New Delhi, May 12: India received a regulation and taxation grade of Average in Global Investor Experience (GIE) report on Regulation and Taxation by Morningstar. India matched global best practices in many areas of regulation.

“Funds must have supervisory boards with independent representatives, regulatory sanctions are published and controls on fund advertising are all positives. The tax system provides incentives for fund investing, including the deferral of capital gains taxes until units are sold. The strength of fund governance in India is offset. However, by some of the market's weaker policy and operational attributes, like a lack of mandated saving via Tier I retirement accounts for non-state employees and fund structures that charge investors asset-based fees to cover the costs of distribution. Also, there is no explicit investor compensation scheme to protect fund investors in the case of fund company wrongdoing or corporate failure,” the report summed up.

The report grades the experiences of mutual fund investors in 26 countries across North America, Europe, Asia, and Africa.

Overall, the report analysed that the regulation of India's mutual fund industry has been proactive and effective. Regulations such as changes to total expense ratio slabs, bans on up-front commissions, fund categorisation and tweaks to fund investment norms have been effective.

“In order to enable investors to make fair comparisons among funds within comparable peer groups, Sebi introduced a fund categorisation system with defined fund mandates. It also limited each asset manager to offering only a single fund in most categories to avoid the proliferation of funds with similar mandates. The regulator also announced a series of enhanced regulations around fund exposure limits, especially for fixed-income securities, to improve their overall risk-management framework,” the report said.

Regarding policy and tax encouragements to invest, the report said India moved from a defined-benefit to a defined-contribution pension system for all central and state government employees. This is known as the National Pension System and is a compulsory contribution programme for all central and state government employees. India provides an incentive to invest in mutual funds or the National Pension System through the deduction of taxable income up to Rs 150,000 for investments made in Equity Linked Saving Schemes or the pension system, plus another Rs 50,000 for investments in the pension system.

It appreciated Sebi’s set stringent eligibility criteria for the sponsors, trustees, custodians, and asset-management companies of mutual funds