Restrictions on AMC Business Activities

When the legislature licenses a person to manage other people's money, it tends to fence that person in. Regulation 24 of the SEBI (Mutual Funds) Regulations, 1996 is exactly that fence. It tells the asset management company (AMC) two blunt things: you cannot be the trustee of the fund you manage, and you cannot run any business beyond the management and advisory work the regulation expressly permits. Everything else in the regulation, the broad-based fund test, the activity-wise segregation of bank and securities accounts, the conflict-of-interest disclosures, exists to police the narrow gap the regulator deliberately left open. This chapter unpacks the exact text, its 2011 redrafting, the 2015 and 2023 refinements, and the case law, principally the Franklin Templeton litigation, that shows why a tightly bounded AMC matters to the unitholder.

Why the AMC is fenced in at all

A mutual fund in India is a three-cornered structure: a sponsor who promotes it, a trust (with trustees) that holds the assets, and an AMC that actually manages the money for a fee. The AMC is the commercial engine, it has the fund managers, the dealing desk, the research and the back office. Precisely because it sits closest to the money and the market-sensitive information, the regulatory instinct is to keep it on a short leash. The leash is Regulation 24, titled in the bare regulation as Restrictions on business activities of the asset management company.

The logic is conflict containment. An entity that manages a broad-based retail mutual fund earns a regulated, relatively thin fee. The same entity, if free to manage hedge-style mandates, family offices or proprietary books, would earn far richer fees elsewhere, creating a structural temptation to favour the high-fee mandate when allocating scarce trades, research or its best people. SEBI's solution is not to ban diversification outright but to permit only management and advisory work, and to wrap even that in segregation and disclosure conditions. To see how this restriction interlocks with the rest of the architecture, read it alongside the duties of the trustees, who police the AMC, and the overall regulatory framework within which both operate.

The two core prohibitions in Regulation 24

Regulation 24, as it stands after the 2011 substitution, opens with the words "The asset management company shall, -". It then imposes two foundational bars. By clause (a), the AMC shall not act as a trustee of any mutual fund. By clause (b), the AMC shall not undertake any business activities other than in the nature of management and advisory services provided to pooled assets including offshore funds, insurance funds, pension funds, provident funds, or Category I foreign portfolio investor as specified in the SEBI (Foreign Portfolio Investors) Regulations, 2014, and even those only if the activities are not in conflict with the activities of the mutual fund.

The first bar enforces a separation of powers. The trustee's job is to watch the AMC; an AMC that was also the trustee would be marking its own homework. The trustees must be an independent check, which collapses if the manager and the monitor are the same person. The second bar is the substantive one: it is a positive list dressed as a negative. Anything not in the nature of management and advisory services to permitted pooled assets is simply off-limits, subject to the carve-outs discussed below. The Category I FPI reference was inserted by the SEBI (Mutual Funds) (Amendment) Regulations, 2015 with effect from 15 May 2015, replacing the older laundry-list of venture capital funds, financial consultancy and sale of research that the pre-2011 text had carried.

From Chinese walls to broad-basing: the 2011 redraft

The current Regulation 24 was substituted by the SEBI (Mutual Funds) (Amendment) Regulations, 2011, with effect from 30 August 2011. The pre-2011 regulation had been more permissive in form: it allowed an AMC to undertake "portfolio management services, management and advisory services to offshore funds, pension funds, provident funds, venture capital funds, management of insurance funds, financial consultancy and exchange of research on commercial basis", provided those activities were not in conflict with the mutual fund and provided the AMC could satisfy the Board that "the key personnel, the systems, back office, bank and securities accounts are segregated activity-wise and there exist systems to prohibit access to inside information of various activities."

That older model rested almost entirely on the Chinese-wall idea, segregate the people and the systems, and trust the wall. SEBI's review concluded that walls alone did not neutralise the conflict that flows from a differential fee structure between the mutual fund product and other mandates. The 2011 redraft therefore layered a second discipline on top of segregation: the broad-based fund requirement, which channels the AMC's permitted side-activities towards genuinely diversified pools rather than concentrated, high-margin vehicles. The shift, from "build a wall" to "build a wall and only manage broad-based money", is the conceptual heart of the modern Regulation 24.

The broad-based fund test

The Explanation to Regulation 24 defines the term with arithmetic precision: "the term 'broad based fund' shall mean the fund which has at least twenty investors and no single investor account for more than twenty five percent of corpus of the fund." Two cumulative conditions, therefore: a floor of twenty investors, and a ceiling of twenty-five per cent for any single investor's share of the corpus.

The purpose is to prevent the AMC from using its mutual-fund licence as a springboard to run effectively private, concentrated mandates for a handful of large clients, the very mandates where conflict and fee-arbitrage are sharpest. By the second proviso to clause (b), an AMC may, itself or through subsidiaries, undertake portfolio management and advisory services for funds that are not broad-based, but only "till further directions" of the Board and only on additional conditions: it must satisfy SEBI that key personnel, systems, back office, bank and securities accounts are segregated activity-wise with systems to prohibit access to inside information, and it must meet capital adequacy separately for each activity and obtain separate approval where necessary. The Explanation carries one carve-out, inserted in 2015: the broad-based test does not apply to the proviso to clause (vi) of the first proviso, which deals with appropriately regulated broad-based Category I and Category II FPI funds managed by the AMC.

The first proviso: eight conditions for permitted activities

Clause (b) is followed by a long first proviso allowing the AMC, itself or through subsidiaries, to undertake the permitted activities "if" a set of conditions is met. These conditions are the operating manual of conflict management and reward careful reading. They require, in substance, that: (i) bank and securities accounts are segregated activity-wise; (ii) capital adequacy is met separately for each activity, with separate approval where necessary; (iii) there is no material conflict of interest across activities; (iv) absence of conflict is disclosed to trustees and unitholders in the scheme information document and statement of additional information; (v) where unavoidable conflicts exist, the AMC discloses the source of conflict, the potential material risk or damage to investors, and detailed parameters; and (vi) a separate fund manager is appointed for each separate fund, unless the investment objectives and asset allocation are identical and the portfolio is replicated across funds.

Condition (vii) requires fair treatment of investors across products, including handling simultaneous buy and sell in the same equity security "only through market mechanism and a written trade order management system", a direct attack on front-running and cross-allocation abuse. Condition (viii) requires independence for key personnel handling conflicts, achieved by "removal of direct link between remuneration" and the revenues generated by that activity, so that a fund manager cannot be paid more for steering value to the high-fee book. The proviso to condition (vi) (inserted in 2015) relaxes the separate-fund-manager rule where the funds managed are appropriately regulated broad-based Category I or Category II FPIs.

The narrow exceptions: debt-segment trading and subsidiaries

Beyond the management-and-advisory permission, Regulation 24 leaves two specific doors ajar. First, a further proviso, traceable to SEBI's 2013 enabling decision and now embedded in the regulation, provides that "the asset management company may become a proprietary trading member for carrying out trades in the debt segment of a recognised stock exchange, on behalf of a mutual fund." This lets the AMC transact directly on an exchange's debt segment for the fund's account, improving execution in the bond market, without opening the door to a general broking business.

Second, the regulation repeatedly contemplates that permitted activities may be undertaken by the AMC "itself or through its subsidiaries." A subsidiary route is permitted, but it does not dilute the conditions: the segregation, capital-adequacy and conflict-disclosure obligations follow the activity wherever it is housed. The structural point is that subsidiarisation is a containment technique, not an escape hatch. These narrow exceptions, read with the investment restrictions that cap what the fund itself may buy, complete the picture of an AMC that can do a few well-defined things and nothing else.

AMCs, AIFs and the broad-basing crossover

A recurring question in practice is whether an AMC may manage an Alternative Investment Fund. SEBI's position has been that where an AMC manages or advises an AIF under the Regulation 24 permission, the AIF must satisfy the broad-based fund test, that is, at least twenty investors with none exceeding twenty-five per cent of corpus, unless it falls within the FPI carve-out. This effectively maps the mutual-fund conflict discipline onto the AMC's AIF business, ensuring that the AMC does not use the AIF wrapper to run concentrated, high-fee money that the broad-basing rule was designed to exclude.

The crossover matters because AIFs, by their nature, often have a small number of large, sophisticated investors, exactly the profile the broad-based test screens out. An AMC wishing to manage such a fund must therefore either bring the AIF within the twenty-investor / twenty-five-per-cent envelope, fit it within the FPI exception, or rely on the second-proviso route for non-broad-based funds, with its heavier segregation and approval conditions. The upshot is that Regulation 24 reaches well beyond plain-vanilla mutual fund schemes into the AMC's adjacent fund-management businesses.

This crossover also explains why the AIF and mutual fund regimes are taught together. An aspirant who treats Regulation 24 as a parochial mutual-fund rule will miss that the same conflict logic, segregation, broad-basing, de-linked remuneration and disclosure, recurs across the SEBI fund universe. The regulator's consistent instinct is that an entity entrusted with diversified retail money should not, behind the same set of doors, be running concentrated mandates whose richer economics could quietly distort how trades, research and talent are allocated. Whether the vehicle is labelled a mutual fund scheme, an offshore fund, a pension mandate or an AIF, Regulation 24's permitted-activity envelope and its conditions travel with the AMC.

The AMC-trustee separation in the case law

Clause (a)'s bar on the AMC acting as trustee is not a dead letter; it reflects a fiduciary architecture that the Supreme Court examined closely in the Franklin Templeton litigation. In Franklin Templeton Trustee Services (P) Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88 (decided 12 February 2021), the Court was confronted with the winding up of six debt schemes. The decision to wind up had been taken by the trustees, while the day-to-day management and the redemption gates sat with the AMC. The Court read the regulatory scheme as one of checks and balances: the trustees, not the AMC, hold the power to wind up, and they must obtain the consent of unitholders by majority before doing so.

Crucially, the Court held that for the purpose of the consent requirement, "consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders." The separation of the manager (AMC) from the monitor (trustees) and the ultimate owners (unitholders) is precisely what Regulation 24(a) protects. Had the AMC been permitted to wear the trustee's hat, the structural safeguard the Court relied on would not exist.

Franklin Templeton sequel: vires and the limits of AMC discretion

The sequel judgment, Franklin Templeton Trustee Services (P) Ltd. v. Amruta Garg, 2021 SCC OnLine SC 464 (decided 14 July 2021), is equally instructive on the boundaries within which an AMC and its trustees operate. The petitioners had attacked the vires of the SEBI (Mutual Funds) Regulations as manifestly arbitrary. The Court rejected the challenge, finding "sufficient guidance and safeguards in the Regulations" themselves to constrain trustee and managerial discretion, including the obligations to disclose the circumstances of winding up and to keep SEBI informed.

The Court also flagged Regulation 53 (despatch of warrants and proceeds) as a "grey area" and declined to resolve the redemption-timing question at that stage, leaving it to the pending forensic and SEBI proceedings. For the student of Regulation 24, the lesson is that the AMC's freedom of action is hemmed in not only by its own restrictions but by a wider web, the trustees' consent power, SEBI's supervisory role, and the disclosure obligations, that the judiciary will enforce as genuine safeguards rather than formalities.

The conflict-of-interest discipline in practice

The heart of Regulation 24 is conflict management, and SEBI has supplemented the regulation with operational rules. The most prominent is the framework on investment and trading in securities by employees and board members of AMCs and trustee companies, refined by SEBI's October 2021 circular, which builds out condition (vii)'s "fair treatment" mandate. The thrust is to prevent personnel from trading ahead of, or against, the fund, and to ensure that where the AMC simultaneously buys and sells the same security across mandates, it does so through the market and a documented trade-order-management system rather than by internal crossing.

Condition (viii)'s requirement to sever the link between an individual's remuneration and the revenue of a particular activity is the structural antidote to fee-arbitrage. If a fund manager's bonus does not rise with the profits of the high-fee book, the temptation to steer the best trades there falls away. Read together, conditions (iii) to (viii) convert the abstract phrase "not in conflict with the activities of the mutual fund" in clause (b) into a concrete, auditable compliance programme. The AMC must not merely assert the absence of conflict; it must demonstrate it to trustees and unitholders through the scheme information document and statement of additional information.

Sponsor disassociation and the self-sponsored AMC

The 2023 amendments did not rewrite Regulation 24 but they reshaped the entity that must comply with it. The SEBI (Mutual Funds) (Amendment) Regulations, 2023 introduced a framework allowing a sponsor to disassociate from the AMC and the mutual fund. Where the sponsor exits, the existing AMC may itself step into the role of sponsor of the same fund, the "self-sponsored AMC" concept. To qualify, the AMC must have carried on financial-services business for at least five years, maintained positive net worth in each of those five years, and earned an average annual net profit of at least Rs. 10 crore over the period.

This matters for Regulation 24 because the restrictions attach to the AMC qua manager regardless of who sponsors it. A self-sponsored AMC is still bound by clause (a)'s trustee bar and clause (b)'s activity restriction; if anything, the removal of a controlling sponsor heightens the importance of the internal conflict controls, since the disciplining presence of an external promoter is gone. The interaction between the sponsor eligibility regime and Regulation 24 illustrates that the AMC's business restrictions are a constant, while the ownership scaffolding around it can change.

The 2025 relaxation debate

Regulation 24(b) has become the focus of an active reform debate. In July 2025 SEBI floated a consultation paper proposing to ease the broad-basing requirement so that AMCs could offer portfolio management and advisory services to non-broad-based pooled vehicles, such as family offices and certain offshore funds, without a separate Portfolio Management Services licence, and to let AMC subsidiaries act as points of presence for pension products and as global distributors. The animating idea is operational flexibility and global expansion, balanced against strengthened conflict safeguards.

For exam purposes the key point is that, as the law currently stands, the broad-based fund test and the eight first-proviso conditions remain in force; the proposals are not yet the law. Candidates should know the existing text cold and treat the 2025 consultation as a directional signal rather than a settled rule. The debate also usefully exposes the underlying tension in Regulation 24: every relaxation that lets the AMC chase higher-fee mandates reopens precisely the conflict that the 2011 redraft was designed to close, which is why SEBI couples each proposed relaxation with heavier disclosure and segregation.

An exam-ready framework for Regulation 24

To answer a question on AMC business restrictions cleanly, march through five layers. First, state the two core bars: no trusteeship (clause a) and no business beyond management and advisory services to permitted pooled assets (clause b). Second, give the permitted-activity list, management and advisory services to offshore funds, insurance funds, pension funds, provident funds and Category I FPIs, qualified by "not in conflict with the activities of the mutual fund." Third, recite the broad-based fund test (twenty investors; no investor above twenty-five per cent of corpus) and note its carve-out for regulated broad-based FPI funds.

Fourth, list the conflict conditions in the first proviso, segregated accounts, separate capital adequacy and approval, no material conflict, disclosure to trustees and unitholders, separate fund managers, market-mechanism trading, and de-linked remuneration, and the narrow proprietary-debt-trading exception. Fifth, anchor it in authority: the Franklin Templeton judgments for the AMC-trustee-unitholder separation and the upheld vires of the regulations, and the 2011, 2015 and 2023 amendments for the regulation's evolution. A student who can move from text, to test, to conditions, to case law, to reform, demonstrates command of both the letter and the policy of Regulation 24.

One final framing helps in the exam hall. Regulation 24 is best understood as the answer to a single question: how does a regulator let a competent manager use its expertise across several mandates without letting it cannibalise the retail unitholder it is licensed to serve? The two prohibitions set the outer wall; the permitted-activity list opens a controlled gate; the broad-based test and the eight conditions install locks on that gate; and the Franklin Templeton line of authority confirms that courts will treat the surrounding safeguards, trustee consent, SEBI supervision and mandatory disclosure, as real rather than ornamental. Frame an answer around that question and the doctrine arranges itself naturally, rather than appearing as a disconnected list of clauses to be memorised.