Securities and Exchange Board of India (SEBI)

Introduction

Ever wondered who ensures a fair and balanced playing field in India’s world of investments? The answer is Securities and Exchange Board of India (SEBI). Established in 1992, SEBI acts as the guardian of investors, overseeing not just the stock market, but also mutual funds, debentures, and other financial instruments. Today, we’ll learn more about SEBI and its importance.

What is SEBI?

The Securities and Exchange Board of India (SEBI) is a government agency with legal authority, established on April 12th, 1992.

It functions as the guardian for India’s capital and securities market, focusing on protecting investors, regulating market activities, and formulating policies for a secure and healthy investment environment.

Structure of SEBI

The Securities and Exchange Board of India (SEBI) functions with a well-defined structure to effectively regulate the Indian securities market. This structure comprises a Board of Directors and various specialised departments.

Board of Directors: The board provides overall guidance and direction to SEBI. It includes members appointed by the Indian government, representatives from the Finance Ministry and the Reserve Bank of India (RBI).
Departments: SEBI’s work is carried out through over 20 specialised departments, each focusing on a specific aspect of market regulation. Here are some key department examples:
- The Information Technology Department.
- The Foreign Portfolio Investors and Custodians.
- Office of International Affairs.
- National Institute of Securities Market.
- Investment Management Department.
- Commodity and Derivative Market Regulation Department.
- Human Resource Department.

This departmental structure allows SEBI to efficiently fulfill its mission of protecting investors, regulating market activities, and formulating policies. By having dedicated departments with expertise in various areas, SEBI can ensure a stable, transparent, and secure financial environment in India.

Functions of SEBI

The Securities and Exchange Board of India (SEBI) plays a vital role in ensuring the integrity and growth of the securities market in India. Here’s a breakdown of its key functions:

Investor Protection:

SEBI serves as the primary protector of investor interests in the securities market. This involves upholding fair practices, preventing fraudulent activities, and fostering transparency in market operations.
SEBI educates investors about the intricacies of the securities market and the roles of various intermediaries, empowering them to make informed investment decisions.

Market Regulation:

SEBI closely monitors and regulates the activities of all participants in the securities market, including stock exchanges, depositories, custodians, credit rating agencies, and market intermediaries like brokers and portfolio managers.
SEBI establishes clear rules and regulations governing market conduct, trading practices, and disclosure requirements, thereby ensuring a stable and orderly market environment.

Development of the Securities Market:

SEBI takes proactive measures to promote the growth and development of the Indian securities market. This includes introducing new products and instruments, streamlining market processes, and encouraging efficient trading mechanisms.

Other Key Functions:

SEBI prohibits insider trading, which involves using non-public information for personal gain in the securities market.
SEBI monitors significant share acquisitions and company takeovers to prevent market manipulation and ensure fair practices.
SEBI conducts research and development activities to identify enhancements and maintain the market’s efficiency and effectiveness over time.

Through these essential functions, SEBI contributes significantly to building a robust and trustworthy securities market in India, benefiting investors and the broader Indian economy alike.

Authority and Power of SEBI

The Securities and Exchange Board of India (SEBI) is actively armed with a powerful toolkit to enforce fair play and protect investors in the Indian securities market. Here’s a breakdown of SEBI’s key powers:

Quasi-Judicial: SEBI can act as a judge and jury for market misconduct. It has the power to investigate and deliver judgments on cases involving fraud, insider trading, and other unethical practices. This ensures that those who break the rules are held accountable, promoting transparency and fairness in the market.
Quasi-Executive: SEBI doesn’t stop at pronouncements. It has the power to enforce its regulations and judgments. This includes taking legal action against violators, imposing penalties, and even directing the return of investors’ money if necessary. Additionally, SEBI can conduct inspections of books and documents to uncover potential violations, ensuring no stone is left unturned.
Quasi-Legislative: SEBI plays a crucial role in shaping the market landscape. It has the authority to formulate rules and regulations to safeguard investor interests. These regulations cover a wide range of areas, including insider trading restrictions, listing obligations for companies, and disclosure requirements. By setting clear guidelines, SEBI helps to prevent market manipulation and malpractices.

While SEBI wields significant power, its decisions can be challenged in higher courts. The Securities Appellate Tribunal (SAT) and ultimately the Supreme Court of India can review SEBI’s orders, ensuring a system of checks and balances.

Mutual Funds and SEBI

Mutual funds, regulated by SEBI, are operated by Asset Management Companies (AMCs) authorised by the regulatory body. Custodians, also SEBI-approved, are responsible for holding the fund’s securities, while trustees ensure adherence to regulatory standards. AMCs offering mutual funds must maintain a net worth of at least Rs 50,000,000. Funds exclusively focusing on money markets are registered with RBI, while others are registered with SEBI.

The self-regulatory organisation AMFI strives to professionalise the industry and promote ethical practices among its 44 registered members, including major entities like Aditya Birla Sun Life AMC Limited and BNP Paribas Asset Management India Private Limited.

How SEBI regulates Mutual Funds

The Securities and Exchange Board of India (SEBI) plays a crucial role in regulating mutual funds to protect investors. Here’s a simplified breakdown of some key SEBI regulations for mutual funds:

No Conflicting Interests: SEBI limits ties between the fund and its manager, so the fund manager prioritises your investment.
Diversification: SEBI mandates a spread of investments, reducing risk by limiting a fund’s dependence on any single stock.
Transparency: Regular checks and clear information disclosure by fund managers empower you to make informed decisions.
Easy Access to Your Money: SEBI ensures liquid funds hold enough easily accessible assets so you can withdraw your investment when needed.
Informed Investment: SEBI restricts investments to listed and transparent instruments, protecting you from complex products.
Security: When a fund invests in debt with guarantees, SEBI ensures extra protection for your capital.

By implementing these regulations, SEBI empowers you to invest in mutual funds with confidence.

SEBI Guidelines on Mutual Funds Reclassification

SEBI’s guidelines on mutual fund reclassification cover several key aspects:

Funds must be named to reflect their primary objective and asset allocation, with clear indication of associated risks.
SEBI proposes distinct classifications for various fund types: 16 for debt funds, 10 for equity funds, 6 for hybrid funds, 2 for solution funds, and 2 for index funds.
Large-cap, mid-cap, and small-cap funds are now categorised based on market capitalization relative rankings, rather than absolute cut-off values.
Classification of debt funds is determined by factors such as fund duration and asset quality mix.
Each category, except for index funds, is restricted to one fund per classification, allowing a maximum of 34 funds per Asset Management Company (AMC), excluding index funds.

Important SEBI Rules and Guidelines

SEBI’s regulations are instrumental in upholding the integrity and security of mutual fund transactions. Here are some key guidelines:

Ceasing NFO Pooling: SEBI’s directive to halt NFO pooling until April 1, 2022, aims to prevent potential misuse of investors’ funds. Initially challenging for mutual fund entities, compliance led to an extension until July 1, 2022. This impacts fund inflows, necessitating direct transfer of investors’ funds to clearing corporations.
Two-Factor Authentication for Redemptions: SEBI’s introduction of two-factor authentication for mutual fund redemptions enhances security. Requiring an OTP during redemptions helps mitigate fraud and money laundering risks. The compliance deadline has been extended to July 1, 2022, urging entities to adopt necessary processes.
Portfolio Rebalancing Guidelines: SEBI mandates a 30-day adjustment period for schemes deviating from asset allocation outlined in the SID. Fund managers must promptly reinstate allocations or justify actions before an investment committee. Non-compliance restricts launching new schemes and imposes exit load restrictions, highlighting the importance of portfolio integrity and investor transparency.

Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.