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SEBI plays an important role in regulating all the players operating in the Indian capital markets. It attempts to protect the interest of investors and aims at developing the capital markets by enforcing various rules and regulations.

This article on SEBI covers the following:

1. What is SEBI?

Securities and Exchange Board of India (SEBI) is a regulatory body of the Government of India. It controls the securities market. It was established on April 12, 1992 under the SEBI Act, 1992. SEBI is headquartered at the Bandra Kurla Complex in Mumbai, India. It has regional offices in major cities of India such as New Delhi, Kolkata, Chennai, and Ahmedabad. These cover the North, South, East, and West regions of India. Besides, it has a network of local branch offices in prominent Indian cities.

2. Structure of SEBI

SEBI has a corporate framework comprising of various departments each managed by a department head. There are about 20+ departments under SEBI. Some of these departments are corporation finance, economic and policy analysis, debt and hybrid securities, enforcement, human resources, investment management, commodity derivatives market regulation, legal affairs, and more.

The hierarchical structure of SEBI consists of the following members:

  • The chairman of SEBI is nominated by the Union Government of India.
  • Two officers from the Union Finance Ministry will be a part of this structure.
  • One member will be appointed from the Reserve Bank of India.
  • Five other members will be nominated by the Union Government of India.

3. Functions of SEBI

  • SEBI is primarily set up to protect the interests of investors in the securities market.
  • It promotes the development of the securities market and regulates the business.
  • SEBI provides a platform for stockbrokers, sub-brokers, portfolio managers, investment advisers, share transfer agents, bankers, merchant bankers, trustees of trust deeds, registrars, underwriters, and other associated people to register and regulate work.
  • It regulates the operations of depositories, participants, custodians of securities, foreign portfolio investors, and credit rating agencies.
  • It prohibits inner trades in securities, i.e. fraudulent and unfair trade practices related to the securities market.
  • It ensures that investors are educated on the intermediaries of securities markets.
  • It monitors substantial acquisitions of shares and take-over of companies.
  • SEBI takes care of research and development to ensure the securities market is efficient at all times.

4. Authority and Power of SEBI

The SEBI board has three main powers:

i. Quasi-Judicial: SEBI has the authority to deliver judgements related to fraud and other unethical practices in terms of the securities market. This helps to ensure fairness, transparency, and accountability in the securities market.

ii. Quasi-Executive: SEBI is empowered to implement the regulations and judgements made and to take legal action against the violators. It is also authorised to inspect Books of accounts and other documents if it comes across any violation of the regulations.

iii. Quasi-Legislative: SEBI reserves the right to frame rules and regulations to protect the interests of the investors. Some of its regulations consist of insider trading regulations, listing obligation, and disclosure requirements. These have been formulated to keep malpractices at bay.

Despite the powers, the results of SEBI’s functions still have to go through the Securities Appellate Tribunal and the Supreme Court of India.

5. Mutual Fund Regulations by SEBI

Some of the regulations for mutual funds laid down by SEBI are:

  1. A sponsor of a mutual fund, an associate or a group company which includes the asset management company of a fund, through the schemes of the mutual fund in any form cannot hold:
    (a) 10% or more of the shareholding and voting rights in the asset management company or any other mutual fund.
    (b) An asset management company cannot have representation on a board of any other mutual fund.
  2. A shareholder cannot hold 10% or more of the shareholding directly or indirectly in the asset management company of a mutual fund.
  3. No single stock can have more than 35% weight in the index for a sectoral or thematic index; the cap is 25% for other indices.
  4. The cumulative weightage of the top three constituents of the index cannot exceed 65%.
  5. An individual constituent of the index should have a trading frequency of a minimum of 80%.
  6. Funds must evaluate and ensure compliance to the norms at the end of every calendar quarter. The constituents of the indices must be made public by publishing it on their website.
  7. New funds must submit their compliance status to SEBI before being launched.
  8. All liquid schemes must hold a minimum of 20% in liquid assets such as government securities (G-Secs), repo on G-Secs, cash, and treasury bills.
  9. A debt mutual fund can invest up to only 20% of its assets in one sector; previously the cap was 25%. The additional exposure to housing finance companies (HFCs) is updated to 15% from 10% and a 5% exposure on securitised debt based on retail housing loan and affordable housing loan portfolios.
  10. Based on the regulator’s recommendation, the valuation methodology for debt and money market instruments is updated to mark-to-market; it is not amortisation entirely.
  11. An exit penalty will be levied on investors of liquid schemes who exit the scheme within a period of seven days.
  12. Mutual funds schemes must invest only in the listed non-convertible debentures (NCD). Any fresh investment in commercial papers (CPs) and equity shares are allowed in listed securities as per the guidelines issued by the regulator.
  13. Liquid and overnight schemes are no longer allowed to invest in short-term deposits, debt, and money market instruments that have structured obligations or credit enhancements.
  14. When investing in debt securities having credit enhancements, a minimum of four times security cover is mandatory for investing in mutual funds schemes. A prudential limit of 10% is prescribed on total investment by such schemes in debt and money market instruments.

6. SEBI Notifications

Date

Title

August 2, 2019

Streamlining issuance of SCORES Authentication for SEBI registered intermediaries

August 1, 2019

Database for Distinctive Number (DN) of Shares – Action against non-compliant companies

August 1, 2019

Rationalisation of the imposition of fines for false/incorrect reporting of margins or non-reporting of margins by Trading Member/Clearing Member in all segments

July 26, 2019

Streamlining the Process of Public Issue of Equity Shares and convertibles- Implementation of Phase II of Unified Payments Interface with Application Supported by Block Amount

July 26, 2019

Staggered Delivery Period in Commodity futures contracts

Jul 26, 2019

Guidelines for Liquidity Enhancement Scheme (LES) in Commodity Derivatives Contracts

7. Mutual Funds and SEBI

In order to govern mutual funds, a set of regulations were implemented in India known as Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. According to these guidelines, mutual funds must register as trusts under the Trusts Act, 1882.

That is, a firm must be established as a separate Asset Management Company (AMC) to offer mutual funds. The net worth of such parent firm or AMC must be Rs.50,000,000. Mutual funds dealing exclusively with money markets must register with the Reserve Bank of India (RBI); all other mutual funds must register with SEBI. Recently, a self-regulation agency for mutual funds has been set up called Association of Mutual Funds of India (AMFI).

The AMFI is focused on developing the Indian mutual fund industry with professional and ethical qualities. The AMFI aims to enhance the operational standards in all areas with a view to protect and promote mutual funds and its stakeholders.

Till date, there are 44 Asset Management Companies that are registered with SEBI, are members of AMFI. Some of them are Aditya Birla Sun Life AMC Limited, BNP Paribas Asset Management India Private Limited, Edelweiss Asset Management Limited, and Quant Money Managers Limited.

8. SEBI Guidelines on Mutual Funds Reclassification

  • Funds must be named based on the core intent of the fund and asset mix. It should specify the risk associated clearly.
  • SEBI has suggested 16 for debt funds, 10 classifications for equity funds, 6 classifications for hybrid, 2 for solution funds, and 2 for index funds.
  • SEBI has reclassified large-cap, mid-cap, and small-cap based on market cap relative rankings rather than absolute market cap cut-offs.
  • The debt fund classification is prescribed based on the duration of the fund and the asset quality mix.
  • All categories except index funds can only have 1 fund per classification, i.e. an AMC can have a maximum of 34 funds other than index funds.

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