SEBI – Securities and Exchange Board of India

The listed companies or public limited companies issuing right shares by 31st July 2020 and intending to send notices to the shareholders, may do so in any other mode other than registered post, speed post or courier and is not considered a violation of SEBI circular.

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

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.

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 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.

Important SEBI Rules and Guidelines

1. SEBI bans NFOs till pool accounts are stopped

The capital market regulator, SEBI, has ordered stockbrokers, mutual fund distributors, investment advisors, and other entities involved in mutual fund transactions on clients’ behalf to halt the pooling of mutual fund units from 01 April 2022. However, as mutual fund houses struggled to comply with this rule, SEBI extended the deadline to 01 July 2022. 

Stock Market entities such as online platforms, mutual fund distributors, stockbrokers etc., pool investors’ money in their bank accounts. The money is subsequently transferred to AMCs to purchase mutual fund scheme units on the investor’s behalf. SEBI wants to stop this approach immediately to prevent the misuse of investors’ money. Moreover, defaults by these entities mean losses for investors. 

The ban on the pooling of units by mutual fund entities impacts mutual fund inflows. Moreover, AMFI has requested SEBI to give mutual funds more time to implement the new rules. After the pooling is discontinued, mutual fund investors’ money will go directly from their accounts to the NSE or BSE Clearing Corporation and not to the bank account of the stockbroker or mutual fund distributor. 

2. SEBI circular on two-factor authentication for mutual fund redemptions

The SEBI two-factor authentication rule makes sure that an additional OTP (One Time Password) is sent during mutual fund redemptions. It cuts down the risk of fraud, and verifying the source account stops money laundering in mutual funds. 

The SEBI two-factor authentication offers an additional security layer, protecting your account against unauthorised access. SEBI has extended the deadline for mutual fund entities to comply with its two-factor authentication to 01 July 2022. 

Moreover, AMCs, stockbrokers, mutual fund distributors etc., must ensure that the required processes are in place to comply with the SEBI two-factor authentication circular. 

3. SEBI timelines for rebalancing mutual fund portfolios

A SEBI circular clearly defines rules governing portfolio rebalancing of schemes launched by mutual funds. All schemes except overnight funds have a mandated 30-day rebalancing period in case of deviation from the required asset allocation mentioned in the SID (Scheme Information Document) on account of passive breaches. 

Moreover, passive breaches are instances not arising due to the actions of mutual fund managers. It may happen due to the movement of asset prices held by the mutual fund. For example, aggressive hybrid funds must invest a minimum of 65% of their assets in stocks. However, this allocation could fall below 65% if the price of stocks held in the scheme’s portfolio falls. In such cases, fund managers must act within 30 days of the date of deviation and reinstate the allocation as mentioned in the SID. 

If the fund manager doesn’t comply, justification must be provided in writing explaining efforts taken towards portfolio rebalancing before an investment committee. Moreover, the AMCs investment committee could extend the portfolio rebalancing period for up to 60 business days from the completion date of the mandated rebalancing period. 

SEBI clearly states that if the AMC fails to rebalance the scheme portfolio, it cannot launch new mutual fund schemes. Moreover, it cannot charge an exit load on mutual fund redemptions. Mutual Fund Houses must keep the trustee informed on deviations from the requisite asset allocation of the portfolio. 

If deviations exceed 10% of the Assets Under Management (AUM) of the scheme’s main portfolio, mutual fund houses must inform investors immediately. Moreover, the fund house must specify the details of the portfolios that are not balanced. It must notify investors after the rebalancing of the portfolio. Investors must be informed of the portfolio’s mandated asset allocation deviations along with portfolio disclosures. However, these rules apply only to main portfolios and not segregated portfolios. 

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