The P K Kaul committee has brought out certain legal and practical complexities posed by the mutual fund industry because of setting up of funds as a trust under the Indian Trusts Act, 1882.
Justifying the separate statute for the mutual fund industry, the committee has stated that the 1882 Act never envisaged dealing with multiple stakeholders.
The Indian Trusts Act appropriately deals with property entrusted by a settler in the hands of trustees for the benefit of beneficiaries. It does not contain adequate provisions to deal with a trust where there is large-scale mobilisation of public funds entrusted by prospective investors for better fund management.
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In the traditional trust, bifurcation of responsibility between trustees and managers is neither visualised nor clearly provided for. Following the establishment of mutual funds, the healthy principle of separating management from
ownership, control and supervision has been built into the structure of mutual funds under the Mutual Funds Regulations 1993 and subsequently in the MF Regulations 1996.
As a result of this, the committee says, the rights, duties and obligations of the different layers the sponsor, the trustees, the AMC, the custodian, the beneficiaries need to be focused under a specific statute rather than seeking to enforce these partly under the Sebi Act 1992 and partly under the Indian Trust Act, 1882.
Things get further aggravated when the trustees are constituted as a company under the Companies Act.
The trustee company, as a person created in the eyes of law, has also to comply with various provisions enacted by the Company Law. This adds a further dimension to the problem.
Moreover, if, as a measure of investor protection, regulations are drawn up to spell out the rights, duties and responsibilities of a director, it becomes necessary to harmonise these with the Companies Act and the Indian Trusts Act.
The properties cannot be registered in the name of the trust as it is not an entity or person in the eyes of the law. Such property needs to be registered in the names of trustees.
Whenever there is a change of trustees, it becomes necessary to register the property in the name of the new trustees.
If a mutual fund is constituted as a body corporate with perpetual succession, it is capable of entering into contracts, being sued, suing others in its own name, and is capable of holding property as a legal entity.