Final Project on Corporate Governance in Mutual Fund.docx

8/12/2019 Final Project on Corporate Governance in Mutual Fund.docx

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Corporate Governance.

1.1 INTRODUCTION

Corporate governance is the set of processes, customs, policies, laws and

institutions affecting the way a corporation is directed, administered or controlled.

Corporate governance also includes the relationships among the many stakeholders

involved and the goals for which the corporation is governed. The principal

stakeholders are the shareholders, management and the board of directors. Other

stakeholders include employees, suppliers, customers, banks and other lenders,

regulators, the environment and the community at large.

Corporate governance is a multi-faceted subject. An important part of corporate

governance deals with accountability, fiduciary duty, disclosure to shareholders

and others, and mechanism of auditing and control. In this sense, corporate

governance players should comply with codes to the overall good of all

constituents. Another important focus is economic efficiency, both within the

corporations such as the best practice guidelines as well as externally nationalinstitutional frameworks. In this economic view, the corporate governance system

should be designed in such a way as to optimize results, as well as to detect and

prevent frauds. Some argue that the firm should act not only in the interest of the

shareholders but also off all the other stakeholders.

Governance makes decisions that the define expectations, grant power, or verify

performance. It consists either of a separate process or of a specific part of the

management or leadership processes. Sometimes people setup a government to

administer these processes and systems.


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1.2WORD- ORIGIN

The word Governance derives from Latin origins that suggest the notion of

steering. One can contrast this sense of steering a group or society with the

traditional Top-Down approach of governments driving society. Distinguish

between governances power to and governments power over.

1.3 DEFINITION

Corporate Governance deals with the ways in which suppliers of finance to

corporations assure themselves of getting a return on their investment

(Shleifer and Vishny)

Corporate Governance is about is about promoting corporate fairness,

transparency and accountability.

(J Wolfensohn)

(President of the World Bank quoted by an article in Financial Times, June21

st,1991)

Corporate Governance is the system by which companies are directed and

controlled

(Cadbur Report (UK),1992)

To do with Power and Accountability who exercises power, on behalf of whom,

how the exercise of power is controlled.

(Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes

Memorial Lecture, 1993)


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The process and structure to direct and manage the business and affairs of the

corporation with the objective of enhancing shareholder value, which includes

ensuring the financial viability of the business.

(Where were the Directors? Guidelines for Improve of Corporate Governance

in Canada, TSE, 1994)

Corporate governance involves a set of relationships between a companys

management, its board, its shareholders and other stakeholders also the structure

through which objectives of the company are set, and the means of attaining those

objectives and monitoring performance are determined.

Preamble to the OECD Principles of Corporate Governance, 2004

Fundamental objective of corporate governance is the enhancement of the long-

term shareholder value while at the same time protecting the interests of other

stakeholders.

SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January,

2000

A Gandhian definition

Trusteeship obligations inherent in company operations, where assets and

resources are pooled and entrusted to the managers for optimal utilization in the

stakeholders interests.


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1.4 History

In the 19th century, state corporation laws enhanced the rights of corporate boards

to govern without unanimous consent of shareholders in exchange for statutory

benefits like appraisal rights, to make corporate governance more efficient. Since

that time, and because most large publicly traded corporations in the US are

incorporated under corporate administration friendly Delaware law, and because

the US's wealth has been increasingly securitized into various corporate entities

and institutions, the rights of individual owners and shareholders have become

increasingly derivative and dissipated. The concerns of shareholders over

administration pay and stock losses periodically has led to more frequent calls forcorporate governance reforms.

In the early 2000s, the massive bankruptcies of Enron and Worldcom, as well as

lesser corporate debacles, such as Adelphia Communications, AOL, Arthur

Andersen, Global Crossing, Tyco, and, more recently, Fannie Mae and Freddie

Mac, led to increased shareholder and governmental interest in corporate

governance. This culminated in the passage of the Sarbanes-Oxley Act of 2002.

But, since then, the stock market has greatly recovered, and shareholder zeal has

waned accordingly.


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1.5 WHAT IS CORPORATE GOVERNANCE?

Corporate governance is typically perceived by academic literature as dealing with

problems that result from the separation of ownership and control. From this

perspective, corporate governance would focus on the internal structure of Board

of Directors, the creation of independent committees rules fo r disclosures of

information to shareholders and creditors, and control of the management.

The recommendations include the responsibility of the BOD, role and

responsibility of independent and non- executive directors, fit and proper norms for

nomination of directors in private sector banks, etc.

Transparency and disclosures standards are also important constituents of a sound

corporate governance mechanism. Transparency and accounting standards in India

have been enhanced to align with international best practices .However; there are

many gaps in the disclosures in India vis-a-vis the international standards,

particularly in the areas of risk management strategies and practices, risk

parameters, risk concentrations, performance measures, component of capital

structure, etc. Hence, the disclosure standards need to be further broad-based in

consonance with improvements in the capability of market players to analyze the

information objectively.


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Fig 1.1- Role of Corporate Governance.

1.6 GENESIS OF CORPORATE GOVERNANCE

It will certainly not be out of place here to recount how issues relating to corporate

governance and corporate control have come to the fore the world over in therecent past. The seeds of modern corporate governance were probably sown by the

Watergate scandal in the USA. Subsequent investigations by US regulatory and

legislative bodies highlighted control failures that had allowed several major

corporations to make illegal political contributions and bribe government officials.

While these developments in the US stimulated debate in the UK, a spate of

scandals and collapses in that country in the late 1980s and early 1990s led

shareholders and banks to worry about their investments. Several companies in

UK which saw explosive growth in earnings in the 80s ended the decade in a


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memorably disastrous manner. Importantly, such spectacular corporate failures

arose primarily out of poorly managed business practices.

This debate was driven partly by the subsequent enquiries into corporate

governance (most notably the Cadbury Report) and partly by extensive changes in

corporate structure. In May 1991, the London Stock Exchange set up a Committee

under the chairmanship of Sir Arian Cadbury to help raise the standards of

corporate governance and the level of confidence in financial reporting and

auditing by setting out clearly what it sees as the respective responsibilities of

those involved and what it believes is expected of them.The Committee investigated accountability of the Board of Directors to

shareholders and to the society. It submitted its report and the associated code of

best practices in December 1992 wherein it spelt out the methods of governance

needed to achieve a balance between the essential powers of the Board of

Directors and their proper accountability. Being a pioneering report on corporate

governance, it would perhaps be in order to make a brief reference to its

recommendations which are in the nature of guidelines relating to, among other

things, the Board of Directors and Reporting & Control.


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1.7 Parties to corporate governance

Parties involved in corporate governance include the regulatory body e.g. the Chief

Executive Officer, the board of directors, management and shareholders. Other

stakeholders who take part include suppliers, employees, creditors, customers and

the community at large.

All parties to corporate governance have an interest, whether direct or indirect, in

the effective performance of the organisation. Directors, workers and management

receive salaries, benefits and reputation, while shareholders receive capital return.

Customers receive goods and services; suppliers receive compensation for their

goods or services. In return these individuals provide value in the form of natural,human, social and other forms of capital.

A key factor in an individual's decision to participate in an organisation e.g.

through providing financial capital and trust that they will receive a fair share of

the organisational returns.

Fig.1.2 Corporate Governance Framework


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1.8 Principles of corporate governance

Contemporary discussions of corporate governance tend to refer to principles

raised in three documents released since 1990: The Cadbury Report UK, 1992, thePrincipals of Corporate Governance OECD, 1998 and 2004, the Sarbanes-Oxley

Act of 2002 US, 2002. The Cadbury and OECD reports present general principals

around which businesses are expected to operate to assure proper governance. The

Sarbanes-Oxley Act, informally referred to as Sarbox or Sox, is an attempt by the

federal government in the United States to legislate several of the principals

recommended in the Cadbury and OECD reports.

Rights and equitable treatment of shareholders

Organizations should respect the rights of shareholders and help shareholders to

exercise those rights. They can help shareholders exercise their rights by openly

and effectively communicating information and by encouraging shareholders to

participate in general meetings.

Interests of other stakeholders

Organizations should recognize that they have legal, contractual, social, and

market driven obligations to non-shareholder stakeholders, including

employees, investors, creditors, suppliers, local communities, customers, and

policy makers.

Role and responsibilities of the board

The board needs sufficient relevant skills and understanding to review and

challenge management performance. It also needs adequate size and
http://en.wikipedia.org/wiki/Cadbury_Reporthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Cadbury_Report


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appropriate levels of independence and commitment to fulfill its responsibilities

and duties.

Integrity and ethical behaviour

Integrity should be a fundamental requirement in choosing corporate officers

and board members. Organizations should develop a code of conduct for their

directors and executives that promotes ethical and responsible decision making.

Disclosure and transparency

Organizations should clarify and make publicly known the roles and

responsibilities of board and management to provide stakeholders with a level

of accountability. They should also implement procedures to independently

verify and safeguard the integrity of the company's financial reporting.

Disclosure of material matters concerning the organization should be timely

and balanced to ensure that all investors have access to clear, factual

information.

1.9 BENEFITS

1) Enhancing overall companys performance.

2) Preparing a small enterprise growth so helping to secure new business

opportunities when they arise

3) Increasing attractiveness to investors and lenders which enables faster growth.


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4) Increasing companys ability to identify andmitigate the risk, manage crisis and

respond to changing market trend.

5) Increasing market confidence as a whole.

6) All company suffers from corporate scandals which scare potential investor

away from the market.

Good Governance can be understood as a set of 8 major characteristics

Participation Consensus orientation

Equity and inclusiveness Rule of law

Effectiveness and Efficiency Transparency

Accountability Responsiveness

1.10 INTERNAL CORPORATE GOVERNANCE CONTROLS

Internal corporate governance controls monitor activities and then take corrective

action to accomplish organizational goals. Examples include:

Monitoring by the board of directors

The board of directors, with its legal authority to hire fire and compensate top

management, safeguards invested capital. Regular board meetings allow potential

problems to be identified, discussed and avoided. Whilst non-executive directors

are thought to be more independent, they may not always result in more effective


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corporate governance and may not increase performance. Different board

structures are optimal for different firms.

Remuneration

Performance-based remuneration is designed to relate some proportion of salary to

individual performance. It may be in the form of cash or non-cash payments such

as shares and share options, superannuation or other benefits. Such incentive

schemes, however, are reactive in the sense that they provide no mechanism for

preventing mistakes or opportunistic behaviour.

1.11 EXTERNAL CORPORATE GOVERNANCE CONTROLS

External corporate governance controls encompass the controls external

stakeholders exercise over the organization.

Examples include:

Competition Takeovers

Debt covenants Media pressure

Government regulations Managerial labour market

Demand for and assessment of performance information


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1.12 Good Corporate Governance Practices

Each member of the Board of Directors and Core Management of the Bank should

adhere to the following so as to ensure compliance with good Corporate

Governance practices.

Dos

Attend Board meetings regularly and participate in the deliberations and

discussions effectively.

Study the Board papers thoroughly and enquire about follow-up reports on definite

time schedule.

Involve actively in the matter of formulation of general policies.

Be familiar with the broad objectives of the Bank and policies laid down by the

Government and the various laws and legislations.

Ensure confidentiality of the Bank's agenda papers, notes and minutes.

Donts

Do not interfere in the day to day functioning of the Bank.

Do not reveal any information relating to any constituent of the Bank to anyone.

Do not display the logo / distinctive design of the Bank on their personal visiting

cards / letter heads.


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Do not sponsor any proposal relating to loans, investments, buildings or sites for

Bank's premises, enlistment or empanelment of contractors, architects, auditors,

doctors, lawyers and other professionals etc.

Do not do anything, which will interfere with and/ or be subversive of maintenance

of discipline, good conduct and integrity of the staff.


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CHAPTER NO: 2

INTRODUCTION OF FINANCIAL SERVICES

The Financial services sector in India is blooming and has become one of the

lucrative areas to professionalism. The sector has undergone metamorphosis since

1990. Indian economy got liberalized during 1991 and the financial sector was kept

open for private and foreign players. During the late eighties, the financial services

industry in India was dominated by commercial banks and other financial

institutions governed by the Central Government. The economic liberalization has

brought in a complete transformation in the Indian financial services industry.

Prior to the economic liberalization, the Indian financial service sector was

characterized by various other factors, which was related to the growth of this

sector.

MEANING OF FINANCIAL SERVICES

The term financial services in its broader sense refers to mobilizing and allocation

of savings. It is identified as all those activities involved in the process of

converting savings into investment. Financial services can be defined as the

products and services offered by institutions like banks of various kinds for the

facilitation of various financial transactions and other related activities in the world

of finance like loans, insurance, credit cards, investment opportunities and money

management as well as providing information on the stock market and other issues

like market trends

Financial services refer to services provided by the finance industry. The finance

industry encompasses a broad range of organizations that deal with the

management of money. Among these organizations are banks, credit card

companies, insurance companies, consumer finance companies, stock brokerages,

investment funds and some government sponsored enterprises. Financial services


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also include FINANCIAL INTERMEDIARIES such as Merchant Bankers,

Venture capitalists, Commercial banks, Insurance Companies Mutual fund etc.

Definition

Services andproductsprovided toconsumers and businesses by financial

institutions such asbanks, insurance companies, brokerage firms, consumer

finance companies, and investment companies all of which comprise the financial

servicesindustry.

NATURE AND CHARACTERSTICS OF FINANCIAL SERVICES

Portfolio management of large public sector undertakings

Recommending suitable changes in the management structure and management

style envisaging achieving better results.

Acting as trustees to the debenture holders

Directing corporate customers in capital restructuring

Planning for mergers and acquisitions and assisting for their smooth carry out.

Rendering project advisory services, right from the preparation of the project

report till the raising of funds for starting the project

Assisting in the process of obtaining government Clarence.
http://www.investorwords.com/6664/service.htmlhttp://www.investorwords.com/3874/product.htmlhttp://www.investorwords.com/1055/consumer.htmlhttp://www.investorwords.com/401/bank.htmlhttp://www.investorwords.com/2447/industry.htmlhttp://www.investorwords.com/2447/industry.htmlhttp://www.investorwords.com/401/bank.htmlhttp://www.investorwords.com/1055/consumer.htmlhttp://www.investorwords.com/3874/product.htmlhttp://www.investorwords.com/6664/service.html


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INTRODUCTION OF MUTUAL FUND

There are a lot of investment avenues available today in the financial market

for an investor with an investable surplus. He can invest in Bank Deposits,

Corporate Debentures, and Bonds where there is low risk but low return. He may

invest in Stock of companies where the risk is high and the returns are also

proportionately high. The recent trends in the Stock Market have shown that an

average retail investor always lost with periodic bearish tends. People began opting

for portfolio managers with expertise in stock markets who would invest on their

behalf. Thus we had wealth management services provided by many institutions.

However they proved too costly for a small investor. These investors have found a

good shelter with the mutual funds.

CONCEPT OF MUTUAL FUND:

A mutual fund is a common pool of money into which investors place their

contributions that are to be invested in accordance with a stated objective. Theownership of the fund is thus joint or mutual; the fund belongs to allinvestors.

A single investors ownership of the fund is in the same proportion as the amount

of the contribution made by him or her bears to the total amount of the fund.

Mutual Funds are trusts, which accept savings from investors and invest the

same in diversified financial instruments in terms of objectives set out in the trusts

deed with the view to reduce the risk and maximize the income and capital

appreciation for distribution for the members. A Mutual Fund is a corporation and

the fund managers interest is to professionally manage the funds provided by the

investors and provide a return on them after deducting reasonable management

fees. The objective sought to be achieved by Mutual Fund is to provide an


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opportunity for lower income groups to acquire without much difficulty financial

assets. They cater mainly to the needs of the individual investor whose means are

small and to manage investors portfolio in a manner that provides a regular

income, growth, safety, liquidity and diversification opportunities.

DEFINITION:

Mutual funds are collective savings and investment vehicles where savings of

small (or sometimes big) investors are pooled together to invest for their mutual

benefit and returns distributed proportionately. A mutual fund is an investment

that pools your money with the money of an unlimited number of other investors.

In return, you and the other investors each own shares of the fund. The funds

assets are invested according to an investment objective into the funds portfolio of

investments. Aggressive growth funds seek long-term capital growth by investing

primarily in stocks of fast-growing smaller companies or market segments.

Aggressive growth funds are also called capital appreciation funds.


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HISTORY OF MUTUAL FUNDS IN INDIA

The mutual fund industry in India started in 1963 with the formation of Unit Trustof India, at the initiative of the Government of India and Reserve Bank. The

history of mutual funds in India can be broadly divided into four distinct phases.

FIRST PHASE1964-87:Unit Trust of India (UTI) was established on 1963 by

an Act of Parliament. It was set up by the Reserve Bank of India and functioned

under the Regulatory and administrative control of the Reserve Bank of India. In

1978 UTI was de-linked from the RBI and the Industrial Development Bank of

India (IDBI) took over the regulatory and administrative control in place of RBI.

The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI

hadRs.6, 700 crores of assets under management.

SECOND PHASE1987-1993(ENTRY OF PUBLIC SECTOR FUNDS): 1987

marked the entry of non- UTI, public sector mutual funds set up by public sector

banks and Life Insurance Corporation of India (LIC) and General Insurance

Corporation of India(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund

established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab

National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank

of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its

mutual fund in June 1989 while GIC had set up its mutual fund in December1990.

At the end of 1993, the mutual fund industry had assets under management of

Rs.47, 004 crores.THIRD PHASE 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS): With

the entry of private sector funds in 1993, a new era started in the Indian mutual

fund industry, giving the Indian investors a wider choice of fund families. Also,

1993 was the year in which the first Mutual Fund Regulations came into being,


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under which all mutual funds, except UTI were to be registered and governed. The

erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first

private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more

comprehensive and revised Mutual Fund Regulations in 1996. The industry now

functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual

fund houses went on increasing, with many foreign mutual funds setting up funds

in India and also the industry has witnessed several mergers and acquisitions.

FOURTH PHASESINCE FEBRUARY 2003:In February 2003, following the

repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate

entities. One is the Specified Undertaking of the Unit Trust of India with assets

under management of Rs.29,835 crores as at the end of January 2003, representing

broadly, the assets of US 64 scheme, assured return and certain other schemes. The

Specified Undertaking of Unit Trust of India, functioning under an administrator

and under the rules framed by Government of India and does not come under the

purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd,

sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions

under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI

which had in March 2000 more than Rs.76,000 crores of assets under management

and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

Fund Regulations, and with recent mergers taking place among different private

sector funds, the mutual fund industry has entered its current phase of

consolidation and growth. As at the end of September, 2004, there were 29 funds,

which manage assets of Rs.153108 crores under 421schemes.


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ADVANTAGES OF MUTUAL FUNDS

The following are the major advantages offered by mutual funds to all investors:

1. Portfolio Diversification:Each investor in the fund is a part owner of all the

funds assets, thus enabling him to hold a diversified investment portfolio even

with a small amount of investment that would otherwise require big capital.

2. Professional Management:Even if an investor has a big amount of capital

available to him, he benefits from the professional management skills brought in

by the fund in the management of the investors portfolio. The investment

management skills, along with the needed research into available investment

options, ensure a much better return than what an investor can manage on his own.

Few investors have the skill and resources of their own to succeed in todays fast

moving, global and sophisticated markets.

3. Reduction/Diversification of Risk:When an investor invests directly, all the

risk of potential loss is his own, whether he places a deposit with a company or a

bank, or he buys a share or debenture on his own or in any other from. While

investing in the pool of funds with investors, the potential losses are also sharedwith other investors. The risk reduction is one of the most important benefits of a

collective investment vehicle like the mutual fund.

4. Reduction of Transaction Costs: What is true of risk as also true of the

transaction costs. The investor bears all the costs of investing such as brokerage or

custody of securities. When going through a fund, he has the benefit of economies

of scale; the funds pay lesser costs because of larger volumes, a benefit passed on

to its investors.

5. Liquidity:Often, investors hold shares or bonds they cannot directly, easily and

quickly sell. When they invest in the units of a fund, they can generally cash their

investments any time, by selling their units to the fund if open-ended, or selling


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them in the market if the fund is close-end. Liquidity of investment is clearly a big

benefit.

6. Convenience and Flexibility:Mutual fund management companies offer many

investor services that a direct market investor cannot get. Investors can easily

transfer their holding from one scheme to the other; get updated market

information and so on.

7. Tax Benefits:Any income distributed after March 31, 2002 will be subject to

tax in the assessment of all Unit holders. However, as a measure of concession to

Unit holders of open-ended equity-oriented funds, income distributions for the year

ending March 31, 2003, will be taxed at a concessional rate of 10.5%. In case of

Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the

Total Income will be admissible in respect of income from investments specified in

Section 80L,including income from Units of the Mutual Fund. Units of the

schemes are not subject to Wealth-Tax and Gift-Tax.

8. Well Regulated:All Mutual Funds are registered with SEBI and they function

within the provisions of strict regulations designed to protect the interests of

investors. The operations of Mutual Funds are regularly monitored by SEBI.


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DISADVANTAGES OF INVESTING THROUGH

MUTUAL FUNDS:

1. No Control over Costs:An investor in a mutual fund has no control of the overall costs of investing. The

investor pays investment management fees as long as he remains with the fund,

albeit in return for the professional management and research. Fees are payable

even if the value of his investments is declining. A mutual fund investor also pays

fund distribution costs, which he would not incur indirect investing. However, this

shortcoming only means that there is a cost to obtain the mutual fund services.

2. No Tailor-Made Portfolio:Investors who invest on their own can build their

own portfolios of shares and bonds and other securities. Investing through fund

means he delegates this decision to the fund managers. The very-high-net-worth

individuals or large corporate investors may find this to be a constraint in

achieving their objectives. However, most mutual fund managers help investors

overcome this constraint by offering families of funds- a large number of different

schemes- within their own management company. An investor can choose from

different investment plans and constructs a portfolio to his choice.

3. Managing a Portfolio of Funds:Availability of a large number of funds can

actually mean too much choice for the investor. He may again need advice on how

to select a fund to achieve his objectives, quite similar to the situation when he has

individual shares or bonds to select.

4. No Control:Unlike picking your own individual stocks, a mutual fund puts youin the passenger seat of somebody else car.


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TYPES OF MUTUAL FUNDS SCHEMES IN INDIA

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial

position, risk tolerance and return expectations etc. thus mutual funds has Variety

of flavors, Being a collection of many stocks, an investors can go for picking a

mutual fund might be easy. There are over hundreds of mutual funds scheme to

choose from. It is easier to think of mutual funds in categories, mentioned below.

A).BY STRUCTURE

1. Open - Ended Schemes: An open-end fund is one that is available for

subscription all through the year. These do not have a fixed maturity. Investors can

conveniently buy and sell units at Net Asset Value("NAV") related prices. The key

feature of open-end schemes is liquidity.

2. Close - Ended Schemes: A closed-end fund has a stipulated maturity period

which generally ranging from 3 to 15years. The fund is open for subscription only

during a specified period. Investors can invest in the scheme at the time of the

initial public issue and thereafter they can buy or sell the units of the scheme on the

stock exchanges where they are listed. In order to provide an exit route to the

investors, some close-ended funds give an option of selling back the units to the

Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations

stipulate that at least one of the two exit routes is provided to the investor.

3. Interval Schemes: Interval Schemes are that scheme, which combines the

features of open-ended and close-ended schemes. The units may be traded on the


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stock exchange or may be open for sale or redemption during pre-determined

intervals at NAV related prices.

(B) BY NATURE

1. Equity Fund:

These funds invest a maximum part of their corpus into equities holdings. The

structure of the fund may vary different for different schemes and the fund

managers outlook on different stocks.

The Equity Funds are sub-classified depending upon their investment objective, as

follows:

Diversified Equity Funds

Mid-Cap Funds

Sector Specific Funds

Tax Savings Funds (ELSS) Equity investments are meant for a longer time

horizon, thus Equity funds rank high on the risk-return matrix.

2. Debt Funds:

The objective of these Funds is to invest in debt papers. Government authorities,

private companies, banks and financial institutions are some of the major issuers of

debt papers. By investing in debt instruments, these funds ensure low risk and

provide stable income to the investors.

Gilt Funds

Income Funds

MIPs

C).BY INVESTMENT OBJECTIVE:

Growth Schemes: Growth Schemes are also known as equity schemes. The aim of

these schemes is to provide capital appreciation over medium to long term. These


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schemes normally invest a major part of their fund in equities and are willing to

bear short-term decline in value for possible future appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The aim of

these schemes is to provide regular and steady income to investors. These schemes

generally invest in fixed income securities such as bonds and corporate debentures.

Capital appreciation in such schemes may be limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and income by

periodically distributing apart of the income and capital gains they earn. These

schemes invest in both shares and fixed income securities, in the proportion

indicated in their offer documents (normally 50:50).

Money Market Schemes: Money Market Schemes aim to provide easy liquidity,

preservation of capital and moderate income. These schemes generally invest in

safer, short-term instruments, such as treasury bills, certificates of deposit,

commercial paper and inter-bank call money.

Load Funds: A Load Fund is one that charges a commission for entry or exit. That

is, each time you buy or sell units in the fund, a commission will be payable.

Typically entry and exit loads range from 1% to 2%. It could be worth paying the

load, if the fund has a good performance history.

No-Load Funds: A No-Load Fund is one that does not charge a commission for

entry or exit. That is, no commission is payable on purchase or sale of units in the

fund. The advantage of a no load fund is that the entire corpus is put to work.


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Corporate Governance in Mutual Fund

SEBI clears new norms on corporate governance; mutual fund policy

Among other major decisions, SEBI board also cleared the much-awaitedlong term

policy for mutual funds, which includes various proposals including potential tax

benefits, for the future growth of the sector

Market regulator Securities and Exchange Board of India (SEBI) on Thursday

cleared new norms for corporate governance and a long term policy with various

proposals, including potential tax benefits, for mutual funds.

The new norms for corporate governance require listed companies to

justify salaries paid to its chief executives, put in place a whistle-blower policy and

have orderly succession plans.

The new norms were cleared by the SEBI board in Delhi and the relevant

provisions would be incorporated in the listing agreement soon, SEBI chairman

UK Sinha said.

Speaking to the reporters after the board meeting Sinha also said that any decision

on the lapsed ordinance that granted greater powers to SEBI needs to be taken by

the government.


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Among other major decisions, SEBI board also cleared the much-awaited long

term policyfor mutual funds, which includes various proposals including potential

tax benefits, for the future growth of the sector.

"The long term policy includes all aspects - including enhancing the reach and

promoting financial inclusion, tax treatment and obligation of various stakeholders

to deal with the public policy objectives of achieving sustainable growth of

the mutual fund industry and mobilisation of household savings for the growth of

the economy. The recommendations of long term policy has been bifurcated in two

buckets, tax incentive related proposals and non-tax related proposals," SEBI said

in a release.

The recommended tax incentives for mutual fund schemes are...

1. A long term product such as Mutual Fund Linked Retirement Plan (MFLRP)with additional tax incentive of Rs50,000 under 80C of Income Tax Act may

be introduced.

2. Alternatively, the limit of section 80C of the Income Tax Act, 1961, may beenhanced from Rs1 lakh to Rs2 lakh to make mutual funds products (ELSS

and MFLRP) as priority for investors among the different investment

avenues. RGESS may also be brought under this enhanced limit.

3. Similar to merger/ consolidation of companies, the merger/ consolidation ofequitymutual funds schemes also may not be treated as transfer and

therefore, may be exempted from capital gain taxation.


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SEBI board also decided to ensure that mutual funds achieve a reasonable size and

play an important role in financial inclusion, while enhancing transparency. Here

are the objectives decided by SEBI for this...

(i) Capital Adequacy i.e. minimum networth of the asset management companies

(AMC) be increased to Rs50 crore.

(ii) The concept of seed capital to be introduced i.e. 1% of the amount raised

(subject to a maximum of Rs50 lakh) to be invested by AMCs in all the open

ended schemes during its life time.

(iii) EPFOs be allowed to invest upto 15% of their corpus in Equities and Mutual

Funds. Further, the members of EPFOs who are earning more than Rs6500 per

month be offered an option for a part of their corpus to be invested in a Mutual

Fund product of their choice.

(iv) Presently, Navratna and Miniratna Central Public Sector Enterprises (CPSEs)

are permitted to invest in public sector mutual funds regulated by SEBI. It has been

recommended that all CPSEs be allowed to choose from any of the SEBI

registered Mutual Funds for investing their surplus funds.

(v) In order to enhance transparency and improve the quality of the disclosures, it

has been decided that AUM from different categories of schemes such as equity

schemes, debt schemes, etc., AUM from B-15 cities, contribution of sponsor and

its associates in AUM of schemes of their mutual fund, AUM garnered through

sponsor group/ non-sponsor group distributors etc. are to be disclosed on monthly

basis on respective website of AMCs and on consolidated basis on website of


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AMFI.

(vi) In order to improve transparency as well as encourage Mutual Funds to

diligently participate in corporate governance of the investee companies and

exercise their voting rights in the best interest of the unit holders, voting data along

with rationale supporting their decision (for, against or abstain) be disclosed on

quarterly basis on their website.

This is to be certified by Auditor annually and reviewed by board of AMC and

Trustees.

(vii) Towards achieving the goal of financial inclusion, a gradual approach to be

taken such that initially the banked population of the country may be targeted with

respect tomutual funds investing. SEBI will work towards achieving the goal that

the basics of capital markets and financial planning may be introduced as core

curriculum in schools and colleges. Printed literature on mutual funds in regional

languages be mandatorily made available by mutual funds. Investor awareness

campaign in print and electronic media on mutual funds in regional languages to be

introduced.

(viii) In order to develop and enhance the distribution network PSU banks may be

encouraged to distribute schemes of all mutual funds. Online investment facility

need to be enhanced to tap the internet savvy users to invest in mutual funds. Also,

the burgeoning mobile-only internet users need to be tapped for direct distribution

of mutual funds products.


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The SEBI board also cleared new KYC registration agency (KRA) regulations that

would make it easier for the investors to comply with know your client (KYC)

requirements across various segments of the capital markets.

The approval by SEBI board to the new corporate governance norms follows

months-long discussion among various stakeholders on draft regulations released

last year.

The new norms seek to check excessive salaries paid to top executives of listed

companies by requiring them to justify such payments, as also all related party

transactions with entities linked to promoters and directors.

The companies would also need to adopt a whistle-blower policy for employees,

while the number of directorship a person can hold on company boards would be

capped, among various other measures to safeguard the interest of minority

shareholders.

The new norms provide for greater oversight by minority shareholders and

independent directors and check any unjustifiable payments to related parties.

They also seek to bring in a greater alignment of CEO salaries with the

performance and goals of the company, while requiring disclosure of ratio

of remuneration paid to each of their directors and their median staff salary.


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Similar provisions have been made in the new Companies Act.

SEBI had earlier said that "on average, the remuneration paid to CEOs in certain

Indian companies are far higher than the remuneration received by their foreign

counterparts and there is no justification available to that effect".

Through these measures, SEBI is seeking to adopt better global practices without

increasing the cost of compliances, so that confidence of the investors is brought

back to market.

Overview of Mutual Fund Governance

A.Fund Boards Follow Strong Governance Practices to Best ServeShareholders

Fund boards are robustly independent. Federal securities laws require that at least40percent of the directors on a fund board be independent, as defined by SEC

rule. In practice, the proportion of independent directors is significantly higher

throughout the industry. In more than 90 percent of fund complexes, 75 percent

or more of fund directors are independent. Moreover, 97 percent of independent

directors have never been employed by the fund complex. Eighty-eight percent of fund boards have an independent director serving as the

boards chair or as lead independent director. There is nolegal requirement for a

board to have an independent chair or independent lead director.


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New independent directors of a fund board are selected and nominated by theexisting independent directors on the board, not by the funds adviser.

A funds adviser cannot fire or otherwise remove an independent director. Independent directorsnot the funds adviserset their own compensation.

B. Independent Directors Protect the Interests of Fund Shareholders byServing as Independent Watchdogs

In broad terms, independent directors oversee the management and operations ofthe fund and are not involved in its day-to-day management.

A critical component of a boards oversight responsibility is to protect the fundsshareholders against potential conflicts of interest between the fund and its

service providers, including the adviser.

Independent directors have a fiduciary duty to protect the interests of fundshareholders. In addition, directors must perform all their duties in an informed

and deliberate manner. Directors devote substantial time and consider large

amounts of information related to various aspects of fund operations andmanagement. This process provides fund directors with the depth of

understanding that ultimately allows them to make informed decisions and fulfill

their duties and responsibilities.

C.Independent Directors Rigorously Review the Advisory Contract EveryYear

In addition to their general oversight responsibilities, fund directors have specificand significant responsibilities under the federal securities laws, ranging from


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overseeing the funds compliance program to approving the fees paid to the

funds adviser.

Independent directors are required to approve the funds advisory fees annually.Directors exercise this responsibility with the utmost diligence and care, often

consulting with independent counsel and third party consultants, reviewing

hundreds if not thousands of pages of detailed information, and participating in

numerous meetings throughout the year.

Directors are not required to negotiate for the absolute lowest rate with theadviser. Instead, there is broad recognition by regulators and the courts that

directors must balance a number of considerations, including the nature, extent,and quality of the services provided by the adviser. Good performance, which is

ultimately what shareholders are seeking, may best be achieved by paying the

adviser a competitive rate, rather than the lowest possible fee. In the fee approval

process, however, directors do often require the adviser to take steps to bring fees

downsteps such as breakpoints at specified asset levels, fee waivers, outright

fee reductions, or service enhancements.

Fund performance is an important component and focus of extensive boardoversight. In fulfilling their oversight responsibilities, directors seek to ensure that

the adviser is managing the fund in a manner consistent with the funds stated

investment objectives. Quarterly reviews with the adviser keep attention focused

on performance issues until they are resolved.

Directors have many means to carry out their duty to forcefully representshareholders interests and effect changes in their funds best interests. For

example, directors can require the adviser to increase the quality of its services or

to take appropriate steps to improve its performance, such as by hiring a new


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portfolio manager for the fund, increasing the advisers investment research

capability, retaining a subadviser, or merging the fund.

The fact that directors typically do not fire the funds adviser does not indicatethat directors do not forcefully represent shareholders interests. Such a drastic

step would be costly, disruptive, and, importantly, contrary to the funds

shareholders express intention to invest with a particular money manager.

Replacing the adviser is not comparable to replacing a CEO and one or two other

top members of management at an operating companyit is more like replacing

an operating companys entire operational staff. Because a funds shareholders

have deliberately chosen that fund on the basis of its adviser and the other reasonsnoted above, directors should consider replacing a funds adviser only as a last

resort, as in the case of fraud.

D.Mutual Funds Boards are Uniquely Different from Corporate Boards

Directors of mutual fund boards and corporate boards both oversee managementand operations and have a fiduciary duty to protect the interests of shareholders.

The focus of fund directors, however, is different, due to the unique structure of

mutual funds. Because a fund has no employees and relies on the adviser and

other service providers to carry out the funds day-to-day operations, the board

focuses on the performance of these entities under their respective contracts and

monitors the potential conflicts of interest that can arise between them and the

fund.

A mutual fund board is not the board of the funds adviser. Thus, while the fundboard oversees the services the adviser provides to the fund, it does not oversee

the management or operations of the adviser. Decisions regarding, for example,


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the hiring, firing, and compensation of the advisers employees should be left

solely to the adviser.

Most mutual fund boards employ governance models that reflect the uniquestructure of funds and fund complexes. Because all of the funds within a fund

complex usually receive necessary services from the same entities, are served by

common personnel, and are organized around common operating features, fund

boards employ a unitary board model (a single board overseeing allfunds in the

complex) or a cluster board model (two or more separate boards each

overseeing a group of funds with the complex) to oversee multiple funds. These

governance models allow directors to provide efficient and effective oversight onbehalf of fund shareholders.


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Final Project on Corporate Governance in Mutual Fund.docx

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Transcript of Final Project on Corporate Governance in Mutual Fund.docx