5.3 Due Diligence Process by AMCs for Distributors

NISM-Series-V-A: Mutual Fund Distributors Certification Examination Exam

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1 Chapter 1: Introduction & Exam Overview

1.1 About the NISM-Series-V-A Examination 1.2 The 12-Unit Curriculum Map and a Study Plan

2 Chapter 2: Investment Landscape

2.1 Investors and Their Financial Goals 2.2 Savings or Investments? 2.3 Different Asset Classes 2.4 Investment Risks 2.5 Risk Measures and Management Strategies 2.6 Behavioural Biases in Investment Decision Making 2.7 Risk Profiling 2.8 Asset Allocation and Do-It-Yourself versus Professional Help

3 Chapter 3: Concept and Role of a Mutual Fund

3.1 Concept of a Mutual Fund 3.2 Classification of Mutual Funds 3.3 Growth of the Mutual Fund Industry in India

4 Chapter 4: Legal Structure of Mutual Funds in India

4.1 Structure of Mutual Funds in India 4.2 Key Constituents of a Mutual Fund 4.3 AMC Organisation Structure and Service Providers 4.4 Role and Function of AMFI

5 Chapter 5: Legal and Regulatory Framework

5.1 Role of Regulators in India 5.2 Role of SEBI and the Mutual Fund Regulations 5.3 Due Diligence Process by AMCs for Distributors 5.4 Investor Grievance Redress Mechanism 5.5 AMFI Code of Conduct for Intermediaries

6 Chapter 6: Scheme Related Information

6.1 Mandatory Documents I: Scheme Information Document and Statement of Additional Information 6.2 Mandatory Documents II: Key Information Memorandum and the Advertisement Code 6.3 Non-Mandatory Disclosures

7 Chapter 7: Fund Distribution and Channel Management Practices

7.1 The Role and Importance of Mutual Fund Distributors 7.2 Different Kinds of Mutual Fund Distributors 7.3 Modes of Distribution 7.4 Pre-requisites to Become a Distributor of a Mutual Fund 7.5 Revenue for a Mutual Fund Distributor 7.6 Commission Disclosure Mandated by SEBI 7.7 Distributors versus Investment Advisers, Nomination Facilities and Change of Distributor

8 Chapter 8: Net Asset Value, Total Expense Ratio and Pricing of Units

8.1 Fair Valuation Principles 8.2 Computation of Net Assets of a Scheme and NAV 8.3 Dividends and Distributable Reserves 8.4 Entry and Exit Load and Its Impact on NAV 8.5 The Expense Ratio Framework: Base Expense Ratio, Brokerage and Statutory Levies 8.6 Key Accounting and Reporting Requirements 8.7 NAV, Total Expense Ratio and Pricing of Units for the Segregated Portfolio

9 Chapter 9: Taxation

9.1 Applicability of Taxes in Respect of Mutual Funds 9.2 Capital Gains on Mutual Fund Units 9.3 Dividend (IDCW) Income and Tax Deducted at Source 9.4 Stamp Duty and Securities Transaction Tax on Mutual Fund Units 9.5 Setting Off Capital Gains and Losses under the Income Tax Act 9.6 Tax Benefit under Section 80C and Applicability of GST

10 Chapter 10: Investor Services

10.1 The New Fund Offer Process 10.2 New Fund Offer Price and Ongoing Offer Price for Subscription 10.3 Investment Plans and Services 10.4 Allotment of Units and Account Statements 10.5 Mutual Fund Investors: Who Can Invest 10.6 Filling the Application Form for Mutual Funds 10.7 Financial Transactions with Mutual Funds 10.8 Cut-Off Time and Time Stamping 10.9 KYC Requirements for Mutual Fund Investors 10.10 Systematic Transactions and Their Operational Aspects 10.11 Non-Financial Transactions, Special Investor Categories and Turnaround Times

11 Chapter 11: Risk, Return and Performance of Funds

11.1 General and Specific Risk Factors 11.2 Factors That Affect Mutual Fund Performance 11.3 Drivers of Returns and Risk in a Scheme 11.4 Measures of Returns 11.5 SEBI Norms Regarding Representation of Returns 11.6 Risks in Fund Investing: The Investor's Perspective 11.7 Measures of Risk and Provisions Relating to Credit Risk

12 Chapter 12: Mutual Fund Scheme Performance

12.1 Benchmarks and Performance 12.2 Price Return Index or Total Return Index 12.3 Basis of Choosing an Appropriate Performance Benchmark 12.4 Benchmarks for Equity Schemes 12.5 Benchmarks for Debt Schemes and Other Schemes 12.6 Quantitative Measures of Fund Manager Performance 12.7 Tracking Error and Scheme Performance Disclosure

13 Chapter 13: Mutual Fund Scheme Selection

13.1 Scheme Selection Based on Investor Needs, Preference and Risk Profile 13.2 Risk Levels in Mutual Fund Schemes 13.3 Scheme Selection Based on Investment Strategy 13.4 Selecting a Scheme Across AMCs or Within a Scheme Category 13.5 Selecting Options in Mutual Fund Schemes and Do's and Don'ts

5.3 Due Diligence Process by AMCs for Distributors

Key Takeaways Explain This Topic AI

SEBI requires AMCs to carry out due diligence on distributors meeting prescribed size thresholds.

Thresholds cover multiple locations, large assets under advisory, high commission received or wide investor reach.

Due diligence covers business model, organisational controls, sales practices, complaints and record keeping.

The obligation rests on the AMC and the trustees, and its findings can restrict or end empanelment.

Its purpose is to reach mis-selling at the distribution layer, which SEBI cannot supervise directly at scale.

Last updated: August 2026

Why AMCs Are Made Responsible for Distributors

SEBI regulates AMCs directly. It does not register mutual fund distributors — AMFI does that through the ARN. That creates a supervisory gap: the layer closest to the investor, where mis-selling actually happens, sits furthest from the regulator.

SEBI's answer is to place the obligation on the entity it does regulate. AMCs must conduct due diligence on distributors and are accountable for whom they empanel. The commercial incentive runs the other way — a large distributor brings assets — so the requirement is deliberately mandatory rather than advisory.

Which Distributors Are Covered

Due diligence is required for distributors that meet any one of the prescribed thresholds. The thresholds are framed around scale and reach, on the reasoning that a large distributor's practices affect many investors:

• Presence in multiple locations , indicating a branch or franchise network
• Assets under advisory above a prescribed level
• Commission received above a prescribed level, aggregated across the industry or from a single AMC
• Number of investors serviced above a prescribed level

A small individual distributor operating alone is generally outside the formal due-diligence net, though ordinary empanelment checks — valid ARN, KYD compliance, PAN, bank details — apply to everyone.

AMFI publishes the aggregated data on distributor commissions and assets that allows AMCs to identify who crosses the thresholds.

What the Process Examines

The review goes well beyond confirming that the ARN is valid.

Area What is examined

Business model How the distributor earns, what else it sells, whether mutual funds are incidental to another product

Organisational structure Number of employees, EUIN coverage, supervisory arrangements over sales staff

Sales practices How suitability is assessed, what is said to investors, whether targets create pressure to churn

• Product mix Concentration in high-commission categories, evidence of steering
• Investor grievances Volume, nature, pattern and resolution of complaints
• Regulatory record Any action by SEBI, AMFI or other regulators
• Record keeping KYC and transaction documentation, retention practices
• Systems and controls Transaction processing, data security, business continuity

Two areas carry the most weight in practice. Churn — repeatedly switching investors between schemes to generate fresh commission — is the classic detriment, and it is visible in transaction data as a pattern of short holding periods. Product-mix concentration in high-commission categories is the other, because it suggests recommendations follow the commission rather than the investor's need.

Who Is Accountable

The obligation rests on the AMC , and the trustees are required to oversee that it is carried out. Due diligence is not a one-off exercise at empanelment; it is periodic , and findings must be recorded.

Outcomes range across a spectrum: continued empanelment; empanelment with conditions such as enhanced monitoring or training requirements; restriction to certain products; suspension; or termination. Where conduct suggests a breach of the AMFI Code of Conduct, the matter can also be referred to AMFI, which administers the ARN.

What This Means for a Distributor

The practical implications are concrete and worth internalising early in a distribution career:

Your transaction pattern is visible. Switch activity, holding periods and the category mix of your book are all data the AMC can examine.

Complaints matter even when resolved. A pattern of complaints of the same type is evidence about process, regardless of individual outcomes.

Documentation is your defence. A recorded risk profile and a written basis for each recommendation is what distinguishes a defensible recommendation from an accusation of steering.

Empanelment is conditional and reviewable. It is not a permanent entitlement acquired once.

Where Due Diligence Sits Among the Other Controls

It helps to see this requirement as one layer among several, because the exam sometimes asks which mechanism addresses which risk.

• Control Operated by What it addresses
• NISM certification NISM Minimum knowledge before selling
• ARN and KYD AMFI Identity, traceability, eligibility
• Code of Conduct AMFI Conduct standards, enforced through the ARN
• Commission disclosure AMC and distributor Investor visibility of the incentive
• Full trail model SEBI Removes the reward for churning
• AMC due diligence AMC, overseen by trustees Whether a large distributor's practice actually serves investors

Certification tests knowledge once. The Code sets a standard. Due diligence is the only control that looks at what a distributor has actually been doing over time , using real transaction and complaint data rather than a declaration. That is why it is aimed at scale: examining every ARN holder this way would be impossible, while examining the largest networks reaches most investors.

A Note on Records

Because due diligence is periodic and evidence-based, the records an AMC can draw on are the records that exist. A distributor whose files contain dated risk profiles, written recommendation rationales and acknowledged commission disclosures can explain an unusual transaction pattern — a cluster of switches following a genuine change in a client's circumstances, for example. A distributor with no such records cannot, and an unexplained pattern is assessed on the data alone.

This sub-topic appears twice in the NISM curriculum — once in the regulatory unit and again in the distribution unit — which is a reliable signal of examination importance. The regulatory framing is that SEBI reaches the distribution layer through the AMC; the distribution framing is that empanelment carries ongoing conduct obligations. Both describe the same process.