What is SEBI: Meaning, Structure, Regulations, Categorisation

March 23, 2020Divya Singh RathoreMutual Funds

Table of Content:

What is SEBI?
Classification & Categorisation of Funds
SEBI Regulations
Structure of SEBI
Functions of SEBI
Powers of SEBI

What is SEBI?

Securities and Exchange Board of India (SEBI) is a statutory regulatory body entrusted with the responsibility to regulate the Indian capital markets. It monitors and regulates the securities market and protects the interests of the investors by enforcing certain rules and regulations.

SEBI was founded on April 12, 1992, under the SEBI Act, 1992. Headquartered in Mumbai, India, SEBI has regional offices in New Delhi, Chennai, Kolkata and Ahmedabad along with other local regional offices across prominent cities in India.

The objective of SEBI is to ensure that the Indian capital market works in a systematic manner and provide investors with a transparent environment for their investment. To put it simply, the primary reason for setting up SEBI was to prevent malpractices in the capital market of India and promote the development of the capital markets.

Categorisation

SEBI Categorisation and Rationalisation of Mutual Funds

Given below are the different mutual funds categorised and rationalised by SEBI-

Equity Funds

Category Name	Definition
Large Cap Fund	An open-ended equity scheme primarily investing in large cap stocks. Minimum 80% total assets are invested in equity & equity related securities of large cap companies
Mid Cap Fund	An open-ended equity scheme primarily investing in mid cap stocks. Minimum 65% of total assets are invested in equity & equity related instruments of mid cap companies
Small Cap Fund	An open-ended equity scheme primarily investing in small cap stocks. Minimum 65% of total assets are invested in equity & equity related securities of small cap companies
Multi Cap Fund	An open-ended equity scheme investing in stocks across market capitalisation (large, small, mid cap). Minimum 65% of total assets are invested in equity and equity related instruments
Large & Mid Cap Fund	An open-ended equity scheme investing in stocks from both large cap & mid cap companies. Minimum 35% of total assets are invested in equity of large cap companies and 35% in mid cap companies
Dividend Yield Fund	An open-ended equity scheme primarily investing only in corporations that have significantly high dividend yielding stocks. Minimum 65% of total assets invested in equity
Value Fund	A Value Fund is a type of Mutual Fund which follows value investing strategy. Minimum 65% of total assets is invested in equity & equity related instruments
Contra Fund	A Contra Fund is a type of Mutual Fund which follows contrarian investing strategy. Minimum 65% of total assets is invested in equity & equity related instruments
Focused Fund	An open-ended equity scheme investing in maximum 30 stocks from either of the market caps. Minimum 65% of total assets are invested in equity related instruments
Sectoral/Thematic fund	An open-ended equity scheme investing in businesses that operate in a particular sector or industry. Minimum 80% of total assets are invested in equity of a particular sector/theme
ELSS	An open-ended equity linked tax saving scheme with a lock-in of three years. Minimum 80% of total assets are invested in equity related securities

Debt Funds

Category Name	Definition
Overnight Fund	An open ended debt scheme which invests in overnight securities having maturity of 1 day
Liquid Fund	An open ended debt scheme which invests in debt & money market instruments with maturity up to 91 days
Ultra Short Duration Fund	An open ended debt scheme which primarily invests in debt instruments with Macaulay duration between 3 to 6 months
Low Duration Fund	An open ended debt scheme which invests in debt instruments with Macaulay duration between 6 to 12 months
Money Market Fund	An open ended debt scheme which invests in debt & money market instruments having maturity up to 1 year
Short Duration Fund	An open ended debt scheme which invests in debt instruments with Macaulay duration between 1 to 3 years
Medium Duration Fund	An open ended debt scheme which invests in debt instruments with Macaulay duration of 4 to 7 years
Long Duration Fund	An open ended debt scheme which invests in debt instruments with Macaulay duration greater than 7 years
Dynamic Bond Fund	An open ended debt scheme which invests in debt instruments across durations
Corporate Bond Fund	An open ended debt scheme which invests in highest rated corporate bonds. Minimum 65% of total assets are allocated in corporate bonds
Credit Risk Fund	An open ended debt scheme which invests in below highest rated corporate bonds. Minimum 65% of total assets are allocated in below highest rated corporate bonds
Banking and PSU Fund	An open ended scheme which invests in debt instruments of Banks, Public Sector Undertakings and Public Sector Financial Institutions. Minimum 80% of total assets are allocated in securities from these sectors
Gilt Fund	An open ended scheme which invests in government securities across maturity
Gilt Fund with 10 year constant duration	An open ended debt scheme investing in government securities having a constant maturity of 10 years
Floater Fund	An open ended debt scheme primarily investing in floating rate instruments

Hybrid Schemes

Category Name	Definition
Conservative Hybrid Fund	An open ended hybrid scheme which primarily invests 75% to 90% of total assets in debt instruments and 10% to 25% in equity
Balanced Hybrid Fund	An open ended balanced scheme which invests 40% to 60% of total assets in debt instruments and and 40% to 60% in equity instruments
Aggressive Hybrid Fund	An open ended aggressive scheme which primarily invests 65% to 80% of total assets in equity & equity related instruments. 20% to 30% assets are placed in debt securities
Dynamic Asset Allocation or Balanced Advantage Fund	An open ended fund which invests in equity/debt that is managed dynamically
Multi Asset Allocation Fund	An open ended scheme investing in different asset classes with a minimum of 10% allocated in each asset class
Arbitrage Fund	An open ended scheme investing in arbitrage opportunities with a minimum of 65% of total assets allocated in equity & equity related securities
Equity Savings	An open ended scheme investing at least 65% in equity & equity related instruments and at least 10% in debt securities

Solution Oriented Schemes

Category Name	Definition
Retirement Fund	An open ended retirement solution oriented scheme which comes with a lock-in of 5 years or till retirement age (whichever is earlier)
Children’s Fund	An open ended fund for investment for children which comes with a lock-in for minimum 5 years or till the child attains the age of majority

Other Schemes

Category Name	Definition
Index Funds/ETF	An open ended scheme which replicates/tracks the index. Minimum 95% of securities are invested in the securities of a particular index
FoF (Overseas/Domestic)	An open ended fund of fund scheme which invests 95% of the total assets in the underlying fund

SEBI Regulations on Mutual Fund

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 of SEBI Regulations.

Following are some of the regulations on Mutual Fund:

A sponsor of a mutual fund scheme, a group of the company or an associate which involves asset management company (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

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Structure of SEBI

SEBI, just like any corporate firm has a hierarchical structure and consists of numerous departments headed by their respective heads. Following is a list of some of the departments of SEBI:

Foreign Portfolio Investors and Custodians
Human Resources Department
Information Technology
Investment Management Department
Office of International Affairs
Commodity and Derivative Market Regulation Department
National Institute of Securities Market

Apart from the department heads, the senior management of SEBI consists of a Board of Directors who are appointed as follows:

1 chairman nominated by the Union Government of India
2 members from the Union Finance Ministry of India
1 member from the Reserve Bank of India (RBI)
5 members nominated by the Union Government of India

Functions of SEBI

The functions and powers of SEBI have been listed in the SEBI Act,1992. SEBI caters to the needs of three parties operating in the Indian Capital Market. These three participants are mentioned below:

Issuers of the Securities: Companies that issue securities are listed on the stock exchange. They issue shares to raise funds. SEBI ensures that the issuance of Initial Public Offerings (IPOs) and Follow-up Public Offers (FPOs) can take place in a healthy and transparent way.
Protects the Interests of Traders & Investors: It is a fact that the capital markets are functioning just because the traders exist. SEBI is responsible for safeguarding their interests and ensuring that the investors do not become victims of any stock market fraud or manipulation.
Financial Intermediaries: SEBI acts as a mediator in the stock market to ensure that all the market transactions take place in a secure and smooth manner. It monitors every activity of the financial intermediaries, such as broker, sub-broker, NBFCs, etc

What are the Powers of SEBI

Securities and Exchange Board of India has the following three powers:

Quasi-Judicial: With this authority, SEBI can conduct hearings and pass ruling judgements in cases of unethical and fraudulent trade practices. This ensures transparency, fairness, accountability and reliability in the capital market. SEBI PACL case is an example of this power.

Quasi-Legislative: Powers under this segment allow SEBI to draft rules and regulations for the protection of the interests of the investor. One such regulation is SEBI LODR (Listing Obligation and Disclosure Requirements). It aims at consolidating and streamlining the provisions of existing listing agreements for several segments of the financial market like equity shares. This type of regulation formulated by SEBI aims to keep any malpractice and fraudulent trading activates at bay.

Quasi-Executive: SEBI is authorised to file a case against anyone who violates its rules and regulation. It is empowered to inspect account books and other documents as well if it finds traces of any suspicious activity.

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