A mutual fund is only a vehicle; the scheme is where the investor's money actually lives. Chapter V of the SEBI (Mutual Funds) Regulations, 1996 governs the entire life-cycle of a scheme — how it is approved, what its offer document must disclose, how units are sold and repurchased, and, in Chapter VI, how it is wound up. For judiciary and CLAT-PG aspirants, this is the most heavily examined block of the mutual fund syllabus because it sits at the intersection of investor protection, contract and the regulator's directory powers. This chapter maps Regulations 28 to 42 with the leading authority, Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg (2021), and the post-2017 scheme-categorization architecture that re-organised the entire Indian fund universe.

What a "Scheme" Is and Where It Sits

The Regulations distinguish three layers. The mutual fund is the trust registered with SEBI; the asset management company (AMC) runs the operation; and the scheme is the individual investment product — an equity fund, a liquid fund, a fixed maturity plan — under which units are issued and a discrete pool of money is managed. Regulation 2 defines a scheme as a scheme launched by a mutual fund, and every rupee an investor commits is committed to a scheme, not to the fund at large. This separation matters: the corpus of one scheme cannot be used to discharge the liabilities of another, and winding up operates scheme-by-scheme, as the Franklin Templeton litigation later confirmed when six debt schemes were shut while the rest of the fund house carried on.

Chapter V of the Regulations — "Procedure for Launching of Schemes" — runs from Regulation 28 to Regulation 38, and Chapter VI carries the winding-up code from Regulation 39 to 42. To understand who actually exercises the powers in this chapter, read it alongside the asset management company and trustee chapters, because launch requires AMC initiative and trustee approval, while winding up is a trustee-driven (or SEBI-driven) act. The whole structure builds on the foundational framework explained in the SEBI Mutual Funds and AIF Regulations hub.

Launching a Scheme: Regulation 28 and the Due Diligence Certificate

Regulation 28(1) lays down the gateway rule: no scheme shall be launched by the asset management company unless such scheme is approved by the trustees and a copy of the offer document has been filed with the Board. Two cumulative conditions therefore precede any launch — trustee approval and filing with SEBI. The trustees' approval is not a formality; under their general duties they must satisfy themselves that the scheme is in the interest of unitholders before signing off.

Regulation 28(2) requires the AMC to file the offer document along with the prescribed filing fee. Crucially, SEBI does not approve a scheme in advance. Under the proviso and the practice built around it, where SEBI communicates observations on the draft offer document within twenty-one working days, the AMC must carry out the changes and file the final document; if no observations are communicated, the AMC may proceed. This is a disclosure-based, not a merit-based, regime — SEBI polices adequacy of disclosure, not the commercial wisdom of the product.

Regulation 28(3) demands a due diligence certificate signed by the compliance officer (and senior management of the AMC) confirming that the offer document is in conformity with the Regulations, that all legal requirements connected with the launch have been complied with, and that the disclosures are true, fair and adequate. The standard offer document is filed in the prescribed form. The validity of SEBI's clearance is time-bound: a scheme cleared but not launched within six months requires a fresh filing, reflecting the regulator's concern that stale disclosures do not mislead investors.

The Offer Document: Regulation 29 and the Disclosure Standard

Regulation 29 fixes the content standard for the offer document. Its core mandate is that the offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision, and SEBI may prescribe further disclosures. In practice the offer document is split into the Scheme Information Document (SID), which carries scheme-specific detail, and the Statement of Additional Information (SAI), which carries fund-house-level information; both are read with the Key Information Memorandum (KIM) that accompanies the application form. This bifurcation flows from SEBI circulars issued under the Regulation rather than the bare text, but the examinable principle is the Regulation 29 standard of adequacy.

The disclosure standard is reinforced by Regulation 31, which obliges the trustees and the AMC to ensure that the offer document and advertisements do not contain any statement or matter that is misleading or that is extraneous to the offer document. Misstatement is not merely a contractual wrong — it exposes the AMC and trustees to SEBI's enforcement powers, including monetary penalties and directions, because the relationship between the fund and the unitholder is fiduciary in character. The investor's primary protection is informational, which is why courts treat the offer document as the constitutive instrument of the scheme.

Marketing a scheme is regulated as tightly as launching it. Regulation 30 requires that advertisements in respect of every scheme shall be in conformity with the Advertisement Code as specified in the Sixth Schedule and shall be filed with SEBI within the prescribed period of issue. The Sixth Schedule Advertisement Code insists that advertisements be accurate, true, fair, clear, complete and not misleading; that they not be framed to exploit the lack of investment knowledge of investors; and that performance figures carry standardised disclaimers and the canonical risk warning that mutual fund investments are subject to market risks.

The thread running through Regulations 30 and 31 is consistency: an advertisement cannot promise what the offer document does not, and cannot contradict it. This is why the standardised risk disclaimer and the requirement to read scheme-related documents carefully are non-negotiable. The regulator's anxiety about misleading promises is also why guaranteed-return claims are separately fenced off under Regulation 38, discussed below.

Open-Ended Schemes: Continuous Sale and Repurchase

An open-ended scheme is one that is available for subscription and repurchase on a continuous basis and does not have a fixed maturity. Its defining feature is liquidity at net asset value (NAV): the unitholder can enter or exit on any business day at the day's NAV, subject to any exit load and cut-off timing rules. The unit capital of an open-ended scheme is therefore variable, expanding when investors buy and contracting when they redeem. Because there is no fixed pool, open-ended schemes are not required to be listed; the fund itself stands ready to repurchase.

The continuous-offer architecture places a premium on accurate and timely NAV computation and on the AMC's obligation to meet redemption requests within the period prescribed by SEBI. The investor protection logic is straightforward — an open-ended unitholder relies on being able to convert units to cash at fair value at will, so any suspension of redemptions is an extraordinary event. It was precisely a suspension of redemptions in six open-ended debt schemes that triggered the Franklin Templeton winding-up dispute, illustrating how the promise of continuous liquidity becomes the fault line when a fund hits a wall.

Close-Ended Schemes: Listing, Maturity and Conversion under Regulations 32 and 33

A close-ended scheme has a fixed maturity and a fixed unit capital raised in a one-time new fund offer. Because the unitholder cannot ordinarily redeem with the fund before maturity, the Regulations supply an exit through the stock market. Regulation 32 provides that every close-ended scheme shall be listed on a recognised stock exchange within the prescribed period from the closure of subscription, so that units can be bought and sold on the exchange in the interim. Listing is not mandatory where the scheme already provides a periodic repurchase facility, or a monthly-income or assured-class facility, or opens for repurchase within a short window of closure — the exceptions exist because in those cases an alternative liquidity route is already built in.

Regulation 33 governs maturity and conversion. A close-ended scheme is to be fully redeemed at the end of the maturity period. Two structural flexibilities exist. First, the offer document may provide for the scheme to be converted into an open-ended scheme, provided the option and period of conversion are disclosed, or the unitholders are given the option to redeem in full. Second, a close-ended scheme may be rolled over — its maturity extended — only after disclosure of the new period and only with respect to those unitholders who give positive written consent; non-consenting unitholders must be redeemed at NAV. The principle is that a unitholder cannot be locked in beyond the bargained maturity without affirmative consent, a theme that resurfaces in the winding-up context.

Allotment, Refund and the Minimum-Subscription Floor: Regulations 34 to 36

Regulations 34 to 36 govern the mechanics after the offer closes. Regulation 35 makes the mutual fund and the AMC liable to refund the application money where the scheme fails to receive the minimum subscription specified in the offer document, or where the moneys received are in excess of the subscription as a result of over-subscription, beyond the limits permitted. The refund must be made within the prescribed period, failing which interest at the prescribed rate is payable — a hard-edged investor-protection rule that mirrors company-law refund obligations on failed public issues.

SEBI's circulars layer on the well-known "20-25 rule": each scheme and plan must have a minimum of twenty investors and no single investor may hold more than twenty-five per cent of the corpus of the scheme or plan. The object is to prevent a scheme from being captured by one or two large investors and operated as a private vehicle in mutual fund clothing. Regulation 36 deals with the issue of unit certificates or statements of account to allottees within the prescribed period of the closure of the offer or receipt of the request, and units are today held substantially in dematerialised form. Together these provisions ensure that the investor either gets allotment evidence promptly or gets the money back with interest.

Guaranteed Returns: The Narrow Gate of Regulation 38

Indian mutual fund law is deeply suspicious of promised returns, because a fund that guarantees a return while taking market risk behaves like a disguised deposit-taker. Regulation 38 therefore permits a guaranteed-return scheme only on strict, cumulative conditions: no guaranteed return shall be provided in a scheme unless such return is fully guaranteed by the sponsor or the asset management company; the name of the person who will guarantee the return is stated in the offer document; and the manner in which the guarantee is to be met is disclosed in the offer document. The guarantee must be real, backed by an identified guarantor with the resources to honour it, and transparent to the investor.

The practical effect is that genuine guaranteed-return schemes are virtually extinct in the market, and SEBI has in its consultation papers proposed deleting Regulation 38 altogether on the view that such schemes operate like shadow banks. For the examinee, the takeaway is that a return cannot be promised at the level of the scheme out of pooled market returns; it can only be promised, if at all, as a third-party guarantee from the sponsor or AMC with full disclosure. The link between Regulation 38 and the sponsor's net-worth obligations is best appreciated alongside the sponsor eligibility and role chapter, because only an entity of substance can stand behind such a guarantee.

Categorization and Rationalization: The 2017 Re-architecture

Until 2017 fund houses ran scores of overlapping schemes whose labels told the investor little. SEBI's circular on Categorization and Rationalization of Mutual Fund Schemes (SEBI/HO/IMD/DF3/CIR/P/2017/114, dated 6 October 2017) reorganised the universe into five groups: Equity, Debt, Hybrid, Solution-Oriented and Other schemes (the last covering index funds, ETFs and fund-of-funds). Within these groups, scheme sub-categories were defined with prescribed characteristics — for instance, a large-cap fund must invest a minimum proportion in the top 100 companies by market capitalisation — and, as a general rule, a fund house may run only one scheme per category (with limited exceptions for index funds, ETFs, sectoral and fund-of-funds).

The reform was implemented not by amending the bare Regulations but through SEBI's directory power under the Regulations and the SEBI Act, 1992. Fund houses had to map existing schemes to the new categories, merge duplicates and change fundamental attributes where required. This is examinable because it shows the regulator using delegated and directory power to standardise products in the investor's interest, the same source of authority later invoked in scheme mergers and in directions to wind up. It also feeds directly into the next provision, because re-categorisation often amounts to a change in a scheme's fundamental attributes.

Changing Fundamental Attributes: Regulation 18(15A)

A scheme's bargain with its investors is captured by its fundamental attributes — its type (open or close-ended), its investment objective, its asset-allocation pattern and the terms relevant to the rights of unitholders such as load structure. Regulation 18(15A) provides that the trustees shall ensure that no change in the fundamental attributes of any scheme is carried out unless a written communication is sent to each unitholder, a public advertisement is issued, and the unitholders are given the option to exit at the prevailing net asset value without any exit load.

Although Regulation 18(15A) sits in the trustee chapter, it is functionally part of scheme law, because it is the mechanism through which mergers, conversions and re-categorisations are effected. The investor cannot be forced to remain in a product materially different from what was originally offered; either he consents by inaction after notice, or he exits free of cost. Scheme mergers are routinely processed as fundamental-attribute changes read with the trustees' powers, the exit window typically being thirty days. The conceptual link to the trustees' supervisory role is developed further in the trustee constitution and duties chapter.

Winding Up: The Three Gateways of Regulation 39

Chapter VI opens with Regulation 39, which lists the circumstances in which a scheme may be wound up. A close-ended scheme is wound up on the expiry of its fixed duration. Beyond that, Regulation 39(2) provides three discretionary gateways: a scheme may be wound up (a) on the happening of any event which, in the opinion of the trustees, requires the scheme to be wound up; (b) if seventy-five per cent of the unitholders of a scheme pass a resolution that the scheme be wound up; or (c) if SEBI so directs in the interest of the unitholders. Regulation 39(3) requires the trustees, on the happening of such an event, to give notice disclosing the circumstances leading to winding up to SEBI and to publish the same.

The interaction between Regulation 39(2)(a) and the trustees' obligation to obtain unitholder consent under Regulation 18(15)(c) became the central question in Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, (2021) 9 SCC 606. When Franklin Templeton's trustees decided in April 2020 to wind up six open-ended debt schemes by suspending redemptions, unitholders challenged the decision. The Supreme Court held that while trustees have the power to decide to wind up under Regulation 39(2)(a), the consent of the unitholders under Regulation 18(15)(c) is a mandatory precondition before the winding-up decision can be implemented — the trustees cannot give effect to the closure on their own ipse dixit.

The harder question in Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg was what "consent of the unitholders" actually means when a scheme has lakhs of investors. In its order of 12 February 2021 (2021 SCC OnLine SC 88), the Supreme Court (S.A. Nazeer and Sanjiv Khanna, JJ.) held that consent of the unitholders for the purpose of clause (c) of Regulation 18(15) means consent by a majority of the unitholders who have participated in the poll, and not consent of the majority of all the unitholders of the scheme. To require consent of all, or of an absolute majority of all unitholders, would be a practical impossibility and would render the provision a "futile and foreclosed exercise"; unitholders who do not vote are counted neither for nor against.

The Court also upheld the validity of e-voting as a mode of taking consent, reasoning that Regulation 18(15)(c) mandates consent but prescribes no particular mode, so e-voting, postal ballot or a physical meeting are all permissible. On the facts, more than ninety per cent of participating unitholders voted to wind up, and the Court rejected objections to the poll. In its reasoned judgment of 14 July 2021 it elaborated the winding-up machinery, observed that aspects of the disclosure regime (including the much-discussed treatment of Regulation 53) were a "grey area" needing clarification, and directed orderly distribution. The case is now the leading authority on every limb of scheme winding up.

Manner and Effect of Winding Up: Regulations 40 to 42

Once the gateway under Regulation 39 is crossed and consent obtained, the procedure follows Regulations 40 to 42. Regulation 40 deals with the effect of the notice of winding up: on and from the date of the publication of the notice, the trustees or the AMC shall cease to carry on any business activities in respect of the scheme, cease to create or cancel units, and cease to issue or redeem units. The scheme is, in effect, frozen as a going concern from that point.

Regulation 41 prescribes the manner of winding up. The trustees must call a meeting of the unitholders to approve, by simple majority of those present and voting, the resolution authorising the trustees or another person to dispose of the assets of the scheme in the best interests of the unitholders. The proceeds are applied to discharge the liabilities of the scheme, the balance is distributed among unitholders in proportion to their holdings after meeting winding-up expenses, and the AMC reports to SEBI and to the unitholders. Regulation 42 governs the effect of winding up: after distribution, the trustees forward a report to SEBI and the unitholders containing the circumstances of winding up and a certified account, and on SEBI's satisfaction that all steps are complete the scheme ceases to exist. This orderly liquidation framework — freeze, dispose, discharge liabilities, distribute, report — is exactly the route the Supreme Court supervised in Franklin Templeton to return roughly Rs 9,000 crore to the affected unitholders.

Exam Synthesis: The Life-Cycle in One Frame

Examiners reward candidates who can narrate the scheme life-cycle as a continuous chain rather than as disconnected sections. The chain runs: trustee approval and filing of the offer document (Reg 28) → adequate disclosure and a due diligence certificate (Regs 28-29) → compliant advertising under the Sixth Schedule (Regs 30-31) → classification as open-ended (continuous liquidity, no listing) or close-ended (listing, fixed maturity, conversion or rollover only with consent) (Regs 32-33) → allotment, the minimum-subscription refund safeguard and the 20-25 rule (Regs 34-36) → the narrow Regulation 38 gate for guaranteed returns → and finally winding up on maturity, on a 75% unitholder resolution, or on a SEBI direction, implemented only with majority consent of participating unitholders (Regs 39-42, read with 18(15)(c)).

Two cross-cutting principles tie it together. First, the regime is disclosure-based: SEBI does not vouch for a scheme but polices the adequacy and truthfulness of what the investor is told. Second, the unitholder cannot be materially bound beyond his bargain without consent or a no-load exit — whether through fundamental-attribute changes (Reg 18(15A)), rollover (Reg 33) or winding up (Reg 18(15)(c) as read in Franklin Templeton). Anchor any answer in Regulations 28, 32-33, 38 and 39, and in Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, and the marks follow. For the supervisory architecture that polices all of this, revisit the asset management company chapter on the hub.

Frequently asked questions

Does SEBI approve a mutual fund scheme before it is launched?

No. The regime under Regulation 28 is disclosure-based, not merit-based. SEBI does not approve the scheme; it scrutinises the draft offer document and may communicate observations within the prescribed period, which the AMC must incorporate. Trustee approval and filing of the offer document with SEBI are the cumulative preconditions to launch, supported by a due diligence certificate confirming compliance and adequate disclosure.

What is the difference between an open-ended and a close-ended scheme?

An open-ended scheme has no fixed maturity and offers continuous subscription and repurchase at NAV, so its unit capital is variable and it need not be listed. A close-ended scheme has a fixed corpus and maturity; under Regulation 32 it must ordinarily be listed on a stock exchange for interim liquidity, and under Regulation 33 it is fully redeemed at maturity unless converted to open-ended or rolled over with the affirmative consent of unitholders.

Can a mutual fund scheme guarantee returns?

Only within the narrow gate of Regulation 38. A guaranteed return is permitted only if it is fully guaranteed by the sponsor or the AMC, the name of the guarantor is stated in the offer document, and the manner of meeting the guarantee is disclosed. Because the guarantee must be backed by an identified, resourced entity, genuine guaranteed-return schemes are effectively extinct, and SEBI has proposed deleting the provision.

What did the Supreme Court hold in Franklin Templeton v. Amruta Garg about winding up?

In Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, (2021) 9 SCC 606, the Court held that while trustees may decide to wind up a scheme under Regulation 39(2)(a), they cannot implement the decision without the consent of unitholders under Regulation 18(15)(c). It further held that such consent means the consent of the majority of unitholders who actually participate in the poll, not of all unitholders, and that e-voting is a valid mode of obtaining consent.

What is the "20-25 rule" for mutual fund schemes?

It is a SEBI requirement, layered on the Regulations through circulars, that each scheme and plan must have a minimum of 20 investors and that no single investor may hold more than 25 per cent of the corpus of the scheme or plan. The object is to prevent a scheme from being captured by one or two large investors and run as a private vehicle. Breach can lead to rebalancing or, failing that, winding up of the plan.

How can the fundamental attributes of a scheme be changed?

Under Regulation 18(15A), the trustees must ensure that no change in fundamental attributes — the scheme type, investment objective, asset-allocation pattern or terms affecting unitholders — is made unless each unitholder is given written notice, a public advertisement is issued, and unitholders are offered an exit at prevailing NAV without any exit load. Scheme mergers and re-categorisations are routinely effected through this route, typically with a 30-day exit window.