CHIEF GENERAL MANAGER
MUTUAL FUNDS DEPARTMENT
December 20, 2001
All Mutual Funds Registered with SEBI Unit Trust of India
Sub: Independent Directors on Boards of AMCs and Trustee Companies.
As you are aware, the concept of independent directors on the Boards of asset management companies (AMCs) and trustee companies has been introduced in SEBI (Mutual Funds) Regulations, 1996 for better corporate governance, to bring about transparency in the operations of mutual funds and to protect the interests of investors. With a view to implement the regulations in this regard in letter and spirit, the following clarifications are being issued.
1 According to Regulation 16(5), an independent trustee should not be associated in any manner with the sponsor. It is clarified that relatives (as defined in the Companies Act) of sponsor or directors of the sponsor company or relatives of associate directors of the AMCs and trustee companies shall be considered as associate directors.
2.The nominees of the companies who are stakeholders in the sponsor company or AMC (even if they are not deemed sponsors by virtue of holding less than 40% of net worth of AMC), shall be considered as associate directors.
3.A person who is an “associate” in accordance with definition in the Regulations cannot be appointed as independent director even after he ceases to be an “associate” unless a cooling off period of three years has elapsed from the date of his disassociation.
For the sake of clarity and to avoid any ambiguity, an example is given here. Supposing an employee of the sponsor or their associate companies or AMC or trustee company resigns on December 1, 2001, then he cannot be appointed as an independent director till December
1, 2004. During this intervening period, he can be appointed only as associate director. However, once he is taken as an associate director, say on December 2, 2001, he cannot be considered as “independent” from December 2, 2004. There must be a cooling off period of 3 years from the date he ceases to be an associate director.
4. The clarifications in Clauses 1-3 above shall be followed in case of directors of trustee companies and AMCs.
Please classify your existing directors of AMC and trustee company as “associates” or “independent” in the light of the aforesaid clarifications and inform us
if the composition of directors does not comply with the requirement of 50% or 2/3rd independent directors of AMC or trustee company. In future also, whenever the composition falls below the requirements due to resignation or any other reason please inform us immediately and also the steps proposed to be taken by you to ensure compliance with the Regulations.
Your attention is drawn to Regulation 18(25)(A)(i) of SEBI (Mutual Funds) Regulations, 1996 which requires the trustees to be discerning in the appointment of the directors on the Board of the asset management company. Further, under Regulations 18(27)(iii) and (v), the independent directors of the trustee or asset management company are required to pay specific attention to the selection and nomination of individuals to fill the vacancies of independent directors.
Considering the above clarifications and provisions in the Regulations, the format for sending the bio-data of directors of AMCs and trustees to SEBI has been revised and is enclosed herewith. You are advised to use this format in the future while sending the bio-data of the new directors of AMC or trustee company for our information or approval as the case may be. New directors should also be informed about their responsibilities and rights as specified in the Regulations.
This circular is being issued in accordance with the provisions of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996.
P. K. NAGPAL