 47

As per 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

Two-thirds. Regulation 16(b) of SEBI (Mutual Funds) Regulations, 1996 mandates that at least two-thirds of the trustees must be independent trustees and shall not be associated with the Sponsor or the Asset Management Company.

Question 48

As per SEBI (Mutual Funds) Regulations, 1996, a mutual fund scheme cannot invest more than what percentage of its net assets in the securities of a single company?

Accepted Answer

10%. The Fourth Schedule, Part A, Clause 1(a) of SEBI (Mutual Funds) Regulations, 1996, stipulates that a mutual fund scheme shall not invest more than 10% of its net assets in the securities of a single company. This restriction aims to diversify the portfolio and limit concentration risk.

Question 49

As per SEBI (Mutual Funds) Regulations, 1996, what is the maximum investment a mutual fund scheme can make in the equity shares of a single company?

Accepted Answer

10% of its net assets. SEBI (Mutual Funds) Regulations, 1996, stipulate that a mutual fund scheme shall not invest more than 10% of its net assets in the equity shares or equity-related instruments of any single company. This is a prudential norm to ensure diversification and limit concentration risk.

Question 50

What is the maximum validity period for a Key Information Memorandum (KIM) from the date of its issue, as per SEBI guidelines?

Accepted Answer

6 months. As per SEBI circulars, the Key Information Memorandum (KIM) is valid for a period of six months from the date of its issue and needs to be updated every six months.

Ch.4: Legal and Regulatory Framework

What You Will Learn in This Chapter

Multiple Choice Questions (200)

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

Ch.4: Legal and Regulatory Framework

What You Will Learn in This Chapter

Multiple Choice Questions (200)

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.