In the three-tier architecture of an Indian mutual fund — sponsor, trustee and asset management company — the trustee is the fulcrum on which investor protection turns. The trustee neither raises the money nor manages it day to day; instead it holds the fund's property in trust for the benefit of the unitholders and polices the AMC's every move. The SEBI (Mutual Funds) Regulations, 1996 devote an entire chapter to the constitution and the rights and obligations of trustees, and the 2023 reforms — prompted in no small measure by the Franklin Templeton winding-up saga — have sharpened those duties into a list of non-delegable “core responsibilities.” This chapter unpacks how trustees are constituted, who is disqualified, and the full sweep of their fiduciary duties under Regulations 14 to 18.
The Trust Form and the Three-Tier Structure
The first thing to grasp is that an Indian mutual fund is, in law, a trust — not a company and not a partnership. Regulation 14 of the SEBI (Mutual Funds) Regulations, 1996 mandates that “a mutual fund shall be constituted in the form of a trust and the instrument of trust shall be in the form of a deed, duly registered under the provisions of the Indian Registration Act, 1908, executed by the sponsor in favour of the trustees named in such an instrument.” The settlor is the sponsor; the trustees are the named beneficiary-fiduciaries; and the cestui que trust are the unitholders who subscribe to the schemes.
This trust form sits within a deliberate three-tier separation of functions explained in our note on the SEBI (Mutual Funds) Regulations, 1996. The sponsor establishes the fund and contributes to the net worth of the AMC; the asset management company manages the corpus and takes investment decisions; and the trustee sits above the AMC as the supervisory and custodial layer, accountable to unitholders. The genius of the design is that the entity that earns management fees (the AMC) is structurally subordinate to an entity (the trustee) whose only interest is the protection of investors. For the broader market context of why this structure exists, see our introduction to mutual funds in India and the subject hub.
Who Is a “Trustee”?
The Regulations contemplate two permissible forms of trusteeship. A mutual fund may appoint a board of individual trustees, or it may appoint a trustee company whose board of directors discharges the trustee function. The defined term “trustees” in Regulation 2 means the board of trustees or the trustee company who hold the property of the mutual fund in trust for the benefit of the unitholders. Regulation 16(2) confirms the flexibility: “the existing trustees of any mutual fund may form a trustee company to act as a trustee with the prior approval of the Board.”
In practice almost every Indian fund house now uses a trustee company, because the corporate form gives perpetual succession, limited liability for the directors acting in good faith, and a cleaner governance interface with SEBI. Where a company acts as trustee, Regulation 16(6) permits its directors to simultaneously act as trustees of other trusts, provided the object of those trusts is not in conflict with the object of the mutual fund. The corporate form does not dilute the fiduciary character of the office: the directors of the trustee company owe the same duties to unitholders that individual trustees would.
The choice of form has practical consequences for governance discipline. A board of individual trustees acts collegially and each individual is personally a fiduciary; a trustee company channels the duty through its board of directors, who are bound by both the Companies Act, 2013 and the Mutual Funds Regulations. SEBI's 2023 reforms — particularly the Regulation 16(7) requirement of an independent chairperson, and the Regulation 25A requirement of an annual joint meeting between the trustee-company board and the AMC board — are framed around the trustee-company model precisely because it is now near-universal. Whatever the form, the legal character of the relationship is the same: the trustee is the legal owner of the scheme property and the unitholders are the beneficial owners, and every power the trustee holds is a power held for the unitholders' benefit and exercisable only in their interest.
Disqualification and Eligibility — Regulation 16
Regulation 16 (headed “Disqualification from being appointed as trustees”) sets the gateway. Under Regulation 16(2), no person is eligible to be appointed a trustee unless he is “a person of ability, integrity and standing,” has not been found guilty of moral turpitude, and has not been convicted of any economic offence or violation of any securities laws; he must also furnish particulars in Form C. These are continuing requirements of fitness, not one-time box-ticking.
The most important structural bar is in Regulation 16(3): “No asset management company and no director (including independent director), officer or employee of an asset management company shall be eligible to be appointed as a trustee of any mutual fund.” This is the firewall — the watched cannot be the watchman. The bar was tightened by the SEBI (Mutual Funds) (Fifth Amendment) Regulations, 2006 to cover even independent directors of the AMC, closing a loophole that had previously let AMC-linked persons sit on the trustee board. Regulation 16(4) adds that a person who is a trustee of one mutual fund cannot be a trustee of any other mutual fund, preventing cross-fund conflicts.
The Two-Thirds Independence Rule
The single most examined proposition in this topic is Regulation 16(5): “Two-thirds of the trustees shall be independent persons and shall not be associated with the sponsors or be associated with them in any manner whatsoever.” This super-majority of independence is the spine of the governance design. The original 1996 text required only that “at least 50% of the trustees shall be independent persons”; the SEBI (Mutual Funds) (Amendment) Regulations, 1998 raised the threshold to two-thirds with effect from 12 January 1998, reflecting SEBI's view that a bare majority was not enough to guarantee genuine arm's-length oversight of the sponsor and the AMC.
An “independent” trustee is one who is not associated with the sponsor in any manner whatsoever — a deliberately broad phrase that captures not only employment but also significant commercial or familial links. Independent trustees carry specific statutory functions: under Regulation 18(24) they must give their comments on the AMC's report regarding the mutual fund's investments in the securities of group companies of the sponsor, and under Regulation 18(27) they must pay special attention to the investment management agreement, related-party service contracts, the selection of the AMC's own independent directors, and the reasonableness of fees paid to the sponsor and AMC.
The logic of demanding a two-thirds super-majority rather than a bare majority is structural. The sponsor controls the AMC through its net-worth contribution and typically nominates the non-independent trustees; if only half the board were independent, a single defection could swing supervision back towards the manager. A two-thirds independent board guarantees that the sponsor-aligned minority can never carry a decision on its own and that genuinely arm's-length voices dominate. This is why the topic recurs so frequently in examinations: it is the clearest illustration in the entire regulatory scheme of how SEBI uses board-composition rules, rather than mere conduct prohibitions, to engineer investor protection into the architecture of the fund itself.
Prior Approval of SEBI — Regulation 17
Trusteeship is not a matter of private arrangement between sponsor and nominee. Regulation 17(1) is categorical: “No trustee shall initially or any time thereafter be appointed without prior approval of the Board.” “Board” here means SEBI. Every original appointment and every subsequent change in trustees must pass through SEBI's scrutiny, which is how SEBI enforces the fit-and-proper and independence requirements in practice rather than merely on paper.
The 2006 amendments and the 2023 reforms layered further structural conditions on top. Regulation 16(7), inserted by the SEBI (Mutual Funds) (Amendment) Regulations, 2023 (notified 26 June 2023), now requires that where a company is appointed as the trustee of a mutual fund, “the Chairperson of the board of directors of that trustee company shall be an independent director.” Existing trustee companies were given six months from the July 2023 operational circular to comply. The thrust of this reform is to ensure that the very person who chairs the trustee board — and therefore sets its agenda — is structurally independent of the sponsor.
The Investment Management Agreement — Regulation 18(1)
The relationship between trustee and AMC is contractual as well as fiduciary. Regulation 18(1) requires that “the trustees and the asset management company shall with the prior approval of the Board enter into an investment management agreement.” Regulation 18(2) provides that this agreement must contain the clauses mentioned in the Fourth Schedule plus such other clauses as are necessary for making investments. The IMA is the instrument through which the trustee delegates portfolio management to the AMC while retaining supervisory control — it fixes the AMC's compensation, the standard of care, indemnities, and the AMC's reporting obligations.
Crucially, the trust deed itself cannot dilute trustee accountability. Regulation 15(2) prohibits any clause in the trust deed that has the effect of limiting or extinguishing the obligations and liabilities of the trust in relation to any mutual fund or the unitholders, or of indemnifying the trustees or the AMC for loss caused to unitholders by their negligence or acts of commission or omission. The fiduciary cannot contract out of fiduciary duty.
Pre-Launch Due Diligence — Regulation 18(4)
Before any scheme goes to market, Regulation 18(4) casts a checklist of pre-launch duties on the trustees. They must ensure that the AMC has, among other things: systems in place for its back office, dealing room and accounting; appointed all key personnel including fund managers and submitted their bio-data within fifteen days of appointment; appointed auditors; appointed a compliance officer responsible for monitoring compliance and redressal of investor grievances; appointed registrars; prepared a compliance manual and designed internal control mechanisms including internal audit systems; and specified norms for empanelment of brokers and marketing agents.
Regulation 18(4A) gives the compliance officer a direct line to SEBI — he must “immediately and independently report to the Board any non-compliance observed by him.” This bypass of the AMC management is a structural safeguard against the suppression of bad news. Regulation 18(5) then obliges the trustees to ensure that the AMC has been diligent in empanelling brokers, monitoring transactions and avoiding undue concentration of business with any single broker — a direct response to the broker-collusion scandals of the early 1990s.
Ongoing Supervision of the AMC — Regulation 18(6) to (22)
The bulk of Regulation 18 is a granular catalogue of continuing oversight duties. Regulation 18(6) requires trustees to ensure that the AMC has not given any undue or unfair advantage to its associates or dealt with associates in a manner detrimental to unitholders. Regulation 18(7) requires that transactions of the AMC accord with the regulations and the scheme. Regulation 18(8) requires the trustees to ensure that the AMC has managed the schemes independently of its other activities and protected one scheme's investors against compromise by another — the cornerstone of the restrictions discussed in our note on restrictions on AMC business activities.
Regulation 18(9) is the omnibus duty: trustees “shall ensure that all the activities of the asset management company are in accordance with these regulations.” Where trustees have reason to believe the fund's conduct is not in accordance with the regulations and the scheme, Regulation 18(10) obliges them to “forthwith take such remedial steps as are necessary” and immediately inform SEBI of the violation and the action taken. The reviewing duties are spelt out further: Regulation 18(16) on transactions in securities by key personnel; Regulation 18(17) on quarterly review of all transactions between the funds, the AMC and its associates; Regulation 18(18) on quarterly review of the AMC's net worth; Regulation 18(19) on periodic review of service contracts such as custody and transfer agency; Regulation 18(20) on conflicts of interest in the deployment of the AMC's net worth; and Regulation 18(21) on periodic review of investor complaints and their redressal. Regulation 18(22) binds trustees to the Code of Conduct in the Fifth Schedule.
Trustee as Custodian and Accountant of the Corpus
Two sub-regulations capture the proprietary heart of the office. Regulation 18(12) provides that “the trustees shall be accountable for, and be the custodian of, the funds and property of the respective schemes and shall hold the same in trust for the benefit of the unitholders in accordance with these regulations and the provisions of trust deed.” Regulation 18(13) adds that trustees must take steps to ensure the fund's transactions accord with the trust deed, and Regulation 18(14) makes them responsible for the calculation of income due to be paid to the fund and to unitholders.
This custodial accountability is what makes the trustee a true fiduciary and not a mere monitor. It is also why the Supreme Court in Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg treated the trustees' decisions as exercises of a fiduciary power subject to SEBI's supervisory jurisdiction — the trustees hold the property for the unitholders, so the unitholders' interest is the touchstone against which every trustee decision is measured.
Half-Yearly Reporting and the Due-Diligence Code — Regulation 18(23) to (27)
Regulation 18(23) requires the trustees to furnish to SEBI on a half-yearly basis: (a) a report on the activities of the mutual fund; (b) a certificate that there have been no instances of self-dealing or front-running by any of the trustees, directors and key personnel of the AMC; and (c) a certificate that the AMC has been managing the schemes independently and, where it has undertaken any of the activities referred to in Regulation 24(2), has taken adequate steps to protect unitholder interests.
Regulation 18(25), inserted in 1999, codifies a due-diligence standard split into “General” and “Specific” limbs. Under the general limb, trustees must be discerning in appointing AMC directors, review the desirability of continuing the AMC if substantial irregularities are observed (and not allow it to float new schemes), ensure the trust property is properly protected and held, ensure all service providers hold appropriate registrations, arrange test checks of service contracts, and immediately report any special developments to SEBI. Under the specific limb, trustees must obtain internal audit reports from independent auditors they appoint, obtain compliance certificates from the AMC, hold trustee meetings more frequently, consider the auditor and compliance reports for action, maintain minutes, prescribe and adhere to a code of ethics, and communicate deficiencies to the AMC in writing while checking on rectification. Regulation 18(26) then provides the vital safe harbour: “the trustees shall not be held liable for acts done in good faith if they have exercised adequate due diligence honestly.” Diligence, not perfection, is the legal standard.
The 2023 “Core Responsibilities” Reform — Regulation 18(25)(C)
The most significant recent development is the introduction of “core responsibilities” through the SEBI (Mutual Funds) (Amendment) Regulations, 2023 and the operational circular SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/117 dated 7 July 2023 (effective 1 January 2024). Acting on a SEBI Working Group and the Mutual Fund Advisory Committee, SEBI carved out, under Regulation 18(25)(C), a set of matters on which trustees must exercise independent due diligence and “not merely rely on AMCs' submissions or external assurances.”
The seven core responsibilities require trustees to: (a) ensure the fairness of fees and expenses charged by the AMC; (b) review the AMC's scheme performance against peers and appropriate benchmarks; (c) ensure adequate systems to prevent mis-selling aimed at inflating assets under management; (d) ensure AMC operations are not unduly influenced by the sponsor, its associates and other stakeholders; (e) ensure no undue or unfair advantage is given to associates or group entities; (f) address conflicts of interest between the shareholders, stakeholders and associates of the AMC and the unitholders; and (g) ensure systems to prevent misconduct including market abuse and misuse of information. For everything outside these core duties, the circular expressly permits trustees to rely on “third-party fiduciaries” such as audit firms, legal firms and merchant bankers — a calibrated allocation of attention so that the trustee's own time is spent where it matters most.
The Unit Holder Protection Committee and Trustee-AMC Meetings
The 2023 reforms also created a parallel investor-protection organ inside the AMC. Under Regulation 25(24), the AMC is required to constitute a Unit Holder Protection Committee (UHPC). The 7 July 2023 circular requires the UHPC's chairperson to be an independent director, at least two-thirds of its members to be independent directors of the AMC, and the committee to meet at least four times a financial year. Although the UHPC is an AMC committee, its minutes must be placed before the board of directors of the trustee company — so the trustee retains visibility over investor-protection issues even where the first line of defence sits within the AMC.
To complete the governance loop, Regulation 25A and the circular require the board of the trustee company and the board of the AMC (including their committees) to meet at least once a year to discuss issues concerning the mutual fund and the future course of action. The architecture thus deliberately distributes responsibility: the AMC's UHPC handles granular investor-protection metrics, the AMC board is accountable for protecting unitholders in managing the funds, and the trustee retains the apex supervisory and fiduciary role over the whole structure.
Trustee Power and Its Limits — the Franklin Templeton Litigation
No discussion of trustee duties is complete without Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, the litigation that arose when the trustees abruptly decided to wind up six debt schemes in April 2020. In the first judgment, reported as 2021 SCC OnLine SC 88 (decided 12 February 2021, S. Abdul Nazeer and Sanjiv Khanna, JJ.), the Supreme Court held that the consent of unitholders required for winding up under Regulation 18(15)(c) read with Regulation 39(2)(a) means the consent of the majority of the unitholders who actually participate in the poll — not the consent of a majority of all unitholders — and that e-voting was a valid mode of obtaining that consent. Abstention was treated as neutral and there was no minimum-quorum requirement implied into the regulation.
In the sequel judgment, reported as 2021 SCC OnLine SC 464 (decided 14 July 2021, same Bench), the Court clarified the limits of trustee power. It held that the discretion of trustees under Regulation 39(2)(a) is “not absolute and unbridled”: trustees must form an articulated opinion, disclose the circumstances justifying winding up, and obtain unitholder consent only after publication of the notice and disclosure of reasons. Critically, the Court affirmed that SEBI retains supervisory and investigative jurisdiction over trustee decisions — where trustees act on “extraneous and irrelevant reasons,” SEBI can intervene under Section 11B of the SEBI Act. The Court also rejected the challenge that the Mutual Funds Regulations were manifestly arbitrary. The decision is the leading authority on the boundary between trustee autonomy and regulatory oversight, and it directly shaped the 2023 codification of core responsibilities.
Exam Takeaways
For judiciary and CLAT-PG purposes, anchor the topic on the regulation numbers: Regulation 14 (trust form, registered deed), Regulation 15 (trust-deed contents and the anti-exoneration clause), Regulation 16 (disqualification, the two-thirds independence rule, and the 2023 independent-chairperson requirement in 16(7)), Regulation 17 (prior SEBI approval for every appointment) and Regulation 18 (the omnibus rights, obligations, due-diligence code and the 2023 core responsibilities). Remember that the independence threshold rose from 50% to two-thirds in 1998, and that even independent directors of the AMC are barred from trusteeship since 2006.
On case law, Franklin Templeton v. Amruta Garg supplies two reportable holdings worth memorising: “consent” under Regulation 18(15)(c) is by majority of participating unitholders (2021 SCC OnLine SC 88), and trustee discretion to wind up is subject to SEBI's supervisory jurisdiction and is not absolute (2021 SCC OnLine SC 464). Tie these to the conceptual point that the trustee holds the corpus in trust under Regulation 18(12) — the fiduciary character of the office is the thread that runs through every duty in the chapter.
Frequently asked questions
In what legal form must an Indian mutual fund be constituted, and who executes the trust deed?
Under Regulation 14 of the SEBI (Mutual Funds) Regulations, 1996, a mutual fund must be constituted as a trust, with the instrument of trust in the form of a deed duly registered under the Indian Registration Act, 1908. The deed is executed by the sponsor in favour of the trustees named in it. The trustees then hold the property in trust for the benefit of the unitholders.
What proportion of trustees must be independent, and how did that requirement evolve?
Regulation 16(5) requires that two-thirds of the trustees be independent persons who are not associated with the sponsor in any manner whatsoever. The original 1996 text required only at least 50% independence; the SEBI (Mutual Funds) (Amendment) Regulations, 1998 raised it to two-thirds with effect from 12 January 1998 to strengthen arm's-length oversight.
Can an officer or director of the AMC be appointed as a trustee?
No. Regulation 16(3) provides that no asset management company, and no director (including an independent director), officer or employee of an AMC, is eligible to be appointed a trustee of any mutual fund. The bar was extended to independent directors of the AMC by the Fifth Amendment Regulations, 2006, reinforcing the firewall between the manager and its supervisor.
What did the Supreme Court hold about unitholder consent in the Franklin Templeton case?
In Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg, 2021 SCC OnLine SC 88 (12 February 2021), the Supreme Court held that “consent” under Regulation 18(15)(c) for winding up means the consent of the majority of unitholders who actually participate in the poll, not a majority of all unitholders, and that e-voting is a valid mode. Abstention is treated as neutral.
Are trustees personally liable for losses suffered by unitholders?
Regulation 18(26) gives trustees a safe harbour: they are not to be held liable for acts done in good faith if they have exercised adequate due diligence honestly. The legal standard is honest diligence, not a guarantee of outcomes. However, the trust deed cannot contain a clause exonerating trustees or the AMC from liability for negligence under Regulation 15(2).
What are the “core responsibilities” introduced for trustees in 2023?
Under Regulation 18(25)(C) and SEBI circular dated 7 July 2023 (effective 1 January 2024), trustees must independently evaluate seven core areas without merely relying on AMC submissions: fairness of AMC fees and expenses; AMC scheme performance versus peers and benchmarks; systems to prevent mis-selling; undue sponsor influence over the AMC; unfair advantage to associates; conflicts of interest between AMC stakeholders and unitholders; and systems to prevent market abuse. For non-core matters, trustees may rely on third-party fiduciaries such as audit and legal firms.