Legal and regulatory framework

Distribution is a regulated activity, and most of the rules that bind a distributor flow from SEBI through the AMC and AMFI. The exam tests who regulates what, the numerical limits that protect investors, the rights an investor can enforce, and where a complaint goes. These are high-yield, memory-based marks.

SEBI and the Mutual Fund Regulations, 1996

The Securities and Exchange Board of India is the statutory regulator of the securities market, set up under the SEBI Act, 1992. It registers mutual funds, approves AMCs and trustees, prescribes how schemes are launched, valued, disclosed and wound up, and can inspect, penalise and cancel registration. The governing rulebook is the SEBI (Mutual Funds) Regulations, 1996, supplemented by circulars, now consolidated in a master circular.

The investment restrictions the exam likes:

• A scheme may not invest more than 10% of its NAV in equity shares of a single company (index funds and sector funds follow their index or sector weights).
• Not more than 10% of NAV in debt instruments of a single issuer, extendable to 12% with the approval of the AMC board and trustees. Government securities and treasury bills are exempt.
• Unlisted equity: not more than 5% of NAV for an open-ended scheme and 10% for a close-ended scheme.
• Debt sector exposure limits (generally 20% of NAV, with an additional allowance for housing finance and affordable housing, as notified) and group exposure limits of 10% of NAV, extendable to 15%.
• A scheme may invest in other schemes of the same or other mutual funds up to 5% of the net assets of the fund (fund of funds excepted), and no management fee may be charged on those investments.
• The 20-25 rule: every scheme must have at least 20 investors, and no single investor may hold more than 25% of the corpus. It applies at the scheme level, checked at the end of each calendar quarter for open-ended schemes.
• Inter-scheme transfers must be at market price and in line with the receiving scheme's objective; no scheme may give loans or advance money.

AMFI and its codes

The Association of Mutual Funds in India is the industry body of all SEBI-registered AMCs. It is not a statutory regulator; its authority over distributors comes from SEBI's circulars that make AMCs responsible for ensuring their distributors follow AMFI's norms. AMFI issues the AMFI Registration Number (ARN), runs the Know Your Distributor process, publishes daily NAVs, maintains the market-cap ranking used for the large, mid and small cap definitions, and runs investor awareness campaigns such as Mutual Funds Sahi Hai.

Three documents matter. The AMFI Code of Ethics (ACE) binds AMCs: integrity, due diligence, disclosure, no excessive portfolio churning, avoiding conflicts of interest. The AMFI Guidelines and Norms for Intermediaries (AGNI) set out the distributor's code of conduct: put the investor's interest first, disclose all commissions including those of competing schemes, no rebates or pass-backs, no assurance of returns, no churning, maintain confidentiality, and comply with KYC and KYD. Violation can lead to suspension or cancellation of the ARN, and AMCs then stop paying commission.

Rights and obligations of unitholders

Unitholders have a proportionate beneficial interest in the scheme's assets. Their rights, and the timelines the exam asks for:

• Receive the scheme information document, statement of additional information, factsheets, half-yearly and monthly portfolios, and the annual report.
• Receive an account statement for every transaction, and a consolidated account statement (CAS) across all fund houses.
• Receive redemption proceeds within 3 working days of the transaction, and IDCW within 7 working days of the record date. Delay beyond this obliges the AMC to pay interest at 15% a year to the investor.
• Be informed of any change in fundamental attributes (scheme type, investment objective, asset allocation pattern, or terms of issue) and be given at least 30 days to exit without exit load.
• Approve, by a 75% majority of unitholders, the winding up of a scheme; the same majority can require the trustees to replace the AMC.
• Nominate up to the permitted number of nominees, change bank details, change distributor without a no-objection certificate, and complain through the grievance ladder.
• Unclaimed redemption and IDCW amounts are invested in money market or liquid schemes. An investor who claims within 3 years receives the prevailing NAV; after 3 years the investor receives the NAV at the end of 3 years, and the income after that goes to investor education.

Obligations run the other way too: complete KYC, give a PAN, disclose FATCA and CRS status, keep contact and bank details updated, and read the scheme documents. A unitholder cannot sue the trust directly for underperformance; the remedy is to redeem.

Where a complaint goes

The grievance ladder has three steps. First, the AMC's investor service centre or RTA. Second, if unresolved, SCORES (SEBI Complaints Redress System), SEBI's online platform, where the AMC must respond within the prescribed period (21 days under the 2023 framework), with escalation to SEBI if the investor is not satisfied. Third, the SMART ODR portal, SEBI's online dispute resolution system, which routes the matter to conciliation and then to online arbitration through a market infrastructure institution. There is no separate mutual fund ombudsman. Complaints against distributors can also go to AMFI, which can act on the ARN.

Other laws that touch distribution

The SEBI (Investment Advisers) Regulations, 2013 draw the line between a distributor and an adviser. A distributor may give advice that is incidental to the sale of a scheme, must not describe themselves as an investment adviser, and cannot charge advisory fees. An individual cannot be both a registered investment adviser and a distributor. The Prevention of Money Laundering Act, 2002 imposes KYC, record-keeping and reporting of suspicious transactions to FIU-IND; AMCs appoint a principal officer for this. The Foreign Exchange Management Act governs NRI investments, repatriation and the accounts used. The Indian Trusts Act, 1882 and the Companies Act, 2013 govern the trust and the AMC. The Income-tax Act, 2025, in force from 1 April 2026, replaces the 1961 Act and renumbers the familiar sections; the ELSS deduction is now in Section 123. Finally, the SEBI (Prohibition of Insider Trading) Regulations now extend to mutual fund units, so AMC employees and connected persons cannot trade on unpublished price-sensitive information about a scheme.