Securities and Exchange Board of India (SEBI): Full Form, New Rules & Objectives

The Securities and Exchange Board of India (SEBI) is the apex regulatory body overseeing the Indian capital and securities markets. Established to safeguard investor interests, SEBI plays a pivotal role in fostering transparency, promoting market development, and enforcing robust regulations. SEBI ensures a fair and efficient financial ecosystem by regulating entities like stockbrokers, mutual funds, and listed companies, driving trust and growth in India’s capital markets.

What is SEBI

SEBI is a statutory regulatory body established on the 12th of April, 1992. It monitors and regulates the Indian capital and securities market while ensuring to protect the interests of the investors, formulating regulations and guidelines. The head office of SEBI is at Bandra Kurla Complex, Mumbai.

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.

History of SEBI

SEBI’s journey reflects its evolution into a cornerstone of India’s financial regulatory framework:

• Pre-Establishment Era: Before SEBI, the capital market was regulated by the Controller of Capital Issues under the Capital Issues (Control) Act, 1947. This framework lacked autonomy and was inadequate for a growing economy.
• Formation: SEBI was established on April 12, 1988, as a non-statutory body to regulate the securities market. Following the Harshad Mehta scam, which exposed market vulnerabilities, it gained statutory powers on April 12, 1992, through the SEBI Act, 1992.

Key Milestones:

• 1990s: SEBI introduced regulations for mutual funds, insider trading, and takeovers, strengthening market oversight.
• 2000s: It implemented dematerialization of securities, T+2 settlement cycles, and corporate governance norms.
• 2010s: SEBI focused on investor education, technology-driven trading, and regulating algorithmic trading.
• 2020s: Recent reforms include direct payout of securities, stricter derivative trading norms, and enhanced mutual fund regulations.

Current Role: Today, SEBI is a globally recognized regulator, balancing investor protection with market innovation. Its headquarters remain in Mumbai’s Bandra Kurla Complex.

SEBI’s history underscores its adaptability and commitment to fostering a transparent and resilient capital market.

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 insider trading, 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.

Authority and Power of SEBI

The SEBI 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 obligations, 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.

Mutual Fund Regulations by SEBI

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

• 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.
• A shareholder cannot hold 10% or more of the shareholding directly or indirectly in the asset management company of a mutual fund.
• 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. 
• The cumulative weight of the top three constituents of the index cannot exceed 65%. 
• An individual constituent of the index should have a trading frequency of a minimum of 80%. 
• AMCs 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 them on their website. 
• New funds must submit their compliance status to SEBI before being launched. 
• 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.
• 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.
• As per SEBI’s recommendation, amortisation is not the only method for evaluating debt and money market instruments. The mark-to-market methodology is also used.
• An exit penalty will be levied on investors of liquid schemes who exit the scheme within a period of seven days. 
• 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.
• 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. 
• 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.

SEBI Latest Notifications

Mutual Funds and SEBI

Mutual funds are managed by Asset Management Companies (AMC), which need to be approved by SEBI. A Custodian who is registered with SEBI holds the securities of various schemes of the fund. The trustees of the AMC monitor the performance of the mutual fund and ensure that it works in compliance with SEBI Regulations.

The firm must be established as a separate AMC to offer mutual funds. The net worth of such a parent firm or AMC must be at least 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 the Association of Mutual Funds of India (AMFI). AMFI focuses on developing the Indian mutual fund industry in a professional and ethical manner.

AMFI aims to enhance the operational standards in all areas with a view to protect and promote mutual funds and their stakeholders. To date, there are 44 Asset Management Companies that are registered with SEBI and 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. A sponsor of a mutual fund scheme, a group of the company or an associate, which involves AMC of the fund, cannot hold the following in any form:

• 10% or above of the voting rights and shareholding in the AMC or any other mutual fund scheme.
   
• An AMC cannot have representation on the board of any other mutual fund.
   
• Shareholders can’t hold more than 10% of the shares both directly and indirectly in AMC of the mutual fund.

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 classifications for debt funds, ten classifications for equity funds, six classifications for hybrid, two for solution funds, and two 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 one fund per classification, i.e. an AMC can have a maximum of 34 funds other than index funds.

Objectives of SEBI

SEBI’s primary objectives are designed to create a robust and investor-friendly capital market:

• Investor Protection: SEBI safeguards investors by enforcing transparency, curbing insider trading, and regulating fraudulent practices in the securities market.
• Market Development: It promotes the growth of the securities market by creating a conducive environment for issuers, intermediaries, and investors.
• Regulation of Intermediaries: SEBI oversees entities like stockbrokers, mutual funds, depositories, and credit rating agencies, ensuring compliance with regulations.
• Market Efficiency: Through research, innovation, and regulatory frameworks, SEBI ensures the securities market operates efficiently and fairly.
• Investor Education: SEBI promotes financial literacy to empower investors to make informed decisions.

These objectives align with SEBI’s mission to maintain trust and integrity in India’s financial markets.

SEBI New Rules

SEBI continuously updates its regulations to address evolving market dynamics and protect investors. Below are some key recent rules introduced by SEBI:

Direct Payout of Securities

• SEBI has mandated that securities be credited directly to investor's demat accounts, eliminating intermediaries like stockbrokers or clearing corporations.
• This rule, effective from October 14, 2024, aims to reduce fraud risks, enhance transparency, and ensure investors receive their securities promptly.
• It applies to all transactions, including IPOs, bonus issues, and rights issues, ensuring seamless and secure transfers.

Index Derivatives Framework 

• SEBI introduced reforms for index derivatives trading effective November 20, 2024, to curb speculative trading and protect retail investors.
• Key changes include:
  • Limiting weekly index derivatives contracts to one per exchange.
  • Increasing the minimum trading lot size to ₹15-20 lakh.
  • Mandating upfront collection of option premiums.
  • Introducing intra-day monitoring of position limits for index derivatives.
• These measures aim to reduce excessive volatility and speculative losses, particularly for retail traders.

Mutual Fund and Market Intermediary Updates

• Two-Factor Authentication for Mutual Fund Redemptions: Extended to July 1, 2022, this rule mandates an OTP-based verification for mutual fund redemptions to prevent fraud and money laundering.
• Ban on Pooling of Funds: Effective July 1, 2022, SEBI prohibited stockbrokers and mutual fund distributors from pooling investors’ money. Funds must now flow directly from investors’ accounts to clearing corporations, reducing the risk of misuse.
• Portfolio Rebalancing Timelines: SEBI mandates a 30-day rebalancing period for mutual fund portfolios deviating from their Scheme Information Document (SID) due to passive breaches. Non-compliance restricts AMCs from launching new schemes or charging exit loads.

These rules reflect SEBI’s commitment to enhancing investor protection, curbing malpractices, and promoting market stability.

Conclusion

The Securities and Exchange Board of India (SEBI) stands as a vital pillar of the Indian financial landscape, dedicated to protecting investor interests while fostering a transparent and efficient capital market. Its ongoing evolution and regulatory reforms reflect a commitment to adapt to market dynamics, ensuring a secure environment for all participants in the securities market.

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