SEBI- Securities and Exchange Board of India – The Complete Guide Of SEBI
Posted by Fintra , updated 2022-03-30
Headquartered in Mumbai, India, the Securities and Exchange Board of India (SEBI) is the regulatory body for securities and commodity markets under the ownership of the Ministry of Finance, Government of India. The Securities and Exchange Board of India (SEBI), constituted as a non-statutory body on April 12, 1988, received Statutory Powers on 30 January, 1992 through the SEBI Act, 1992. The Preamble of the SEBI defines its basic functions as to safeguard the investor's interests in securities, facilitate the development, and regulate the securities market. SEBI has regional offices in New Delhi, Chennai, Kolkata, Ahmedabad, and various other local regional offices across prominent cities in India.
In this blog, Fintra will highlight the following topics about the Securities and Exchange Board of India (SEBI):
- What Is The Securities and Exchange Board of India (SEBI)?
- The Structure Of The Securities and Exchange Board of India (SEBI)
- The Functions And Power of The Securities and Exchange Board of India (SEBI)
- The Mutual Fund Regulations By The Securities and Exchange Board of India (SEBI)
- The Securities and Exchange Board of India (SEBI) Guidelines on Mutual Funds Reclassification
What Is The Securities and Exchange Board of India (SEBI)?
The Securities and Exchange Board of India (SEBI) is essentially a statutory body of the Indian Government that acts as a market regulator by monitoring and regulating the Indian capital and securities market. It also regulates the functioning of the mutual funds, stock market, etc. SEBI was introduced to facilitate transparency in the investment market of India.
SEBI ensures the Indian capital market functions systematically and provides investors a transparent environment for their investments. In simple terms, SEBI's primary goal was to prevent malpractices in the Indian capital market along with promoting the development of the capital markets.
The Structure Of The Securities and Exchange Board of India (SEBI)
SEBI's framework resembles a corporate structure that comprises various departments which are managed by a department head. Besides this, it also has a Board of Directors, senior management, and several crucial departments. It's believed that there are approximately 20 departments under SEBI, and some of these are economic and policy analysis, debt and hybrid securities, corporation finance, enforcement, human resources, investment management, commodity derivatives market regulation, legal affairs, and more. The SEBI's hierarchical structure comprises of the following designated officers:
- The Chairman of SEBI– The chairman gets nominated by the Indian Union Government
- Two members who belong to the Union Finance Ministry of India are also a part of this structure
- One member belonging to the Reserve Bank of India (RBI)
- The other five members get nominated by the Union Government of India
The list below highlights some of the most vital departments of SEBI:
The Information Technology Department (ITD)
The Foreign Portfolio Investors and Custodians (FPI&C)
Office of International Affairs
National Institute of Securities Market (NISM)
Investment Management Department
Commodity and Derivative Market Regulation Department
Human Resource Department
Corporation Finance Department (CFD)
Department of Economic and Policy Analysis (DEPA-I, II, & III)
Legal Affair Department
Treasury and Accounts Divisions (T&A)
Besides the above-mentioned departments, the other crucial departments take care of the legal, financial and enforcement-related affairs.
The Functions And Power of The Securities and Exchange Board of India (SEBI)
Since it's a regulatory body, the Securities and Exchange Board of India (SEBI) has several powers to perform vital functions. The SEBI Act of 1992 bears a list of such powers granted in the regulatory body.
The functions of SEBI are as follows:
- SEBI is primarily created to protect the interests of Indian investors in the securities market.
- To promote the development of a hassle-free functioning of the securities market and regulate the business operations of the Indian securities market.
- SEBI serves as a platform for stockbrokers, sub-brokers, share transfer agents, bankers, merchant bankers, trustees of trust deeds, portfolio managers, investment advisers, registrars, underwriters, and various other associated people to register and regulate work.
- To regulate the operations of depositories, participants, foreign portfolio investors, custodians of securities, and credit rating agencies.
- SEBI prohibits insider trading, such as fraudulent and unfair trade practices related to the Indian securities market.
- SEBI is responsible for ensuring that the investors are educated about the securities markets and their intermediaries.
- To monitor substantial acquisitions of shares and company take-overs.
- To ensure the securities market is efficient at all times, SEBI is in charge of research and development.
Securities and Exchange Board of India (SEBI) has a few main powers that are as follows:
- Quasi-Judicial: SEBI has the authority to pass judgements linked to fraud and other unethical practices occurring in the securities market. This enables to ensure transparency, fairness, and accountability.
- Quasi-Executive: SEBI is authorised to enforce regulations and pass judgements. It can take legal actions against any violators. SEBI is also empowered to examine the Books of accounts and other documents coming across any violation of the regulations.
- Quasi-Legislative: To protect the interest of investors, SEBI reserves the power to frame rules and regulations. Few of its regulations consist of listing obligations, insider trading regulations, and disclosure requirements. These regulations have been developed to get rid of the malpractices which are prevalent in the securities market. Despite possessing these powers, the results of SEBI’s functions have to still go through the Securities Appellate Tribunal and the Supreme Court of India.
When it comes to the powers and functions of SEBI, the Supreme Court of India and the Securities Appellate Tribunal do tend to have an upper hand. Moreover, all the SEBI's functions and related decisions first have to go through the two apex bodies.
The Mutual Fund Regulations By The Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India Regulations has formulated a set of guidelines to manage mutual funds in India. As per the guidelines, mutual funds have to be registered under the Trusts Act, 1882. Moreover, mutual funds which exclusively deal with the money market must register with the RBI. Even the Asset Management Companies (AMC) that manage mutual funds should be SEBI approved, and the AMC's trustees must ensure that the mutual funds are performing as per the regulations. It is also assigned the responsibility of monitoring the overall performance of mutual funds.
SEBI has further issued various mutual funds regulations which the asset management companies, sponsors, and shareholders must abide by. Some of them are as follows:
- A group of a company, a mutual fund sponsor, or an associate of an AMC, through the mutual fund's schemes in any form cannot hold 10% or more of the shareholding and voting rights in an AMC or any other mutual fund. Moreover, AMC cannot be represented on a board of any other mutual fund.
- In an AMC of a mutual fund, a shareholder cannot hold 10% or more of the total shareholding directly or indirectly.
- For a sectoral or thematic index, no single stock can have more than 35% weight in the index, and the cap for other indices is 25%.
- Speaking about the top three constituents of the index, their cumulative weight cannot surpass 65%.
- The individual constituent of the index must have a trading frequency of a minimum 80%.
- At the end of every calendar quarter, AMCs must ensure and evaluate compliance with the norms. The constituents of the indices have to be made public by publishing them on their website.
- New funds have to submit their compliance status to SEBI before getting launched.
- All liquid schemes have to hold a minimum of 20% in liquid assets like treasury bills, government securities, cash, repo on government securities, etc.
- A debt mutual fund, in one sector, can invest only up to 20% of its assets; earlier the cap was 25%. The additional exposure to housing finance companies (HFCs) has been updated to 15% from 10%, and 5% exposure on securitised debt which is based on the retail housing loans, and affordable housing loan portfolios.
- Amortisation isn't the only mode for evaluating debt and money market instruments as per SEBI’s recommendation. Even the mark-to-market methodology is used.
- An exit penalty will get levied on investors of liquid schemes who exit the scheme within seven days.
- Mutual funds schemes have to only be invested in the listed non-convertible debentures (NCD). Fresh investments in commercial papers (CPs) and equity shares are allowed in listed securities according to the guidelines issued by the regulator.
- Overnight and liquid schemes no longer are allowed to invest in short-term deposits, debt, and money market instruments, which have structured obligations or credit enhancements.
- While investing in debt securities that have credit enhancements, a minimum of four times security cover is compulsory for investing in mutual funds schemes. On total investment by such schemes in debt and money market instruments, a prudential limit of 10% is prescribed.
At the end of every calendar year, mutual funds have to ensure they have been abiding by the guidelines issued by the Securities and Exchange Board of India. Along with this, they are also required to make their constituents of the indices public by publishing them on their respective websites.
The Securities and Exchange Board of India (SEBI) Guidelines on Mutual Funds Reclassification
- Based on the fund's core intent and asset mix, the funds have to be named. It should clearly state the risk associated.
- It's been said that SEBI has proposed around ten classifications for equity funds, six classifications for hybrid, two for solution funds, 16 classifications for debt funds, and two for index funds.
- SEBI has reclassified mid-cap, large-cap, and small-cap based on market cap relative rankings instead of absolute market cap cut-offs. Moreover, the debt fund classification is stipulated based on the duration of the fund and on the asset quality mix.
- All categories except index funds can have only one fund per classification- For example, an AMC can have a maximum of 34 funds other than index funds.
From the above information, we can note that the Securities and Exchange Board of India (SEBI) plays a vital role in regulating all the players who operate in the Indian capital market. SEBI also strives to protect the investor's interest, and it aims to develop the capital markets by implementing various rules and regulations.